VANCOUVER, Oct. 24 /CNW/ - Don Lindsay, President and CEO said, "Net earnings in the third quarter were a record $405 million reflecting the company's earnings power in a favourable commodity price environment. In the third quarter, the company announced its investment in the Fort Hills Oil Sands project which is an ideal opportunity to further diversify the company's production base in quality, long life assets, and issued US$1.0 billion in ten-year and thirty-year notes. As well, the company announced plans to extend Highland Valley Copper mine life by five years to 2013."
Highlights and Significant Items
- Unaudited net earnings were $405 million or $2.00 per share in the
third quarter, compared with $120 million or $0.62 per share in the
third quarter of 2004. The higher earnings were due mainly to higher
copper, zinc and coal prices. In addition, third quarter net earnings
included a gain on sale of assets of $19 million and favourable tax
adjustments of $42 million.
- Cash flow from operations, before changes to non-cash working capital
items, was $476 million in the third quarter, up from $329 million in
the third quarter of 2004.
- In September 2005, the company entered into an agreement with
UTS Energy Corporation and Petro-Canada to subscribe for a 15%
interest in the Fort Hills Oil Sands project in Alberta.
- On September 23, 2005, the company announced plans to extend the
Highland Valley Copper mine life by five years to September 2013.
- On October 5, 2005, the strike at the Trail operations ended when the
unions ratified the terms of a new three-year collective agreement.
- The company issued US$1.0 billion of notes on September 28, 2005
consisting of US$700 million thirty-year notes at 6.125% and
US$300 million ten-year notes at 5.375%.
- At September 30, 2005, the company had a cash balance of $2.5 billion
and a long-term debt to debt-plus-equity ratio of 28%. On a net
basis, the company had cash in excess of debt of $800 million.
Management's Discussion and Analysis of Financial
Position and Results of Operations
This discussion and analysis of financial condition and results of operations of Teck Cominco Limited is prepared as at October 24, 2005, and should be read in conjunction with the unaudited consolidated financial statements of Teck Cominco Limited and the notes thereto for the three and nine months ended September 30, 2005 and with the audited consolidated financial statements of Teck Cominco Limited and the notes thereto for the year ended December 31, 2004. In this discussion, unless the context otherwise dictates, a reference to Teck Cominco or the company refers to Teck Cominco Limited and its subsidiaries including Teck Cominco Metals Ltd. and a reference to Teck Cominco Metals refers to Teck Cominco Metals Ltd. and its subsidiaries. Additional information relating to the company, including the company's annual information form, is available on SEDAR at www.sedar.com.
Earnings
Unaudited net earnings in the third quarter were $405 million or $2.00 per share compared with net earnings of $120 million or $0.62 per share in the third quarter of 2004, up significantly due mainly to higher realized prices for the company's products. Included in third quarter net earnings was a $19 million gain from the sale of a 5% interest in the Elkview coal mine by Elk Valley Coal and favourable tax adjustments totalling $42 million.
In the third quarter, the average realized prices for copper and zinc including settlement adjustments were US$1.95 and US$0.61 per pound compared with US$1.46 and US$0.45 per pound a year ago, up 34% and 36% respectively. Realized molybdenum prices averaged US$23 per pound compared with US$16 per pound a year earlier which contributed significantly to operating profits at Highland Valley Copper and Antamina. Realized coal prices averaged US$118 per tonne in the third quarter, up 115% from US$55 per tonne in same period last year. A lower Canadian/U.S. dollar exchange rate of 1.22 in the third quarter compared with 1.34 a year ago partially offset the higher commodity prices.
Net earnings for the nine months ended September 30, 2005 were $835 million, two and a half times the net earnings of $332 million in the same period last year primarily as a result of higher commodity prices.
Operating profit was a record $560 million in the third quarter compared with $332 million in the same period in 2004. Positive settlement adjustments of $25 million were recorded in the third quarter compared with $17 million in the same period last year. Operating profit increased significantly at Red Dog and copper and coal operations due mainly to higher commodity prices as well as increased zinc and coal sales volumes. Operating profits from coal operations accounted for an increase of $143 million or two-thirds of the increase in operating profit over the third quarter of 2004.
Third quarter operating profit of $560 million was a significant increase over the $417 million recorded in the second quarter of 2005. This was primarily a result of higher contributions from Red Dog with seasonally higher zinc and lead concentrate sales volumes, and from coal operations with significantly higher coal prices.
Operating profit from Trail operations in the third quarter was $8 million lower compared with the second quarter of 2005 as the strike shut down metal operations.
Comparative figures have been restated to account for the Cajamarquilla zinc refinery, which was sold in December 2004, as a discontinued operation.
Cash Flow
Cash flow from operations, before changes to non-cash working capital items, was $476 million in the third quarter, up from $329 million last year with higher operating profits from zinc, copper and coal operations.
Cash flow from operations, before changes to non-cash working capital items, was $1.1 billion in the nine months ended September 30, 2005 compared with $740 million a year ago.
Revenues
Revenues from operations were $1.2 billion in the third quarter of 2005 compared with $925 million in the same period a year ago due mainly to higher coal and metal prices. Coal revenues in the third quarter increased to $358 million from $162 million last year reflecting higher coal prices and a 8% increase in sales volumes. Revenue from copper operations was $363 million compared with $317 million due mainly to higher copper and molybdenum prices. Zinc revenues of $396 million were similar to last year as higher zinc prices were offset by lower sales from Trail operations due to the strike.
Revenues are affected by sales volumes, commodity prices and currency exchange rates. Comparative data for production and sales as well as revenues are presented in the tables on pages 4 and 5. Realized commodity prices and the realized Canadian exchange rate are presented in the table below.
<<
REALIZED METAL PRICES AND EXCHANGE RATE
(including the effect of hedging and settlement adjustments on prior
period sales)
Third Quarter Year to Date
2005 2004 % Change 2005 2004 % Change
-------------------------- --------------------------
Zinc (US$/pound) 0.61 0.45 +36% 0.60 0.47 +28%
Copper (US$/pound) 1.95 1.46 +34% 1.66 1.32 +26%
Lead (US$/pound) 0.40 0.43 -7% 0.43 0.39 +10%
Molybdenum
(US$/pound)(x) 23 16 +44% 28 14 +100%
Gold (US$/ounce) 434 398 +9% 431 398 +8%
Coal (US$/tonne) 118 55 +115% 92 50 +84%
Canadian/U.S.
exchange rate
(US$1 equals Cdn$) 1.22 1.34 -9% 1.25 1.35 -7%
(x) Net of smelter deductions.
Note:
Realized metal prices include the effect of hedging, and settlement
adjustments recorded on final settlements of sales and marking the
period end receivables to market.
