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VANCOUVER, BRITISH COLUMBIA--(Marketwire -
April 21, 2009) - All dollar amounts expressed in this news release are
in Canadian dollars unless otherwise noted.
Teck Cominco Limited (TSX: TCK.A and TCK.B, NYSE: TCK) announced that
net earnings were $241 million, or $0.50 per share, in the first
quarter. Earnings before non-recurring items and positive pricing
adjustments were $227 million and our operating profit, before
depreciation and pricing adjustments, was $765 million. At March 31,
2009, our cash balance was $1.6 billion.
"General economic conditions have improved somewhat in the first
quarter of the year, but we are still operating in challenging
times," said Don Lindsay, President and CEO. "Our operations
performed well, with all of our major sites generating positive cash
flow from operations in the quarter. We are also making progress with
our debt reduction plan and our non-core asset sales."
Highlights and Significant Items
- Revenues in the first quarter were $1,708 million, up 11% from $1,542
million in 2008. Operating profit before depreciation and pricing
adjustments was $765 million, up 29% from $594 million in 2008.
- It is difficult to forecast coal sales volumes at this stage in the
economic cycle and their effect on results for the coming year is
uncertain at this time. Currently we expect our 2009 coal sales to be
between 18 and 20 million tonnes, 90% of which is expected to be hard
coking coal. Actual volumes will depend on developments in global steel
markets. To date we have concluded price negotiations for approximately
11 million tonnes of coal for the 2009 coal year, with our highest
quality coal products being priced at US$128 per tonne. Negotiations
with the rest of our customers are ongoing. In addition, we have
several customer commitments to accept delivery of 1.6 million tonnes
of carryover tonnage at 2008 coal year prices. Negotiations on the
remaining carryover tonnage are also ongoing.
- In the first quarter we sold our investments in the Lobo-Marte gold
property in Chile
and our indirect interest in Sociedad Minera El Brocal S.A.A. We
realized cash proceeds of US$141 million and US$35 million respectively
for these sales, of which US$101 million was received in April.
- We have announced the sale of our 50% interest in the Hemlo gold
mines for US$65 million. We expect the transaction to close in the
second quarter of 2009.
- We also announced the sale of a royalty interest in respect of
Andacollo's gold production, which is expected to close in the second
quarter of 2009.
- To date we have received approximately $980 million of our expected
tax refunds of $1.1 billion arising from our acquisition of the coal
assets from Fording.
- We are also in advanced negotiations with our lenders to amend the
terms of the bridge and term loans related to the Fording acquisition.
- In the first quarter of 2009, Moody's Investor Services and Standard
& Poor's lowered our credit ratings to Ba3 and BB+ respectively,
both with a negative outlook.
This management's discussion and analysis is dated as at April 20, 2009
and should be read in conjunction with the unaudited consolidated
financial statements of Teck Cominco Limited (Teck) and the notes
thereto for the three months ended March 31, 2009 and with the audited
consolidated financial statements of Teck and the notes thereto for the
year ended December 31, 2008. In this news release, unless the
context otherwise dictates, a reference to "the company" or
"us", "we" or "our" refers to Teck and
its subsidiaries. Additional information, including our annual
information form and management's discussion and analysis for the year
ended December 31, 2008, is available on SEDAR at www.sedar.com.
This document contains forward-looking statements. Please refer to the
cautionary language under the heading "CAUTIONARY STATEMENT ON
FORWARD-LOOKING INFORMATION" below.
Earnings and Adjusted Earnings(i)
Net earnings were $241 million, or $0.50 per share in the first
quarter, compared with $345 million or $0.78 per share in the first
quarter of 2008. Earnings included positive after-tax pricing
adjustments of $43 million, primarily due to rising copper prices,
compared with $74 million in the same period last year. In addition, we
recorded after-tax gains totalling $168 million from the sale of our
interest in the Lobo-Marte gold project and our investment in El
Brocal. This was offset by non-cash foreign exchange translation losses
on our long-term debt of $203 million after-tax. We also recorded a $30
million tax recovery in respect of the effect of future provincial tax
rate reductions in British
Columbia.
(in millions of dollars) 2009 2008 ---------------------------------------------------------- Net earnings as reported $ 241 $ 345 Add (deduct): Derivative losses 24 - Asset sales and other (168) (8) Foreign exchange losses on debt 203 - Tax items (30) (11) ------------- Adjusted net earnings 270 326 Positive pricing adjustments (note 1) (43) (74) ------------- Comparative net earnings $ 227 $ 252 ------------- (1) See FINANCIAL INSTRUMENTS AND DERIVATIVES section for further information.
(i)
Our financial results are prepared in accordance with Canadian GAAP
(GAAP). This news release refers to adjusted net earnings, comparative
net earnings, operating profit and operating profit before depreciation
and pricing adjustments, which are not measures recognized under GAAP
in Canada or the United States and do not have a standardized meaning
prescribed by GAAP. For adjusted net earnings and comparative net
earnings, we adjust net earnings as reported to remove the effect of
unusual and/or non-recurring transactions in these measures. Operating
profit is revenues less operating expenses and depreciation and
amortization. Operating profit before depreciation and pricing
adjustments is operating profit with depreciation, amortization and
pricing adjustments added or deducted as appropriate. Pricing
adjustments are described under the heading "Average Commodity
Prices and Exchange Rates" below. These measures may differ from
those used by, and may not be comparable to such measures as reported
by other issuers. We disclose these measures, which have been derived
from our financial statements and applied on a consistent basis,
because we believe they are of assistance in understanding the results
of our operations and financial position and are meant to provide
further information about our financial results to shareholders.