PRODUCTION AND SALES (Note 1)
-----------------------------
Production Sales
--------------------------- ---------------------------
Third Year Third Year
Quarter to Date Quarter to Date
2005 2004 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
TRAIL METAL
OPERATIONS
Refined Zinc -
Thousand tonnes 13 77 156 217 33 73 169 213
Refined Lead -
Thousand tonnes 5 21 47 59 7 20 46 58
Surplus Power -
GW.h - - - - 581 263 1,076 811
MINE OPERATIONS
(Note 2)
Zinc - Thousand
tonnes
Red Dog 155 153 426 422 198 176 359 404
Antamina 12 10 38 37 11 11 37 38
Pend Oreille 13 7 36 7 13 7 36 7
Louvicourt - 1 3 4 - 2 3 4
---------------------------------------------------------------------
180 171 503 470 222 196 435 453
Copper -
Thousand tonnes
Highland Valley
Copper
(Note 3) 47 42 126 112 39 36 133 110
Antamina 20 21 61 59 21 23 62 55
Louvicourt - 2 4 6 - 2 4 6
---------------------------------------------------------------------
67 65 191 177 60 61 199 171
Lead -
Thousand tonnes
Red Dog 29 33 73 85 56 62 58 67
Pend Oreille 3 1 6 1 3 1 6 1
---------------------------------------------------------------------
32 34 79 86 59 63 64 68
Molybdenum -
Thousand pounds
Highland Valley
Copper
(Note 3) 1,276 2,518 4,872 7,450 1,659 3,149 5,292 7,036
Antamina 842 476 2,199 949 790 237 2,523 468
---------------------------------------------------------------------
2,118 2,994 7,071 8,399 2,449 3,386 7,815 7,504
Gold -
Thousand ounces
Hemlo 58 54 179 181 61 53 182 182
Other 4 3 12 9 2 2 10 9
---------------------------------------------------------------------
62 57 191 190 63 55 192 191
Coal -
Thousand tonnes
Elk Valley
Coal
(Note 4) 2,356 2,175 7,556 6,810 2,463 2,273 7,110 6,824
Notes:
(1) The table presents the company's share of production and sales
volumes.
(2) Production and sales volumes of base metal mines refer to metals
contained in concentrate.
(3) The company owns 97.5% of Highland Valley Copper since March 1, 2004
and owned 63.9% prior to that date.
(4) Results of the Elk Valley Coal Partnership represent the company's
39% direct interest in the Partnership commencing April 1, 2005, 38%
from April 1, 2004 to March 31, 2005 and 35% prior to April 1, 2004.
OPERATING PROFIT, REVENUES AND DEPRECIATION
-------------------------------------------
QUARTER ENDED SEPTEMBER 30
--------------------------
Operating Depreciation
Profit (Note 1) Revenues and Amortization
----------------- ----------------- -----------------
Third Quarter Third Quarter Third Quarter
($ in millions) 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Zinc
Trail (including
power sales) $34 $40 $152 $248 $6 $12
Red Dog 106 59 241 185 22 19
Pend Oreille 1 (2) 14 6 4 3
Inter-segment
sales and other (5) 3 (11) (25) - -
-----------------------------------------------------------------------
136 100 396 414 32 34
Copper
Highland Valley
Copper (Note 2) 144 125 233 212 15 15
Antamina 94 59 129 98 9 11
Louvicourt 1 3 1 7 - 2
-----------------------------------------------------------------------
239 187 363 317 24 28
-----------------------------------------------------------------------
Gold
Hemlo 3 6 33 32 5 5
Coal
Elk Valley Coal
(Note 3) 182 39 358 162 10 8
-------------------------------------------------------------------------
TOTAL $560 $332 $1,150 $925 $71 $75
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
Operating Depreciation
Profit (Note 1) Revenues and Amortization
----------------- ----------------- -----------------
Year to Date Year to Date Year to Date
($ in millions) 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Zinc
Trail (including
power sales) $101 $102 $686 $731 $28 $36
Red Dog 158 107 380 363 40 45
Pend Oreille - (2) 40 6 13 3
Inter-segment sales
and other (5) 4 (81) (71) 1 -
-----------------------------------------------------------------------
254 211 1,025 1,029 82 84
Copper
Highland Valley
Copper (Note 2) 423 269 731 526 49 38
Antamina 256 125 362 226 28 32
Louvicourt 12 10 21 25 3 6
-----------------------------------------------------------------------
691 404 1,114 777 80 76
Gold
Hemlo 8 24 98 106 16 15
Coal
Elk Valley Coal
(Note 3) 353 93 835 465 25 24
-------------------------------------------------------------------------
TOTAL $1,306 $732 $3,072 $2,377 $203 $199
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes:
(1) Depreciation and amortization are deducted in calculating operating
profit.
(2) Highland Valley Copper results were consolidated commencing March 1,
2004, with a minority interest provision of 2.5%. Prior to March 1,
2004, the company had proportionately consolidated 63.9% of Highland
Valley Copper.
(3) Results of the Elk Valley Coal Partnership represent the company's
39% direct interest in the Partnership commencing April 1, 2005, 38%
from April 1, 2004 to March 31, 2005 and 35% prior to April 1, 2004.
Operations
Trail Smelter and Refineries (100%)
Three months ended Nine months ended
Sep. 30 Sep. 30
--------------------- ---------------------
100% 2005 2004 2005 2004
----
Zinc production (000's tonnes) 13.2 76.6 156.0 217.1
Lead production (000's tonnes) 4.9 21.2 47.3 59.1
Zinc sales (000's tonnes) 32.4 72.7 168.9 212.7
Lead sales (000's tonnes) 7.4 19.5 46.1 57.7
Surplus power sold (GW.h) 581 263 1,076 811
Power price (US$/megawatt hr) 62 48 54 43
Operating profit (loss)
($ millions)
- Metal operations (2) 28 46 69
- Power sales 36 12 55 33
Production and sales in the third quarter were affected by the strike of the unionized employees that began on July 19, 2005. As a result of reduced sales volumes and care and maintenance costs during the strike, metal operations incurred an operating loss of $2 million compared with an operating profit of $28 million in same period last year.
Operating profit from power sales in the third quarter was $36 million compared with $12 million in the same period last year, with increased power sales volumes resulting from metal operations being shut down and higher power prices compared to a year ago.
On October 5, 2005, the unions at Trail ratified the terms of a new collective agreement covering a three year period from June 1, 2005 to May 31, 2008. Replenishment of product inventories and resumption of normal sales levels is expected during November. The lower sales and the cost associated with the collective agreement settlement will negatively impact operating profit in the fourth quarter.
Red Dog (100%)
Three months ended Nine months ended
Sep. 30 Sep. 30
--------------------- ---------------------
100% 2005 2004 2005 2004
----
Tonnes milled (000's) 872 817 2,324 2,215
Zinc grade (%) 20.8 21.5 21.5 22.2
Lead grade (%) 5.7 6.2 5.3 6.0
Zinc recovery (%) 85.7 86.9 85.4 85.9
Lead recovery (%) 58.4 65.0 59.3 63.9
Zinc production (000's tonnes) 155.6 152.8 426.4 422.0
Zinc sales (000's tonnes) 197.4 176.5 359.2 404.4
Lead production (000's tonnes) 28.8 32.8 73.2 84.9
Lead sales (000's tonnes) 56.0 61.6 57.8 66.8
Operating profit ($ millions) 106 59 158 107
Mill throughput in the third quarter was 7% higher than last year due mainly to ores with more favourable milling characteristics being processed. The higher throughput was mostly offset by lower ore grades due to the sequencing of areas mined and resulted in zinc production being similar to last year at 155,600 tonnes. Lead production of 28,800 tonnes was 12% lower than the same period last year due mainly to lower grades and recoveries.
Zinc sales of 197,400 tonnes increased by 12% compared with the same period last year as some customers accelerated deliveries in the quarter. Lead sales of 56,000 tonnes were similar to last year. The higher zinc price in the third quarter combined with higher sales volumes resulted in an operating profit of $106 million compared with $59 million in the third quarter of 2004.
The shipping season was completed on October 21, 2005 with a total of 1.0 million tonnes of zinc concentrate and 200,000 tonnes of lead concentrate shipped from the mine. At September 30, 2005 zinc in concentrate available for sale, excluding production inventories at site, was 330,000 tonnes compared with 365,000 tonnes last year.
Antamina (22.5%)
Three months ended Nine months ended
Sep. 30 Sep. 30
--------------------- ---------------------
100% 2005 2004 2005 2004
----
Tonnes milled (000's) 7,367 8,069 21,996 23,228
Copper grade (%) 1.3 1.3 1.3 1.3
Zinc grade (%) 1.0 1.0 1.1 1.1
Copper recovery (%) 90.1 87.1 89.7 85.7
Zinc recovery (%) 81.5 73.2 83.1 73.2
Copper production
(000's tonnes) 86.6 91.9 270.3 259.4
Copper sales (000's tonnes) 94.2 98.7 274.8 242.2
Zinc production (000's tonnes) 55.2 45.0 169.2 165.8
Zinc sales (000's tonnes) 46.2 47.5 162.8 166.8
Molybdenum production
(000's pounds) 3,742 2,112 9,772 4,216
Molybdenum sales
(000's pounds) 3,515 1,053 11,215 2,080
Company's share of operating
profit ($ millions) 94 59 256 125
Mill throughput in the third quarter was 9% lower than the same period in 2004 due mainly to harder ores being processed. Copper production of 86,600 tonnes was 6% lower than the same period last year due mainly to the lower mill throughput, while zinc production increased 23% due to ore types resulting in higher mill recoveries. Copper-only ore accounted for 63% of mill throughput, similar to the third quarter of 2004. In the fourth quarter, the mining plan calls for the processing of 88% of copper-only ore, which is expected to result in improved milling rates and significantly higher copper production and lower zinc production compared with the third quarter.
Molybdenum production of 3.7 million pounds in the third quarter was higher than 2.1 million pounds a year ago due to significantly higher mill recoveries resulting from continued process improvements. The average realized molybdenum price after smelter deductions was US$23 per pound in the third quarter compared with US$12 per pound last year. The company's share of molybdenum revenues in the third quarter increased to $24 million compared with $4 million a year ago as a result of the higher prices and sales volumes.
The company's 22.5% share of operating profit in the third quarter was $94 million, including positive settlement adjustments of $10 million, compared with $59 million a year ago due mainly to higher copper and zinc prices and the higher molybdenum revenues.
On September 19, 2005, the Antamina mine issued a press release announcing the completion of a revised reserve and resource estimate for the Antamina deposit. The new estimate is the culmination of a three-year program aimed at improving the Antamina reserve and resource model's local predictive capabilities, incorporating improvements to the geologic and interpolation modeling methods along with additional density data and interpolation. Although a revision of criteria has resulted in a reclassification of proven ore to the probable category, the new estimate substantially confirms the global estimates of reserves and resources previously published for the Antamina project.
Highland Valley Copper (97.5%)(x)
Three months ended Nine months ended
Sep. 30 Sep. 30
--------------------- ---------------------
100% 2005 2004 2005 2004
----
Tonnes milled (000's) 13,079 12,726 37,139 37,731
Copper grade (%) 0.41 0.38 0.39 0.38
Copper recovery (%) 89.1 89.2 88.6 87.0
Copper production
(000's tonnes) 47.6 43.2 128.7 123.2
Copper sales (000's tonnes) 40.8 37.2 136.8 125.0
Molybdenum production
(000's pounds) 1,308 2,582 4,997 8,257
Molybdenum sales
(000's pounds) 1,701 3,230 5,427 7,588
Company's share of
operating profit
($ millions)(x) 144 125 423 269
(x) The company had proportionately consolidated 63.9% of Highland Valley
Copper (HVC) results up to February 29, 2004. Upon the acquisition of
the additional 33.6% interest of HVC on March 1, 2004, the company
began to consolidate 100% of HVC with a 2.5% provision for minority
interests.
Copper production of 47,600 tonnes in the third quarter was 10% higher than a year ago due mainly to higher ore grades and slightly higher throughput. Molybdenum production was 1.3 million pounds compared with 2.6 million pounds in the third quarter of 2004 as a greater proportion of ore from the Valley pit, which has higher copper but lower molybdenum grades, was mined in the current period.
Operating profit, including settlement adjustments of $15 million, was $144 million in the third quarter compared with $125 million in the same period last year. Copper sales volumes of 40,800 tonnes were 10% higher than a year ago due to timing of shipments and molybdenum sales of 1.7 million pounds were 50% lower than the third quarter 2004 due to the lower production. The lower molybdenum sales volumes were partially offset by a higher realized molybdenum price of US$23 per pound compared with US$17 per pound a year ago. Molybdenum revenues were $47 million compared with $70 million in the third quarter of 2004.
In September the mine announced plans to proceed with an extension of the mine life by five years to September 2013, which is discussed in more details in the Corporate Development section.
Hemlo Gold Mines (50%)
Three months ended Nine months ended
Sep. 30 Sep. 30
--------------------- ---------------------
100% 2005 2004 2005 2004
----
Tonnes milled (000's) 842 944 2,626 2,744
Grade (g/tonne) 4.6 3.8 4.5 4.4
Mill recovery (%) 94.0 93.9 93.9 94.2
Production (000's ozs) 118 107 359 362
Sales (000's ozs) 122 105 364 363
Cash operating cost per
ounce (US$) 330 298 321 272
Company's share of operating
profit ($ millions) 3 6 8 24
Gold production of 118,000 ounces in the third quarter increased by 11,000 ounces compared with the same period last year due mainly to higher ore grades. The average gold price realized in the quarter was US$434 per ounce compared with US$398 per ounce, but was mainly offset by a weaker U.S. dollar and reduced hedging gains compared with the third quarter 2004.
Cash operating costs of $396 (US$330) per ounce in the third quarter were similar to $390 (US$298) a year ago as higher mining costs were offset by the effect of the increased production. The increase in U.S. dollar unit operating costs was due to the effect of a weaker U.S. dollar. Operating profit was $3 million in the third quarter compared with $6 million last year due mainly to lower hedging gains.
Elk Valley Coal Partnership (39%)
Three months ended Nine months ended
Sep. 30 Sep. 30
--------------------- ---------------------
100% 2005 2004 2005 2004
----
Coal production
(000's tonnes) 6,042 5,725 19,545 18,396
Coal sales (000's tonnes) 6,316 5,980 18,378 18,399
Average sale price (US$/tonne) 118 55 92 50
Average sale price (Cdn$/tonne) 147 76 117 71
Cost of product sold
(Cdn$/tonne)
Operating expenses 32 28 30 27
Transportation 36 28 35 28
Company's share of operating
profit ($ millions)(x) 182 39 353 93
(x) Results from Elk Valley Coal Partnership represent the company's 39%
direct interest from April 1, 2005, 38% from April 1, 2004 to
March 31, 2005 and 35% prior to April 1, 2004. The company holds an
additional 5.3% indirect ownership interest through its investment in
the Fording Canadian Coal Trust for a combined 44.3% effective
interest since April 1, 2005.