Debt Reduction
In order to finance the 2008 acquisition of the Fording assets we
entered into bridge and term financing facilities with a consortium of
lenders for a total of US$9.8 billion. As at April 20, 2009, US$9.2
billion was outstanding. It was our plan to repay the current portion
of the debt through operating cash flows, sale of non-core assets and
receipt of substantial tax refunds and by accessing bond markets for
longer term financing. In the fourth quarter of 2008, general global
economic conditions deteriorated substantially, effectively closing the
credit markets to us. We also saw a sharp decline in the selling price
of our products as well as reduced coal sales volumes. As a result of
these conditions, our credit ratings were lowered and our ability to
carry out the original refinancing and repayment plan was compromised.
Subsequent to year end markets for base metals have improved
substantially. By April 15th, prices for copper, zinc and lead had
improved by 54%, 30% and 58% respectively from December, 2008 year end
prices. We have also settled a substantial portion of our metallurgical
coal sales for the 2009 coal year at price levels which, while
substantially lower than 2008, are the second highest ever.
We have also taken the following steps to assist us in meeting our
obligations under our lending agreements:
- To date, we have received proceeds of US$141 million from the sale of
our investments in the Lobo-Marte gold property in Chile and US$35
million from the sale of our indirect interest in Sociedad Minera El
Brocal S.A.A.
- We have announced the sales of our 50% interest in the Hemlo gold
mines, and a 75% interest in the future gold production from our Andacollo
mine.
The sale of Hemlo is expected to close in the second quarter of 2009
for proceeds of US$65 million, less any cash flow received since
January 1, 2009.
The sale of a royalty interest in respect of Andacollo's gold
production is expected to close in the second quarter of 2009 with
Andacollo realizing proceeds of US$218 million cash and 1.2 million
shares of Royal Gold, Inc.
We are also in various stages of advanced negotiations and discussions
with respect to the sale of other non-core assets.
- We expedited the filing of our 2008 tax returns to accelerate the
receipt of cash refunds expected to total approximately $1.1 billion. To
date we have received approximately $980 million.
- We suspended our semi-annual dividend.
- We have placed operations that have become unprofitable in the new
commodity price environment on care and maintenance.
- We reduced production at Trail and Teck Coal to better match supply
to demand.
- We have implemented workforce reductions totalling 1,400 positions
and cut administrative overhead.
- We have reduced our capital expenditure and exploration budgets,
placed development projects on hold, and have entered into equipment
leasing programs where appropriate to conserve cash.
We are also in advanced negotiations with our lenders to amend our
bridge and term loans to provide us with additional time to generate
cash and/or access appropriate sources of financing to repay the loans
and we intend to access the debt capital markets to issue longer term
bonds as market conditions permit.
Our ability to repay or refinance the bridge facility prior to its
maturity and make the scheduled instalment payments on the term
facility depends on a number of factors, some of which are beyond our
control. There is no assurance that our expected cash flows from
operations in combination with asset sales and other steps being taken
will allow us to meet these revised obligations as they become due.
Business Unit Results
Our first quarter business unit results are presented in the table
below:
Operating profit before depreciation and Operating (in millions of dollars) Revenues pricing adjustments profit ---------------------------------------------------------------------------- 2009 2008 2009 2008 2009 2008 ---------------------------------------------------------------------------- Copper $ 447 $ 716 $ 168 $ 372 $ 158 $ 435 Coal 874 221 519 26 429 15 Zinc 348 573 60 183 40 155 Gold 39 32 18 13 9 6 ---------------------------------------------------------------------------- Total $ 1,708 $1,542 $ 765 $ 594 $ 636 $ 611 ----------------------------------------------------------------------------
Operating
profit from our copper business unit was $158 million in the first
quarter after the effect of $63 million of positive pricing
adjustments. This compares with an operating profit of $435 million
after $115 million of positive pricing adjustments in the first quarter
of 2008. The decline in operating profit was primarily due to lower
copper prices, which averaged US$1.56 per pound in the first quarter
compared with US$3.54 per pound in the first quarter of 2008. Higher
sales volumes, which increased 22% from a year ago due to timing of
shipments, lower operating costs and the effect of a weaker Canadian
dollar partially offset the lower copper price.
Operating profit from our coal business unit accounted for 67% of our
operating profit and was $429 million in the first quarter compared
with $15 million in the same period last year. The significantly higher
operating profit reflected higher coal prices and our ownership of 100%
of Teck Coal compared with a 40% direct interest last year. Coal prices
averaged US$204 per tonne in the first quarter compared with US$96 per
tonne realized in the first quarter of 2008. Our realized coal price
was affected by the sale of approximately 275,000 tonnes of lower
priced 2007 coal year carryover tonnages and 600,000 tonnes of thermal
coal in the quarter. Operating profits were also negatively affected by
currency hedging losses on our US dollar revenues of $57 million. Coal
sales on a 100% basis were 3.7 million tonnes in the first quarter
representing a 36% decline from the same period a year ago, as our
customers significantly reduced their coal deliveries in late 2008 in response to
lower steel production.
Our zinc business unit operating profit was $40 million in the first
quarter compared with $155 million in the first quarter of 2008. This
was the result of significantly lower zinc prices and reduced sales
volumes. Positive pricing adjustments increased earnings by $7 million
in the first quarter, the same as a year ago. Sales volumes of refined
zinc from our Trail operations were 21% lower due to production
curtailments implemented in late 2008 in response to
the lower demand from customers. Our Pend Oreille mine was placed on
care and maintenance at the end of February due to reduced metal demand
and persistent weakness in zinc prices.
Our gold business unit, which consists of our 40% interest in the Pogo
mine, generated an operating profit of $9 million in the quarter
compared with $6 million in the first quarter of 2008. In February
we entered into an agreement to sell our Hemlo mines for US$65 million
and have reclassified these as discontinued operations. We also sold
our Lobo-Marte gold project for US$40 million cash and approximately
5.6 million Kinross shares, which were sold in April 2009 for US$101
million. Proceeds from these asset sales are used to reduce the bridge
financing as part of our debt reduction program.