Coal production at Elk Valley Coal increased by 6% in the third quarter to 6.0 million tonnes compared with the same period a year ago, as expansion projects start to result in additional volumes. Production volumes were lower than anticipated due to a combination of delays in the arrival of new equipment, weather conditions and regularly scheduled maintenance in the quarter.
Coal sales of 6.3 million tonnes were lower than expected due in part to requests for shipment delays from Chinese customers. As a result, Elk Valley Coal has revised its estimate of 2005 coal sales to be approximately 25 million tonnes.
The average sale price for coal was US$118 per tonne in the third quarter compared with $55 per tonne in the same period in 2004. This 115% price increase, though slightly offset by a lower Canadian/U.S. dollar exchange rate, has resulted in the company's share of operating profit significantly increasing to $182 million in the third quarter compared with $39 million a year ago.
Production capacity expansion work at Cardinal River, Fording River and Elkview continued in the third quarter. At the Cardinal River mine, delays in the delivery of equipment, mechanical breakdowns and poor weather adversely affected coal release over the third quarter. Elk Valley Coal still anticipates that the mine will achieve producing at a rate of 2.4 million tonnes per annum by the end of 2005. At Fording River, capacity expansion was completed as planned in the third quarter. Elkview's expansion, consisting of equipment additions and stripping activities, is progressing on schedule to increase mine capacity by 1.0 million tonnes to an annualized rate of 7.0 million tonnes by the end of 2007.
Elk Valley Coal executed the agreement with POSCO and Nippon Steel Corporation in the third quarter, providing for a ten-year sales contract and the acquisition of a 5% interest in the Elkview mine by the two companies (2.5% each) for US$50 million. The company recorded a gain of $19 million on the dilution of its interest in Elkview.
Elk Valley Coal has given notice to Westshore Terminals that it is requesting a review of the loading rate for the Elkview mine contract effective April 1, 2005. Under the terms of the contract, the loading rate is linked to the Canadian dollar price received for coal. The parties have agreed to mediation to determine whether the rates should be revised to be consistent with the original intention of the parties. Mediation is expected to commence in late October.
The collective agreements at Line Creek expired at the end of May and negotiations are still ongoing. Elkview's collective agreement expires at the end of October 2005.
Costs and Expenses
Interest expense of $13 million in the third quarter of 2005 was reduced from $16 million in the previous year mainly as a result of the conversion and redemption of the company's convertible debenture of $202 million in October 2004.
Administration expense was $7 million higher in the third quarter compared with a year ago, primarily due to an increase in stock-based compensation expense which was $8 million in the quarter.
Exploration expense of $31 million in the third quarter was significantly higher than $12 million a year ago, and included the expensing of $14 million of unplanned property acquisition costs.
Other income of $56 million included $33 million of investment income recognized on the company's holding of Fording Canadian Coal Trust units. The Trust income recognized in the third quarter was significantly higher than a year ago due to high coal prices and a reversal of certain future income tax provisions in Fording Canadian Coal Trust as a result of a reorganization of the Trust and its subsidiaries.
Also included in other income was the company's $19 million share of the gain from the sale of a 5% interest of the Elkview mine by Elk Valley Coal. The company also recognized additional consideration of $12 million from the sale of the company's interest in the Quebrada Blanca Copper mine in 2000. This consideration was contingent upon the price of copper achieving minimum price levels in 2005.
The provision for income and resource taxes of $140 million in the third quarter included unusual adjustments totalling $42 million, including a decrease of $26 million of future income taxes as a result of a reduction in British Columbia provincial income tax rates. In addition, the company recorded $16 million of tax benefits relating to previously unrecognized losses carried forward as higher commodity prices have increased the company's level of confidence that the losses will be utilized. The composite tax rate, excluding the effect of the aforementioned unusual items, was 34% in the third quarter as compared with the Canadian Statutory tax rate of 35%. The effect of provincial mineral taxes in Canada was offset by the lower tax rates in foreign jurisdictions. The composite tax rate of 34% was lower than the tax rate of 42% in the second quarter of 2005 because a larger portion of income in the current quarter was earned in lower tax rate jurisdictions.
Financial Position and Liquidity
Cash flow from operations of $476 million in the third quarter was significantly higher than $329 million a year ago due to higher operating profits from zinc, copper and coal operations. Cash flow from operations for the nine months ended September 30, 2005 was $1.1 billion compared with $740 million in the previous year.
Debt repayments consisted of the company's share of Antamina debt repayments totalling $48 million (US$40 million).
Capital expenditures in the third quarter were $91 million compared with $67 million in the third quarter of 2004, of which $55 million was sustaining capital expenditures and $36 million was development expenditures. Development expenditures included $27 million for the Pogo gold project and the company's share of development expenditures of $3 million at Cardinal River and $5 million for Elkview expansion expenditures. The company also made investments in marketable securities totalling $192 million in the quarter.
The company issued ten and thirty-year notes totalling US$300 million and US$700 million respectively late in the third quarter, net proceeds of the issue totalled Cdn$1.16 billion. The ten-year notes have a semi-annual coupon of 5.375% and the thirty-year notes have a semi-annual coupon of 6.125%. The long-term debt to debt-plus-equity ratio was 28% at the end of the quarter.
At September 30, 2005, the company had a cash balance of $2.5 billion and debt of $1.7 billion excluding the exchangeable debentures. The company also had bank credit facilities aggregating $1.08 billion. Unused credit lines under these facilities amounted to $958 million, after issuing letters of credit for $125 million.
Corporate Development
On September 5, 2005, the company entered into an agreement to subscribe for a 15% interest in the Fort Hills Energy Limited Partnership, which is developing the Fort Hills Oil Sands project in Alberta, Canada. The subscription price will be satisfied by the company contributing 34% ($850 million) of project expenditures until project spending reaches $2.5 billion and its 15% share thereafter. Closing of the transaction is subject to customary conditions including settlement of definitive partnership documentation, and is expected to occur in the fourth quarter.
In September, the Highland Valley Copper mine announced plans to proceed with an extension of the mine life by five years to September 2013. The plan involves the relocation of two in-pit crushers in the Valley pit together with a push-back of the Valley pit wall to release additional ore, as well as the release of additional ore from the Lornex pit. Capital cost for the relocation of the crushers and conveyer in the Valley pit and the purchase of additional equipment are approximately $40 million. Stripping costs on the push-back of the Valley pit wall amounting to $150 million in the four-year period from 2006 to 2009 will be deferred and amortized over the extension period. Approximately 85% of the waste for the Valley pit expansion will be removed by the end of 2009 and the average strip ratio for the remaining mine life after 2009 is estimated to be 0.15.
Construction at the Pogo mine is 85% complete at the end of September and is on schedule for a first quarter 2006 start-up. Commissioning of some of the process systems has begun and ore is being placed on stockpile for the start-up. The estimated final cost for the project is now US$347 million, with an additional US$10 million contingency provision in light of the current construction environment. Project costs have increased due to higher than expected costs for construction materials and labour costs in Alaska, and unanticipated geotechnical conditions both on surface and underground. Project commitments to the end of September were US$319 million. Underground development has fallen behind schedule due to poor ground conditions in some areas that have caused a change of location of the underground ore bin location and reduced the overall rate of advance. This will affect only the start-up of the underground conveyor system, not the overall mine startup, as trucking of ore to the mill will be used as a stop-gap measure until the conveyor system is completed in the first quarter of 2006.
John Taylor retired as Senior Vice President, Finance and Chief Financial Officer effective October 3, 2005, after a 28-year career in which he held various finance positions. Mr. Taylor was replaced by Ron Millos who has served as Chief Financial Officer of Elk Valley Coal Partnership and Fording Canadian Coal Trust since June 2003. Prior to that he was Vice President, Corporate Finance of Teck Cominco, and prior to 2001, Chief Financial Officer of Cominco.
Outlook
The strike at the company's Trail operations was resolved on October 5, 2005 and employees returned to work in the first week of October. Replenishment of product inventories and resumption of normal sales levels is expected during November. The lower sales and the costs associated with the collective agreement settlement will negatively impact operating profit in the fourth quarter.
Sales and profits of the Red Dog mine follow a seasonal pattern, with the highest sales volumes of zinc and most of the lead sales occurring in the last five months of the year following the commencement of the shipping season in July.
At Antamina, copper-only ore is expected to account for 88% of mill throughput in the fourth quarter, compared with 63% in the third quarter. Softer ore will be processed and is expected to result in higher throughput rates. Copper production is expected to increase in the fourth quarter with a corresponding decrease in zinc production. Molybdenum production should exceed the level achieved in the third quarter as process improvements completed in the third quarter will be in operation for the full quarter.
Coal sales for the 2005 coal year ending March 31, 2006, are priced at an average of US$122 per tonne. In the third quarter of 2005, Elk Valley Coal experienced some delays in shipment which was caused, in part, by the over purchase of metallurgical coal by its customers in reaction to last year's extreme under-supply environment. As a result, Elk Valley Coal has revised its estimate of 2005 coal sales to be approximately 25 million tonnes. Collective agreements at Line Creek and Elkview are being negotiated in the current year. Failure to reach agreement with the employees could lead to production disruption and lower sales.
Copper, zinc and molybdenum prices have remained strong in the third quarter, but are vulnerable to fluctuations due to changes in global economic conditions. Fluctuations in metal prices will affect the company's earnings, and may result in significant settlement adjustments on outstanding settlements receivable.
Any strengthening of the Canadian dollar relative to the U.S. dollar will have a negative impact on the company's earnings as the prices of the company's products are denominated in U.S. dollars and a significant portion of the company's operating costs are Canadian dollar based. The Canadian dollar has strengthened against the U.S. dollar in the third quarter, with an exchange rate of 1.16 at September 30, 2005 compared with 1.23 at June 30, 2005.
To mitigate the impact of fluctuations in metal prices and the Canadian/U.S. dollar exchange rate, the company has made certain forward sales commitments. The outstanding hedge positions are presented in the notes to the financial statements.
The company's operations are experiencing rising production costs due to increasing prices for fuel, steel, tires, labour and maintenance parts and supplies. These rising prices as a result of increased global mining activities are expected to continue into 2006 and affect the company's operating costs.
The company's capital expenditures in the fourth quarter of 2005 are estimated to be $90 million, with $46 million of sustaining capital expenditures and $44 million of development expenditures. The majority of development expenditures are for the company's share of the Pogo gold project.
Contingencies
Lake Roosevelt
On November 11, 2004, the District Court for Eastern Washington State denied a motion by Teck Cominco Metals Ltd. (TCML) to dismiss, for want of jurisdiction, a citizen's suit brought by two members of the Confederated Tribes of the Colville Reservation (the "Tribes") supported by the State of Washington. On February 14, 2005, the Federal Court of Appeals for the 9th Circuit granted TCML's petition for permission to appeal and the District Court entered a stay of proceedings pending the appeal. In September 2005, the State of Washington and the Tribes filed motions to lift the stay of proceedings in District Court to add the Tribes as an additional plaintiff and to file an amended complaint adding the State's and the Tribes' claims for natural resource damages and cost recovery under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). On September 29, 2005, the individual plaintiffs also served notice of their intention to file suit under the U.S. Resource Conservation and Recovery Act ("RCRA") seeking injunctive relief and costs.
The original citizen's suit was brought pursuant to Section 310(a)(i) of the U.S. Superfund Statute (CERCLA) to enforce a unilateral administrative order issued by the U.S. Environmental Protection Agency (EPA) purporting to require TCML to conduct a remedial investigation and feasibility study with respect to metal contamination in the sediments of the Upper Columbia River and Lake Roosevelt. The EPA issued the order shortly after breaking off negotiations with the company during which TCML offered to fund human health and ecological studies, at an estimated cost of US$13 million, to address the possible impact of historical discharges from the Trail Metallurgical Operations in British Columbia. Both the Canadian government and the company have the view that the EPA does not have jurisdiction to apply U.S. law in Canada. Teck Cominco has filed its brief with the 9th Circuit and the Government of Canada, the Mining Association of Canada and the Canadian Chamber of Commerce, the US Chamber of Commerce and the US National Mining Association have filed amicus briefs in support of Teck Cominco's position. Oral argument has been scheduled for December 5, 2005.
The Government of Canada and the Government of the U.S. are continuing to pursue a bilateral agreement to facilitate the studies and appropriate remediation to address environmental concerns about the area. Such an agreement could provide a basis under which TCML's offer of funding for this work could be implemented.
There can be no assurance the amount offered to fund the studies will be sufficient or any offer to fund the studies will resolve the matter, or that TCML or its affiliates will not be faced with liability in relation to this matter. Until studies of the kind described above are completed, it is not possible to estimate the extent and cost, if any, of remediation that may be required.
Competition Investigation
Teck Cominco Metals Ltd., as the marketing agent for Highland Valley Copper Partnership (HVC), has responded to an Order issued pursuant to the Competition Act to produce documents relevant to the marketing of custom copper concentrates. The company understands that this is part of an ongoing industry-wide investigation involving major copper concentrate producers commenced in Canada, the U.S. and Europe to determine whether there is evidence of a cartel agreement and related illegal practices concerning pricing, customer allocation and market sharing in the copper concentrate sector. The company has been advised by the United States Department of Justice that it intends to close its investigation. We have also been advised by the European Commission that they did not find any grounds to proceed with the investigation and have closed their file on the copper case. The company is co-operating in the continuing investigation in Canada. There can be no assurance that the investigation will not result in further regulatory action against the company or HVC in Canada or that the company or HVC will not face prosecution or liability under the Competition Act or otherwise in relation to the investigation. The company can also not predict the course of the ongoing investigation in Canada or when the investigation will be completed.
Changes in Accounting Policies
Variable Interest Entities
Effective January 1, 2005, the company adopted the new Accounting Guideline 15 (AcG-15) "Consolidation of Variable Interest Entities". The new standard establishes when a company should consolidate a variable interest entity in its financial statements. AcG-15 provides the definition of a variable interest entity and requires a variable interest entity to be consolidated if a company is at risk of absorbing the variable interest entity's expected losses, or is entitled to receive a majority of the variable interest entity's residual returns, or both. Adoption of this guideline resulted in insignificant changes in certain balance sheet and income statement accounts and no change in earnings or retained earnings.