Revenues
Revenues from operations were $1.7 billion in the first quarter of 2009
compared with $1.54 billion a year ago. Revenues from coal operations
increased by $653 million, with $524 million attributable to our
increased ownership interest in Teck Coal. This was partially offset by
reduced copper and zinc revenues of $494 million due to lower base
metal prices.
Average Commodity Prices and Exchange Rates(i) Three months ended March 31, 2008 2009 2008 %Change ----------------------------------------------------------------- Copper (LME Cash - US$/pound) 1.56 3.54 -56% Coal (realized - US$/tonne) 204 96 +113% Zinc (LME Cash - US$/pound) 0.53 1.10 -52% Gold (LME PM fix - US$/ounce) 908 928 -2% Molybdenum (published price - US$/pound) 9 33 -73% Lead (LME Cash - US$/pound) 0.53 1.31 -60% US/Cdn exchange rate (Bank of Canada) 1.24 1.00 +24% (i) The average commodity prices disclosed above are provided for information only. Our actual revenues are determined using commodity prices and other terms and conditions specified in our various sales contracts with our customers. The molybdenum price is the major supplier selling price published in Platts Metals Week.
Sales
of metals in concentrate are recognized in revenue on a provisional
pricing basis when title transfers and the rights and obligations of
ownership pass to the customer, which usually occurs upon shipment. However,
final pricing is typically not determined until a subsequent date,
often in the following quarter. Accordingly, revenue in a quarter is
based on current prices for sales occurring in the quarter and ongoing
pricing adjustments from sales that are still subject to final pricing.
These pricing adjustments result in additional revenues in a rising
price environment and reductions to revenue in a declining price
environment. The extent of the pricing adjustments also takes into
account the actual price participation terms as provided in the
concentrate sales agreements. In the first quarter of 2009, we had
positive pricing adjustments of $73 million ($43 million after
non-controlling interests, royalties and tax) compared with $128
million ($74 million after non-controlling interests, royalties and
tax) in the first quarter of 2008. The 2009 amount is comprised of $22
million of pricing adjustments on sales from the previous quarter, and
$51 million on sales that were initially recorded at the average price
for the month of shipment and subsequently revalued to quarter end
forward curve prices.
At December 31, 2008, outstanding receivables included 164 million
pounds of copper provisionally valued at an average of US$1.40 per
pound, 195 million pounds of zinc valued at an average of US$0.54 per
pound and 45 million pounds of lead provisionally valued at an average
of US$0.42 per pound. During the first quarter of 2009, 151 million
pounds of copper included in the December 31, 2008 receivables were
settled at an average final price of US$1.53 per pound, 195 million
pounds of zinc were settled at an average final price of US$0.53 per
pound and 45 million pounds of lead were settled at an average final
price of US$0.51 per pound, resulting in positive after-tax pricing
adjustments of C$14 million ($22 million before tax) in the quarter. Positive
after-tax pricing adjustments on current quarter sales were C$29
million.
Commodity Hedge Positions
At March 31, 2009, outstanding receivables included 113 million pounds
of copper provisionally valued at an average of US$1.83 per pound and
95 million pounds of zinc valued at an average of US$0.60 per pound. There
were no outstanding lead receivables at March 31, 2009. Final price
adjustments on these outstanding receivables will increase or decrease
our revenue in 2009 depending on metal prices at the time of
settlement. To date we have also sold forward 83 million pounds of
copper at an average price of US$1.86 with maturities in various months
to July, 2009. This includes forward sales contracts for 45 million
pounds at an average price of US$1.69 per pound which were in place at
March 31, 2009. As at March 31, 2009, US$39 million of outstanding US
dollar forward sales contracts at an average price of C$1.02, all of
which matured in early April.
Cash Flow from Operations
Cash flow from operations was $1.1 billion in the first quarter
compared with $157 million in the same period last year. Cash flow from
operations before working capital changes was up slightly despite lower
earnings as the 2009 figures include a number of non-cash items
including foreign exchange revaluations on our long term debt. A
reduction in working capital also contributed to cash flow as tax
refunds of $801 million were partially offset by payment of negative
pricing adjustments from the previous quarter, currency hedges and
seasonal items. In 2008 working capital was negatively impacted by
large tax payments.
BUSINESS UNIT RESULTS
The table below shows our share of production and sales of our major
commodities.
Units (000's) Production Sales ---------------------------------------------------------------------------- First Quarter First Quarter -------------- ------------- 2009 2008 2009 2008 -------------------------------------------------------------- ------------- Principal products Copper Contained in concentrate tonnes 47 45 56 43 Cathodes (note 1) tonnes 27 26 27 25 ---------------------------- 74 71 83 68 ---------------------------- Coal (note 2) Direct share tonnes 3,966 2,357 3,687 2,303 Indirect share tonnes - 707 - 691 ---------------------------- 3,966 3,064 3,687 2,994 ---------------------------- Refined zinc tonnes 58 74 57 73 Zinc contained in concentrate (note 3) tonnes 167 175 130 135 Gold (note 4) ounces 76 66 80 69 Major by-products Molybdenum contained in concentrate pounds 1,875 1,621 1,834 1,591 Refined lead tonnes 19 26 17 24 Lead contained in concentrate tonnes 33 39 1 3 ---------------------------------------------------------------------------- (1) We include 100% of production and sales from our Quebrada Blanca and Andacollo mines in our production and sales volumes, even though we own 76.5% and 90%, respectively, of these operations, because we fully consolidate their results in our financial statements. (2) The direct share of coal production included our 40% proportionate share of production from Teck Coal until October 30, 2008 prior to our acquisition of Fording and 100% thereafter. The indirect share of coal production was the pro rata share of production represented by our 19.95% interest in units of Fording. (3) The Lennard Shelf zinc mine ceased production in August 2008 and the Pend Oreille zinc mine was placed on care and maintenance in February 2009. (4) Includes production from Hemlo that is classified as discontinued operations.
REVENUES
AND OPERATING PROFIT
QUARTER ENDED MARCH 31
Our revenue, operating profit before depreciation and pricing
adjustments and operating profits by business unit are summarized in
the table below:
Operating profit before Operating depreciation profit and pricing (loss) ($ in millions) Revenues adjustments (note 3) --------------------------------------------------------------------------- 2009 2008 2009 2008 2009 2008 --------------------------------------------------------------------------- Copper Highland Valley Copper $ 186 $ 270 $ 51 $ 144 $ 72 $ 189 Antamina 126 190 63 109 77 147 Quebrada Blanca 94 171 41 81 7 72 Carmen de Andacollo 24 45 12 24 1 18 Duck Pond 17 40 1 14 1 9 --------------------------------------------------------------------------- 447 716 168 372 158 435 Coal (note 1) 874 221 519 26 429 15 Zinc Trail (including power sales) 292 441 31 77 18 64 Red Dog 91 170 29 98 21 87 Corporate and other (note 2) 14 40 1 8 2 4 Inter-segment sales (49) (78) (1) - (1) - --------------------------------------------------------------------------- 348 573 60 183 40 155 Gold (note 4) 39 32 18 13 9 6 --------------------------------------------------------------------------- TOTAL $ 1,708 $ 1,542 $ 765 $ 594 $ 636 $ 611 --------------------------------------------------------------------------- (1) On October 30, 2008, we completed the acquisition of Fording's assets which increased our direct ownership interest in Teck Coal from 40% to 100%. The results summarized in the above table reflect our increased ownership from October 30, 2008. (2) Our Pend Oreille zinc mine was placed on care and maintenance in February 2009 and the Lennard Shelf zinc mine ceased production in August 2008. (3) After depreciation, amortization and pricing adjustments. (4) Gold operations include our 40% interest in the Pogo gold mine. Our Hemlo gold operations have been classified as discontinued operations pending their sale, which is expected in the second quarter of 2009.
COPPER
Highland Valley Copper (97%)
Operating results at the 100% level are summarized in the following
table:
Three months ended March 31 2009 2008 --------------------------------------------- Tonnes milled (000's) 10,972 10,459 Copper Grade (%) 0.30 0.31 Recovery (%) 84.4 83.1 Production (000's tonnes) 27.4 26.6 Sales (000's tonnes) 34.5 25.6 Molybdenum Production (million pounds) 1.4 0.8 Sales (million pounds) 1.3 0.8 Cost of sales ($ millions) Operating costs $ 91 $ 64 Distribution costs $ 8 $ 7 Depreciation and amortization $ 15 $ 10 Operating profit ($ millions) Before depreciation $ 87 $ 199 After depreciation $ 72 $ 189 ---------------------------------------------
Highland
Valley Copper's operating profit declined to $72 million in the first
quarter compared with $189 million in the same period last year. Positive
pricing adjustments of $36 million were recorded in the quarter
compared with $55 million in the first quarter of 2008. The reduction
in operating profit before pricing adjustments was due to significantly
lower copper prices partially offset by higher sales volumes and a
weaker Canadian dollar. Copper sales volumes were 35% higher than the
first quarter of 2008 due to timing of shipments.
Copper production in the first quarter was 3% higher than the same
period a year ago. Copper recoveries improved slightly from a year ago
and are expected to remain similar to current levels for the first half
of 2009 while a high percentage of ore is processed from the clay
bearing Lornex pit, but are expected to improve to between 86% and 88%
by the end of 2009. Lornex ore accounted for 44% of mill throughput
compared with 50% in the first quarter of 2008. Molybdenum production
increased to 1.4 million pounds compared with 800,000 pounds
in the first quarter of 2008 as a result of mining in a higher grade
section of the Valley pit.
The remediation of the two Valley pit geotechnical failures experienced
in the latter part of 2008 was substantially completed in the first
quarter of 2009. Pre-production stripping of the east wall in the
Valley pit is continuing with expected completion in the third quarter
of 2009. After this stripping is complete, work will commence on the construction
of a 3.5 million tonne buttress to provide long term stability of the
east wall. Pre-production stripping of the west wall is expected to
start in late 2009 after the permit amendment for this next phase of
mine life extension is received.
Antamina (22.5%)
Operating results at the 100% level are summarized in the following
table:
Three months ended March 31 2009 2008 ---------------------------------------------------------------- Tonnes milled (000's) Copper-only ore 3,803 3,892 Copper-zinc ore 4,050 2,626 --------------------------------------------------------------- 7,853 6,518 Copper (note 1) Grade (%) 1.22 1.21 Recovery (%) 83.4 90.0 Production (000's tonnes) 79.0 74.1 Sales (000's tonnes) 88.4 62.7 Zinc (note 1) Grade (%) 2.94 3.60 Recovery (%) 83.5 88.4 Production (000's tonnes) 92.4 77.6 Sales (000's tonnes) 85.5 58.0 Molybdenum Production (million pounds) 2.1 3.8 Sales (million pounds) 2.5 3.5 Cost of sales (US$ millions) Operating costs $ 120 $ 85 Distribution costs $ 20 $ 22 Royalties and other costs (note 2) $ 8 $ 53 Depreciation and amortization $ 24 $ 30 Our 22.5% share of operating profit ($ millions) Before depreciation $ 84 $ 152 After depreciation $ 77 $ 147 ---------------------------------------------------------------- (1) Copper ore grades and recoveries apply to all of the processed ores. Zinc ore grades and recoveries apply to copper-zinc ores only. (2) In addition to royalties paid by Antamina, we also pay a royalty to the vendor of our interest in Antamina equivalent to 7.4% of our share of cash flow distributed by the mine.