Financial Instruments
In the third quarter of 2005, the company's commodity price and foreign exchange hedging activities increased the company's revenue by $18 million. In addition, included in other income and expenses are losses on derivatives and financial instruments totalling $10 million in the quarter, which relate mostly to copper forward sales contracts that do not qualify for hedge accounting treatments. The unrealized market gain on hedging positions, principally foreign exchange contracts, totalled $53 million as at September 30, 2005.
Quarterly Earnings and Cash Flow
($ in millions,
except per share data) 2005 2004
-------------------- ---------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1
Revenues 1,150 994 928 1,051 925 777 675
Operating profit 560 417 329 392 332 221 179
Net earnings 405 225 205 285 120 116 96
Earnings per share $2.00 $1.11 $1.01 $1.42 $0.62 $0.60 $0.51
Cash flow (before
changes to working
capital item) 476 332 286 403 329 231 180
2003
---------------------------
Q4 Q3 Q2 Q1
Revenues 716 545 460 507
Operating profit 132 62 33 43
Net earnings 104 16 9 5
Earnings per share $0.56 $0.08 $0.04 $0.03
Cash flow (before
changes to working
capital item) 139 79 52 44
Outstanding Share Data
As at October 17, 2005 there were 198,350,586 Class B Subordinate Voting Shares and 4,673,453 Class A Common Shares outstanding. In addition, there were outstanding 3,091,453 director and employee stock options with exercise prices ranging between $6.39 and $45.28 per share. Exchangeable debentures due 2024 are convertible into a total of 11,489,400 Class B Subordinate Voting Shares (equivalent to $9.72 per share). More information on these instruments and the terms of their conversion is set out in note 13 of the company's 2004 year-end financial statements.
Cautionary Statement on Forward-Looking Information
This document contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include estimates, forecasts, and statements as to management's expectations with respect to, among other things, the size and quality of the company's mineral reserves and mineral resources, future trends for the company, progress in development of mineral properties, future production, capital and mine production costs, demand and market outlook for commodities, future commodity prices and treatment and refining charges, the outcome of legal proceedings involving the company, and the financial results of the company. These forward-looking statements involve numerous assumptions, risks and uncertainties and actual results may vary.
Factors that may cause actual results to vary include, but are not limited to, changes in commodity and power prices, changes in interest and currency exchange rates, inaccurate geological and metallurgical assumptions (including with respect to the size, grade and recoverability of mineral reserves and resources), unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, unavailability of materials and equipment, government action or delays in the receipt of government approvals, industrial disturbances or other job action, and unanticipated events related to health, safety and environmental matters), political risk, social unrest, and changes in general economic conditions or conditions in the financial markets.
These risks are described in more detail in the annual information form of the company. The company does not assume the obligation to revise or update these forward-looking statements after the date of this document or to revise them to reflect the occurrence of future unanticipated events, except as may be required under applicable securities laws.
Webcast
Teck Cominco will host an Investor Conference Call to discuss its Q3/2005 financial results on Tuesday, October 25, 2005 at 11 AM Eastern/8 AM Pacific time. A live audio webcast of the conference call, together with supporting presentation slides, will be available at the company's website at www.teckcominco.com. The webcast is also available at www.newswire.ca and www.q1234.com. The webcast will be archived at www.teckcominco.com.
Teck Cominco Limited
Consolidated Statements of Earnings
(Unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
(in millions of dollars, September 30 September 30
except per share data) 2005 2004 2005 2004
-------------------------------------------------------------------------
Revenues $1,150 $925 $3,072 $2,377
Cost of operations (519) (518) (1,563) (1,446)
Depreciation and amortization (71) (75) (203) (199)
-------------------------------------------------------------------------
Operating profit 560 332 1,306 732
Other expenses
General, administration
and marketing (24) (17) (62) (51)
Interest on long-term debt (13) (16) (39) (47)
Exploration (31) (12) (50) (28)
Research and development (3) (4) (11) (11)
Other income (expense) (Note 6) 56 (15) 106 -
Writedown of investment - (64) - (64)
-------------------------------------------------------------------------
Earnings before income and
resource taxes 545 204 1,250 531
Provision for income and
resource taxes (140) (88) (415) (208)
-------------------------------------------------------------------------
Net earnings from continuing
operations 405 116 835 323
Net earnings from discontinued
operation - 4 - 9
-------------------------------------------------------------------------
Net earnings $405 $120 $835 $332
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share $2.00 $0.62 $4.12 $1.73
Basic earnings per share from
continuing operations $2.00 $0.60 $4.12 $1.69
Diluted earnings per share $1.88 $0.57 $3.88 $1.60
Diluted earnings per share
from continuing operations $1.88 $0.54 $3.88 $1.56
Weighted average shares
outstanding (000's) 202,718 192,669 202,242 190,718
Shares outstanding at end
of period (000's) 203,024 193,046 203,024 193,046
Teck Cominco Limited
Consolidated Statements of Cash Flow
(Unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
(in millions of dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating activities
Net earnings from continuing
operations $405 $116 $835 $323
Items not affecting cash:
Depreciation and
amortization 71 75 203 199
Future income and resource
taxes 32 58 117 137
Writedown of investment - 64 - 64
Gain on sale of investments
and assets (21) - (57) (4)
Other (11) 16 (4) 21
-----------------------------------------------------------------------
476 329 1,094 740
Net change in non-cash
working capital items (93) (93) (95) (83)
-----------------------------------------------------------------------
383 236 999 657
Financing activities
Issuance of long-term debt 1,157 - 1,157 -
Repayment of long-term debt (48) (37) (94) (107)
Class B Subordinate Voting
Shares issued 7 6 23 112
Dividends paid - - (81) (19)
Interest on exchangeable
debentures - - (2) (2)
-----------------------------------------------------------------------
1,116 (31) 1,003 (16)
Investing activities
Property, plant and
equipment (91) (67) (226) (148)
Investments and other assets (192) (19) (199) (54)
Acquisition of additional
interest in Highland Valley
Copper - - - (80)
Contributions to pension plans - - - (34)
Proceeds from sale of
investments and assets 26 2 81 22
-----------------------------------------------------------------------
(257) (84) (344) (294)
Effect of exchange rate on cash (43) (18) (40) (18)
-------------------------------------------------------------------------
Increase in cash from
continuing operations 1,199 103 1,618 329
Increase in cash from
discontinued operation - - - 4
-------------------------------------------------------------------------
Increase in cash 1,199 103 1,618 333
Cash at beginning of period 1,326 326 907 96
-------------------------------------------------------------------------
Cash at end of period $2,525 $429 $2,525 $429
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Teck Cominco Limited
Consolidated Balance Sheets
(Unaudited)
-------------------------------------------------------------------------
September 30 December 31
(in millions of dollars) 2005 2004
-------------------------------------------------------------------------
ASSETS
Current assets
Cash $2,525 $907
Accounts and settlements receivable 424 364
Production inventories 545 410
Supplies and prepaid expenses 160 130
-----------------------------------------------------------------------
3,654 1,811
Investments 659 469
Property, plant and equipment 3,476 3,488
Other assets 253 291
-------------------------------------------------------------------------
$8,042 $6,059
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $531 $415
Current portion of long-term debt 212 38
Current portion of future income taxes 91 7
-----------------------------------------------------------------------
834 460
Long-term debt (Note 3) 1,489 627
Other liabilities (Note 8) 614 608
Future income and resource taxes 908 895
Exchangeable debentures 248 248
Shareholders' equity (Note 9) 3,949 3,221
-------------------------------------------------------------------------
$8,042 $6,059
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Teck Cominco Limited
Consolidated Statements of Retained Earnings
(Unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
(in millions of dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
Balance at beginning of period $1,396 $686 $1,049 $495
Net earnings 405 120 835 332
Dividends - - (81) (19)
Exchangeable debentures
interest, net of tax - - (2) (2)
-------------------------------------------------------------------------
Balance at end of period 1,801 $806 1,801 $806
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Teck Cominco Limited
Notes to Consolidated Financial Statements
(Unaudited)
-------------------------------------------------------------------------
1. BASIS OF PRESENTATION
These interim consolidated financial statements have been prepared in
accordance with Canadian GAAP using standards for interim financial
statements and do not contain all of the information required for
annual financial statements. Accordingly, they should be read in
conjunction with the most recent annual financial statements of the
company.