Our
22.5% share of Antamina's operating profit, before positive pricing
adjustments, declined to $56 million in the first quarter compared with
$104 million in the same period last year. The decline in operating
profit was due to significantly lower copper and zinc prices partially
offset by higher sales volumes. Our share of positive pricing
adjustments in the first quarter was $21 million compared with $43
million in the same period a year ago.
Tonnes milled increased 20% as the main grinding mill operated at near
full capacity in the first quarter, as performance last year was
affected by 11 days of down time due to electrical problems. In
addition, the new pebble crusher, which came on-line in the third
quarter of 2008, increased throughput slightly. These items were partly
offset by lower recoveries as a result of the type of ore processed in
the quarter.
As a result of higher mill throughput, copper production in the first
quarter increased by 7% to 79,000 tonnes compared with 74,100 tonnes a
year ago. Zinc production in the quarter increased by 19% over last
year to 92,400 tonnes due to processing a greater amount of copper-zinc
ores, partly offset by lower ore grades due to mine sequencing.
Sales volumes were higher than production levels, significantly higher
than the first quarter of 2008, as poor weather at the port had delayed
shipments in the first quarter of 2008. The operating cost component of
cost of sales increased by 41% in direct relation to an increase in the
sales volumes of zinc and copper concentrates.
Quebrada Blanca (76.5%)
Operating results at the 100% level are summarized in the following
table:
Three months ended March 31 2009 2008 ------------------------------------------------------- Tonnes placed (000's) Heap leach ore 1,836 1,669 Dump leach ore 1,573 2,500 ------------------------------------------------------ 3,409 4,169 Grade (TCu%) (note 1) Heap leach ore 1.23 1.21 Dump leach ore 0.48 0.64 Production (000's tonnes) Heap leach ore 15.7 15.5 Dump leach ore 5.9 5.4 ------------------------------------------------------ 21.6 20.9 Sales (000's tonnes) 21.2 19.9 Cost of sales (US$ million) Operating costs $ 40 $ 53 Inventory adjustments (note 2) $ - $ 23 Distribution costs $ 2 $ 2 Depreciation and amortization $ 27 $ 20 Operating profit ($ millions) (note 3) Before depreciation $ 41 $ 92 After depreciation $ 7 $ 72 ------------------------------------------------------- (1) TCu% is the percent assayed total copper grade. (2) Inventory adjustments consisted of mark-to-market adjustments of work in process inventory at the time of the acquisition of the mine from Aur Resources in August 2007, which were charged to earnings as the inventory was sold. (3) Results do not include a provision for the minority interests' 23.5% share of Quebrada Blanca.
Quebrada
Blanca's operating profit, which included nominal pricing adjustments,
was $7 million in the first quarter. This compares with $72 million in
the first quarter of 2008, or $84 million before positive pricing
adjustments of $11 million and a $23 million charge in respect of
inventory revaluations to fair value on the acquisition of the mine
from Aur Resources.
Operating profit in the first quarter of 2009 benefited from the
reversal of an $8 million inventory provision, which was initially
provided for in December 2008 due to the sharp decline in copper prices
at year end. This provided a lower cost base for the copper inventory
sold in the first quarter and a reduction in the reported cost of
sales.
Copper production and sales volumes in the first quarter were slightly
higher than last year at 21,600 tonnes and 21,200 tonnes, respectively.
Operating costs, before changes in inventory, were US$42 million in the
first quarter compared with US$60 million in the first quarter of 2008
due to lower sulphuric acid, energy and other input costs. The full
effect of these lower costs will be realized once in-process
inventories are processed and we expect sulphuric acid costs to
continue to decline in the second quarter.
Carmen de Andacollo (90%)
Operating results at the 100% level are summarized in the following
table:
Three months ended March 31 2009 2008 ------------------------------------------------------ Tonnes placed (000's) Heap leach ore 959 894 Dump leach ore 237 215 ----------------------------------------------------- 1,196 1,109 Grade (TCu%) (note 1) Heap leach ore 0.63 0.63 Dump leach ore 0.29 0.24 Production (000's tonnes) Heap leach ore 4.2 3.8 Dump leach ore 1.1 1.4 ----------------------------------------------------- 5.3 5.2 Sales (000's tonnes) 5.3 5.3 Cost of sales (US$ million) Operating costs $ 7 $ 12 Inventory adjustments (note 2) $ - $ 6 Distribution costs $ 1 $ 1 Depreciation and amortization $ 11 $ 8 Operating profit ($ millions) (note 3) Before depreciation $ 14 $ 26 After depreciation $ 1 $ 18 ------------------------------------------------------ (1) TCu% is the percent assayed total copper grade. (2) Inventory adjustments consisted of mark-to-market adjustments of work in process inventory at the time of the acquisition of the mine from Aur Resources in August 2007, which were charged to earnings as the inventory was sold. (3) Results do not include a provision for the minority interests' 10% share of Andacollo.
Andacollo's
operating profit was $1 million in the first quarter after positive
price adjustments of $1 million. This compares with an operating profit
of $22 million in the first quarter of 2008, before positive price
adjustments of $2 million and a $6 million charge in respect of
inventory revaluations to fair value on the acquisition of the mine
from Aur Resources.
Operating profit in the first quarter of 2009 benefited from the
reversal of a $6 million inventory provision, which was initially
provided for in December 2008 due to the sharp decline in copper prices
at year end. This provided a lower cost base for the copper inventory
sold in the first quarter and a reduction in the reported cost of
sales.
Copper production of 5,300 tonnes in the first quarter was similar to
the same period last year, and sales volumes were the same as last
year, also at 5,300 tonnes.
The development of Andacollo's concentrate project is progressing
according to plan with production start up scheduled for 2010. The
development consists of the construction of a 55,000 tonne per day
concentrator and tailings facility and is expected to produce 76,000
tonnes (168 million pounds) of copper and 53,000 ounces
of gold in concentrate annually over the first 10 years of the project.
Detailed engineering on the project is complete. Concrete work is well
advanced for the concentrator and steel erection for the mill has
started. Approximately two thirds of the new 26.8 kilometre
fresh water line has been laid and welded. The capital cost forecast
for the project is US$425 million using a US$1 equals 535 Chilean pesos
exchange rate, of which US$281 million has been spent from inception to
March 31, 2009. On April 6, 2009, Andacollo announced the sale of an
interest in the gold production from the Andacollo mine to Royal Gold,
Inc. ("Royal Gold"). Based on Royal Gold's recent common
stock offering, proceeds to Andacollo are expected to be approximately
US$218 million cash and 1.2 million common shares of Royal Gold,
assuming the underwriters' over-allotment option is not exercised.
Royal Gold will be entitled to payment based on 75% of the payable gold
produced until total cumulative production reaches 910,000 ounces
of gold, and 50% thereafter.
Closing is subject to customary conditions and is expected to occur in
the second quarter of 2009.
The proceeds received will be accounted for as deferred revenue and
amortized to revenue based on the gold sold over the life of the
hypogene project. Accordingly, no gain or loss will be recorded for
this transaction.
Duck Pond (100%)
Duck Pond's operating profit was $1 million in the first quarter,
including $5 million in positive pricing adjustments. Copper and zinc
production in the quarter were 3,000 tonnes and 4,300 tonnes
respectively, compared with 2,500 tonnes and 4,400 tonnes in the same
quarter a year ago. Sales volumes in the first quarter were 2,800
tonnes of copper and 7,300 tonnes of zinc. Underground ramp development
to the lower part of the orebody is expected to be complete in the second
quarter of 2009 which will allow access to new primary production areas
in the second half of the year.
Development Projects
Due to the present economic conditions, no significant work was done on
our copper development projects during the first quarter of 2009.
In February 2009, we amended certain provisions of the partnership
agreement relating to the Galore Creek Project. Under the amended
agreement, our remaining committed funding on Galore Creek has been
reduced to approximately $32 million, which must be contributed by
December 31, 2012. While we are making these committed contributions,
which will represent 100% of project funding, we will have a casting
vote on the Galore Creek management committee with respect to the
timing and nature of expenses to be funded. The new funding
arrangements replace the arrangements agreed by us and NovaGold in
November 2007, pursuant to which we had committed to spend an
additional $72 million on studies to reassess the Galore Creek Project,
of which $15.8 million had been spent to December 31, 2008, in addition
to our share of other project costs.
COAL
Teck Coal Partnership (100%)
Operating results are summarized in the following table:
Three months ended March 31 2009 2008 ------------------------------------------------------------------- Production (000's tonnes) 3,966 5,892 Sales (000's tonnes) 3,687 5,758 Average sale price US$/tonne $ 204 $ 96 C$/tonne $ 237 $ 96 Operating expenses (C$/tonne) Cost of product sold $ 61 $ 48 Transportation $ 36 $ 37 Depreciation $ 24 $ 5 Our share of operating profit ($ millions) (note 1) Before depreciation $ 519 $ 26 After depreciation $ 429 $ 15 ------------------------------------------------------------------- (1) Results of Teck Coal represent our 100% direct interest commencing October 30, 2008 and 40% prior to that date.
On
October 30, 2008, we acquired all the assets of Fording, which
primarily consisted of Fording's 60% interest in Teck Coal (formerly
Elk Valley Coal Partnership). The transaction increased our interest in
the partnership from our effective 52% to a 100% direct interest. We
began to fully consolidate the results of Teck Coal from October 30,
2008.
Operating profit in the first quarter increased significantly to $429
million compared with $15 million in 2008. The increase was due to our
increased ownership and significantly higher coal prices, which
averaged US$204 per tonne in the first quarter compared with US$96 per
tonne in the first quarter of 2008. Our realized Canadian dollar coal
price in the quarter benefited from the weaker Canadian dollar and
averaged C$237 per tonne compared with C$96 per tonne last year. Approximately
275,000 tonnes of carryover tonnage from the 2007 coal year, 600,000
tonnes of thermal coal and 680,000 tonnes priced at the 2009 coal year
prices were sold in the quarter, which reduced the average price by
US$75 per tonne to US$204 per tonne in the first quarter, compared with
US$96 per tonne in 2008.
Coal sales were 3.7 million tonnes in the first quarter or 36% lower
than a year ago as our customers significantly reduced their coal
deliveries beginning in late 2008 in response to lower steel
production.
Coal production in the first quarter of 2009 was reduced to match the
lower sales volume levels resulting in a 33% decrease in production to
4.0 million tonnes compared with the first quarter of 2008.
The unit cost of product sold increased to $61 per tonne compared with
$48 per tonne for the first quarter of 2008. Lower production volumes,
which increase fixed costs per tonne of coal produced, and higher strip
ratios contributed to the unit cost increase. The benefits of lower
fuel prices and shorter haul distances in the first quarter of 2009
were generally offset by higher labour costs and the impact of British
Columbia carbon taxes, which became effective in July, 2008. The
additional waste moved in the first quarter is expected to benefit
strip ratios and production costs in the remaining three quarters of
2009.