Comparative figures have been restated to account for the
Cajamarquilla zinc refinery, which was sold in December 2004, as a
discontinued operation.
2. CHANGE IN ACCOUNTING POLICY
Effective January 1, 2005, the company adopted the new Accounting
Guideline 15 (AcG-15) "Consolidation of Variable Interest Entities".
The new standard establishes when a company should consolidate a
variable interest entity in its financial statements. AcG-15 provides
the definition of a variable interest entity and requires a variable
interest entity to be consolidated if a company is at risk of
absorbing the variable interest entity's expected losses, or is
entitled to receive a majority of the variable interest entity's
residual returns, or both. Adoption of this guideline resulted in
insignificant changes in certain balance sheet and income statement
accounts and no change to earnings or retained earnings.
3. LONG-TERM DEBT
On September 28, 2005, the company issued US$300 million of 5.375%
notes due October 1, 2015 and US$700 million of 6.125% notes due
October 1, 2035. Net proceeds after the costs of the issue were
Cdn$1.16 billion.
4. ACQUISITION OF INTEREST IN FORT HILLS OIL SANDS PROJECT
On September 5, 2005, the company entered into an agreement to
subscribe for a 15% interest in the Fort Hills Energy Limited
Partnership, which is developing the Fort Hills Oil Sands project in
Alberta, Canada. The subscription price will be satisfied by the
company contributing 34% ($850 million) of project expenditures until
project spending reaches $2.5 billion and its 15% share thereafter.
Closing of the transaction is subject to customary conditions
including settlement of definitive partnership documentation and is
expected to occur in the fourth quarter.
5. SUPPLEMENTARY CASH FLOW INFORMATION
Three months ended Nine months ended
September 30 September 30
(in millions of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
Interest paid $22 $19 $46 $52
Income and resource taxes
paid $42 $7 $134 $59
6. OTHER INCOME (EXPENSE)
Three months ended Nine months ended
September 30 September 30
(in millions of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
Income from Fording Canadian
Coal Trust $33 $3 $51 $8
Gain (loss) on sale of
investments and assets 5 (3) 38 4
Gain on 5% sale of
Elkview mine 19 - 19 -
Interest and investment income 11 1 29 5
Insurance proceeds - 3 21 12
Additional Quebrada Blanca
sales proceeds 12 - 12 -
Non-hedge derivative losses (10) - (25) -
Asset retirement obligation
expense for closed properties (7) (9) (11) (13)
Miscellaneous income (expense) (7) (10) (28) (16)
---------------------------------------------------------------------
$56 $(15) $106 $-
---------------------------------------------------------------------
---------------------------------------------------------------------
7. EMPLOYEE FUTURE BENEFITS EXPENSE
Three months ended Nine months ended
September 30 September 30
(in millions of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
Pension plans $9 $10 $29 $31
Post-retirement benefit plans 5 4 13 11
---------------------------------------------------------------------
Employee future benefits
expense $14 $14 $42 $42
---------------------------------------------------------------------
---------------------------------------------------------------------
8. OTHER LIABILITIES
September 30 December 31
(in millions of dollars) 2005 2004
---------------------------------------------------------------------
Asset retirement obligation and closure costs $387 $383
Accrued pension and post-retirement benefits 178 182
Minority interests 15 10
Other 34 33
---------------------------------------------------------------------
$614 $608
---------------------------------------------------------------------
---------------------------------------------------------------------
9. SHAREHOLDERS' EQUITY
(a) Components of shareholders' equity
September 30 December 31
(in millions of dollars) 2005 2004
-----------------------------------------------------------------
Share capital $2,149 $2,124
Contributed surplus 60 58
Retained earnings 1,801 1,049
Cumulative translation adjustment (168) (117)
Exchangeable debentures (due 2024) 107 107
-----------------------------------------------------------------
$3,949 $3,221
-----------------------------------------------------------------
-----------------------------------------------------------------
The cumulative translation adjustment represents the net
unrealized foreign exchange gain (loss) on the translation of the
accounts of self-sustaining foreign subsidiaries and U.S. dollar
denominated debt designated as hedges against these investments.
(b) Stock-Based Compensation
In March 2005, 367,200 share options were granted to employees.
These options have an exercise price of $45.28, a term of six
years and vest in equal amounts over three years. The weighted
average fair value of Class B Subordinate Voting share options
issued was estimated as $18 per share option at the grant date
using the Black-Scholes option-pricing model. The option
valuation was based on an average expected option life of 4.73
years, a risk-free interest rate of 3.75%, a dividend yield of
0.88% and an expected volatility of 36%.
In the first and second quarter the company issued 232,000
Deferred and Restricted Share Units to employees and directors.
In addition, 3,679 units were issued in June in respect of
dividend entitlements on units which had previously been granted.
Deferred and Restricted Share Units issued in the year vest
immediately for directors and vest on December 31, 2007 for
employees. The company recorded stock-based compensation expense
of $12 million for the year to date in respect of all outstanding
options and share units. Total number of deferred and restricted
share units outstanding at the end of the period was 344,515.
10. DERIVATIVES AND FINANCIAL INSTRUMENTS AT SEPTEMBER 30, 2005
Unrealized
Market
Value
2008- Gain
2005 2006 2007 2010 Total (Loss)
---------------------------------------------------------------------
(Cdn$
millions)
Gold
(thousands of ozs)
Forward sales
contracts - - 44 87 131
Average price
(US$/oz) - - 350 350 350 $(20)
Forward sales
contracts 10 34 8 - 52
Average price
(C$/oz) 522 520 520 - 520 (2)
US dollars (millions)
(Note b)
Forward sales
contracts 76 159 - - 235
Average exchange
rate 1.48 1.44 - - 1.45 71
Power (MW.h)
Forward sales
contracts 30,800 - - - 30,800
Average price
(US$/MW.h) 51 - - - 51 (1)
Zinc
(millions of lbs)
(Note a)
Fixed forward
purchase
commitments 21 4 - - 25
Average price
(US cents/lb) 50 55 - - 50 4
Copper (Note c)
(Not qualified
for hedge
accounting)
Forward collars
(millions
of lbs) 20 - - - 20 (10)
Average upper
limit 1.30 - - - 1.30
Average lower
limit 1.15 - - - 1.15
Interest Rate Swap
Rate Rate Maturity Unrealized
Principal Amount Swapped Obtained Date Gain
---------------------------------------------------------------------
LIBOR September
US$100 million 7.00% plus 2.14% 2012 1
Notes:
(a) From time to time, certain customers purchase refined zinc at fixed
forward prices from the company's smelter and refinery operations.