Unit transportation costs of $36 per tonne were similar to a year ago
as the higher port loading costs in the first quarter of 2009, which
are variable in part with average selling prices, were generally offset
by lower ocean freight rates and vessel demurrage costs.
We have settled coal contracts with the majority of our customers in
Asia and with some of our customers in Europe and North America for the
2009 coal year that commenced April 1. Settlement prices of US$128 per
tonne for our highest quality products are consistent with prices
achieved by our Australian competitors. The negotiations have also
included the treatment of carryover tonnage from the 2008 coal year,
which is being negotiated independently from the pricing on 2009 coal
year tonnage. Average selling prices for the 2009 coal year will
reflect a range of hard coking coal products of various qualities as
well as thermal and PCI coal, which normally comprise about 10% of our
coal sales volume. For the 2009 calendar year, coal sales volumes are
currently expected to be in the range of 18 to 20 million tonnes. This
sales volume guidance should be considered in the context of highly
uncertain market conditions. Further decreases in steel production and
demand for hard coking coal could cause 2009 sales volumes to fall
short of this guidance range.
ZINC
Trail (100%)
Operating results at the 100% level are summarized in the following
table:
Three months ended March 31 2009 2008 ----------------------------------------------------------------- Metal production Zinc (000's tonnes) 58.4 73.7 Lead (000's tonnes) 19.3 25.6 Metal sales Zinc (000's tonnes) 57.4 73.0 Lead (000's tonnes) 17.3 23.7 Power Surplus power sold (GW.h) 276 189 Power price (US$/MW.h) $ 37 $ 75 Cost of sales ($ millions) Concentrates $ 158 $ 254 Operating costs $ 78 $ 86 Distribution costs $ 25 $ 25 Depreciation and amortization $ 13 $ 13 Operating profit before depreciation ($ millions) Metal operations $ 20 $ 64 Power sales $ 11 $ 13 Operating profit after depreciation ($ millions) Metal operations $ 10 $ 55 Power sales $ 8 $ 9 -----------------------------------------------------------------
Operating
profit at Trail's metal operations was $10 million in the first quarter
compared with $55 million in the same period last year due to
significantly lower zinc and lead prices. As a result of implementing
zinc production curtailments in late 2008 to better match market
conditions, refined zinc sales volumes decreased 21% compared with the
same period a year ago. The weaker Canadian dollar partly offset the
lower metal prices and sales volumes.
Refined lead production will not be affected by the zinc production
curtailments, although production declined by 21% in the first quarter
due to accretions in the continuous drossing furnace that restricted
proper flows.
Operating profit from surplus power sales in the first quarter of $8
million was slightly lower than a year ago. As a result of the zinc
production curtailments, surplus power sales volumes increased to 276
gigawatt hours from 189 gigawatt hours in the first quarter of 2008. This
was offset by a sharp decline in power prices, which averaged US$37 per
megawatt hour compared with US$75 per megawatt hour in the same period
last year.
Upper Columbia River Basin (Lake Roosevelt)
On December 31, 2008, the EPA approved the work plan required for the
assessment of site conditions which will lead to the development of a
set of sampling and other plans and field work in 2009. A beach
sediment sampling plan was approved in March 2009. Data from field work
expected to be conducted this summer will be used to determine whether
further studies are required.
Following the denial of our petition for review by the U.S. Supreme
Court in January 2008, the Lake Roosevelt litigation reverted to the
Federal District Court for Eastern Washington. Judgment on the first
phase of the litigation dealing with issues associated with an EPA
order issued in December, 2003 and withdrawn in June 2008 was delivered
on September 19, 2008. All of the claims associated with the order were
dismissed. The plaintiffs have appealed the dismissal to the 9th
Circuit Court of Appeal.
In November, 2008, Teck Cominco Metals Ltd. ("TCML") filed a
motion to stay the plaintiffs' Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") cost recovery
declaratory relief claim. On December 30, 2008, the Court denied the
motion and discovery and briefing of the liability phase of the
litigation will occur in 2009. The hearing for this phase of the
litigation is set for October, 2010.
On March 9, 2009, the Court granted the plaintiffs motion for an award
of the costs of litigating the CERCLA enforcement proceeding. The Court
certified its order for immediate appeal and we intend to appeal the
decision to the 9th Circuit.
The hearing of the plaintiffs' claims for natural resource damages and
costs has been deferred until the remedial investigation and
feasibility study being conducted by TCML's affiliate Teck American
Incorporated ("TAI") under the EPA Agreement have been
substantially advanced or completed. Natural resource damages
("NRD") are assessed for injury to, destruction of, or loss
of natural resources including the reasonable cost of a damage
assessment. Teck American commissioned a study by recognized experts in
NRD assessment in 2008. Based on the assessment performed, we estimate
that the compensable value of such damage will not be material.
There can be no assurance that TCML will ultimately be successful in
its defense of the litigation or that TCML or its affiliates will not
be faced with further liability in relation to this matter. Until the
studies contemplated by the Agreement and additional damage assessments
are completed, it is not possible to estimate the extent and cost, if
any, of remediation or restoration that may be required or to assess
the company's potential liability for damages. The studies may
conclude, on the basis of risk, cost, technical feasibility or other
grounds, that no remediation should be undertaken. If remediation is
required, the cost of remediation may be material.