The forward purchase commitments for zinc are matched to these fixed
price sales commitments to customers. Any gains or losses from these
forward purchase commitments will be offset by similar gains or
losses on the fixed price sales commitments. A portion of these
forward contracts do not qualify for hedge accounting and the company
has recognized mark-to-market and realized loss in other income and
expense of $0.4 million.
(b) Included in the U.S. dollar forward sales contracts of US$235 million
is the company's share of forward sales contracts by the Elk Valley
Coal Partnership of US$70 million.
(c) As copper concentrates contain copper and other payable metals, and
due to the effect of treatment and refining charges, circumstances
may arise whereby the forward sales contracts may not be considered
to be sufficiently effective under hedge accounting standards.
Accordingly, the company is unable to apply hedge accounting to
copper forward sales contracts. Mark-to-market and realized gains and
losses are included in other income and expense.
11. CONTINGENCIES
(a) Lake Roosevelt
On November 11, 2004, the District Court for Eastern Washington
State denied a motion by Teck Cominco Metals Ltd. (TCML) to
dismiss, for want of jurisdiction, a citizen's suit brought by
two members of the Confederated Tribes of the Colville
Reservation (the "Tribes") supported by the State of Washington.
On February 14, 2005, the Federal Court of Appeals for the 9th
Circuit granted TCML's petition for permission to appeal and the
District Court entered a stay of proceedings pending the appeal.
In September 2005, the State of Washington and the Tribes filed
motions to lift the stay of proceedings in District Court to add
the Tribes as an additional plaintiff and to file an amended
complaint adding the State's and the Tribes' claims for natural
resource damages and cost recovery under the Comprehensive
Environmental Response, Compensation and Liability Act
("CERCLA"). On September 29, 2005, the individual plaintiffs also
served notice of their intention to file suit under the U.S.
Resource Conservation and Recovery Act ("RCRA") seeking
injunctive relief and costs.
The original citizen's suit was brought pursuant to
Section 310(a)(i) of the U.S. Superfund Statute (CERCLA) to
enforce a unilateral administrative order issued by the U.S.
Environmental Protection Agency (EPA) purporting to require TCML
to conduct a remedial investigation and feasibility study with
respect to metal contamination in the sediments of the Upper
Columbia River and Lake Roosevelt. The EPA issued the order
shortly after breaking off negotiations with the company during
which TCML offered to fund human health and ecological studies,
at an estimated cost of US$13 million, to address the possible
impact of historical discharges from the Trail Metallurgical
Operations in British Columbia. Both the Canadian government and
the company have the view that the EPA does not have jurisdiction
to apply U.S. law in Canada. Teck Cominco has filed its brief
with the 9th Circuit and the Government of Canada, the Mining
Association of Canada and the Canadian Chamber of Commerce, the
US Chamber of Commerce and the US National Mining Association
have filed amicus briefs in support of Teck Cominco's position.
Oral argument has been scheduled for December 5, 2005.
The Government of Canada and the Government of the U.S. are
continuing to pursue a bilateral agreement to facilitate the
studies and appropriate remediation to address environmental
concerns about the area. Such an agreement could provide a basis
under which TCML's offer of funding for this work could be
implemented.
There can be no assurance the amount offered to fund the studies
will be sufficient or any offer to fund the studies will resolve
the matter, or that TCML or its affiliates will not be faced with
liability in relation to this matter. Until studies of the kind
described above are completed, it is not possible to estimate the
extent and cost, if any, of remediation that may be required.
(b) Competition Investigation
Teck Cominco Metals Ltd., as the marketing agent for Highland
Valley Copper Partnership (HVC), has responded to an Order issued
pursuant to the Competition Act to produce documents relevant to
the marketing of custom copper concentrates. The company
understands that this is part of an ongoing industry-wide
investigation involving major copper concentrate producers
commenced in Canada, the U.S. and Europe to determine whether
there is evidence of a cartel agreement and related illegal
practices concerning pricing, customer allocation and market
sharing in the copper concentrate sector. The company has been
advised by the United States Department of Justice that it
intends to close its investigation. We have also been advised by
the European Commission that they did not find any grounds to
proceed with the investigation and have closed their file on the
copper case. The company is co-operating in the continuing
investigation in Canada. There can be no assurance that the
investigation will not result in further regulatory action
against the company or HVC in Canada or that the company or HVC
will not face prosecution or liability under the Competition Act
or otherwise in relation to the investigation. The company can
also not predict the course of the ongoing investigation in
Canada or when the investigation will be completed.
12. SEGMENTED INFORMATION
The company has six reportable segments: zinc refineries, zinc,
copper, gold and coal mines and corporate. Segments are based upon
the principal product produced by each operation.
Three months ended September 30, 2005
--------------------------------------------------------
Corp-
Zinc orate
($ in Refin- Zinc and Inter-
millions) eries Mines Copper Gold Coal Other Segment Total
---------------------------------------------------------------------
Revenues 152 255 363 33 358 114 (125) 1,150
Operating
profit 34 107 239 3 182 (5) - 560
Capital
expenditures 4 14 12 29 32 - - 91
Nine months ended September 30, 2005
--------------------------------------------------------
Corp-
Zinc orate
($ in Refin- Zinc and Inter-
millions) eries Mines Copper Gold Coal Other Segment Total
---------------------------------------------------------------------
Revenues 686 420 1,114 98 835 135 (216) 3,072
Operating
profit 101 158 691 8 353 (5) - 1,306
Property,
plant and
equipment 992 990 745 299 433 17 - 3,476
Total assets 1,294 1,541 1,152 313 628 3,114 - 8,042
Capital
expenditures 24 30 21 61 87 3 - 226
Three months ended September 30, 2004
--------------------------------------------------------
Corp-
Zinc orate
($ in Refin- Zinc and Inter-
millions) eries Mines Copper Gold Coal Other Segment Total
---------------------------------------------------------------------
Revenues 248 191 317 32 162 7 (32) 925
Operating
profit 40 57 187 6 39 3 - 332
Capital
expenditures 7 15 2 25 17 1 - 67
Nine months ended September 30, 2004
--------------------------------------------------------
Corp-
Zinc orate
($ in Refin- Zinc and Inter-
millions) eries Mines Copper Gold Coal Other Segment Total
---------------------------------------------------------------------
Revenues 731 369 777 106 465 14 (85) 2,377
Operating
profit 102 105 404 24 93 4 - 732
Property,
plant and
equipment 1,205 1,094 781 224 380 16 - 3,700
Total assets 1,566 1,501 1,080 237 519 951 - 5,854
Capital
expenditures 14 31 13 51 36 3 - 148
13. SUBSEQUENT EVENT
Trail operations were shut down on July 19, 2005 due to a strike by
its unionized employees. On October 5, 2005 the employees ratified
the terms of a new collective agreement for the period from June 1,
2005 to May 31, 2008.
>>
For further information: Reference: Greg Waller, Investor Relations; Additional corporate information is available on the Internet at http://www.teckcominco.com; To request a free copy of this organization's annual report, please go to http://www.newswire.ca and click on Tools for Investors.
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