Red Dog (100%)
Operating results at the 100% level are summarized in the following
table:
Three months ended March 31 2009 2008 ----------------------------------------------- Tonnes milled (000's) 790 775 Zinc Grade (%) 21.2 21.3 Recovery (%) 82.0 83.8 Production (000's tonnes) 137.4 138.5 Sales (000's tonnes) 97.9 103.4 Lead Grade (%) 5.8 7.2 Recovery (%) 70.5 63.5 Production (000's tonnes) 32.3 35.5 Sales (000's tonnes) - - Cost of sales (US$ millions) Operating costs $ 28 $ 26 Distribution costs $ 19 $ 18 Royalties (NANA and State) $ (2) $ 29 Depreciation and amortization $ 11 $ 10 Operating profit ($ millions) Before depreciation $ 35 $ 103 After depreciation $ 21 $ 87 -----------------------------------------------
Red
Dog's operating profit, before pricing adjustments, declined to $15
million in the first quarter compared with $82 million in the same
period last year due to significantly lower zinc prices. Positive
pricing adjustments were $6 million in the first quarter compared with
$5 million in the first quarter of 2008.
Zinc production in the first quarter of 2009 was slightly lower than
last year at 137,400 tonnes, as the higher mill throughput was offset
by lower mill recoveries due to the ore types processed in the quarter.
Lead production declined by 9% to 32,300 tonnes as the mining of higher
grade sections had taken place in the first quarter of 2008. Operating
costs increased slightly from a year ago due to higher fuel and labour
costs, while NANA royalty costs decreased significantly from a year ago
due to the decline in the operating profit margin in the quarter.
We continue to work towards the approval of a Supplemental
Environmental Impact Statement ("SEIS") for the Aqqaluk
deposit, the next ore body scheduled to be developed by Red Dog. The
mine's effluent discharge permit is expected to be renewed in
conjunction with the SEIS. In the interim, we are working with NANA and
the EPA to ensure that the mine can discharge sufficient water under
its existing water discharge permit to maintain a safe water level in
the tailings impoundment.
At March 31, 2009 we had 120,000 tonnes of zinc in concentrate
available for sale from the 2008 shipping season, excluding production
inventory at site.
Other Zinc Mines
We placed our Pend Oreille mine on care and maintenance at the end of
February, 2009, due to reduced metal demand and persistent weakness in
zinc prices. The mine incurred an operating loss of $2 million in the
first quarter compared with a $2 million operating profit in the same
period a year ago.
GOLD
Pogo (40%)
Operating results at the 100% level are summarized in the following
table:
Three months ended March 31 2009 2008 ------------------------------------------------------------ Tonnes milled (000's) 182 192 Grade (grams/tonne) 17.1 15.8 Mill recovery (%) 82.7 85.5 Production (000's ounces) 91 83 Sales (000's ounces) 87 87 Cash operating cost per ounce (US$) $ 500 $ 546 Our 40% share of operating profit ($ millions) Before depreciation $ 18 $ 13 After depreciation $ 9 $ 6 ------------------------------------------------------------
Pogo's
gold production in the first quarter was 90,800 ounces
compared with 83,200
ounces in the same period a year ago, due to a
draw down of work in process inventories.
Gold sales were 86,900
ounces in the first quarter at an average
realized price of US$914 per ounce similar to 86,600 ounces
and a realized price of US$919 per ounce in the first quarter of 2008. Our
40% share of Pogo's operating profit was $9 million in the first
quarter compared with $6 million in the same period last year.
ENERGY
Fort Hills Project
Engineering studies for the mining portion of the project are underway
to evaluate opportunities for cost reductions and execution
efficiencies and to update the cost estimate to take into account the
current market conditions.
The regulatory hearing on the Sturgeon County upgrader was convened in
the second half of 2008 and the ERCB approved the project, in January
2009, subject to conditions and the commitments made by Petro-Canada. In
March 2009, the partnership announced it had reached agreement with the
Government of Alberta to extend the term of the Fort Hills oil sand
leases until 2019,
in exchange for a commitment to upgrade in
Alberta the bitumen produced from the second phase of the Fort Hills
Project.
Petro-Canada, the operator and 60% owner of the Fort Hills project,
recently announced its intention to merge with Suncor Energy Inc. and
also announced layoffs in its oil sands division, the majority of which
are related to the Fort Hills project. As a result of these
developments, the timing of a final investment decision on this project
is uncertain at this time. We continue to explore strategic
alternatives in connection with this asset.
Frontier and Equinox Projects
Engineering studies continue on the Equinox Project, including pilot
plant test work to support the design assumptions used for both the
Equinox and Frontier Projects. A Design Basis Memorandum
("DBM") study is now expected to be completed on Equinox in
the second quarter of 2009. The joint venture continues to advance the
project through the permitting process. Engineering studies are
expected to start on the Frontier Project in 2009.
In February 2009 Alberta Environment issued the final terms of
Reference for the Environmental Impact Assessment for both the Frontier
and Equinox Oil Sand Mine Projects. This is an important step in the
regulatory process and establishes the terms to complete the
Environmental Impact Assessment for submission to Alberta Environment.
Other Oil Sand Leases
During the 2009 winter drilling season 54 core holes were completed on
Leases 421, 022 and 023 (Lease 421 Area), bringing the total core holes
completed to 59. Preliminary results indicate 49 of the core holes
contain prospective oil sands that range in thickness from 10 to 40 metres
(averaging 19
metres) with overburden thicknesses ranging from
17 to 68 metres
(averaging 39
metres). Results from the core analysis for the
2009 wells are expected to be available in the fourth quarter of 2009.
COSTS AND EXPENSES
Administration and general expenses were $31 million in the first
quarter compared with $30 million last year.
Interest expense was $137 million in the first quarter compared with
$20 million a year earlier. The increase in interest expense is a
result of the additional debt incurred to finance the acquisition of
Fording. In addition, our pre-existing debt and the related interest
charges were affected by the strengthening of the US dollar in the
period. Our average interest rate in the period was approximately 4% as
interest on the new debt is based on LIBOR rates which are at
historically low levels.
Other expenses, net of other income, was $69 million in the first
quarter compared with other income of $4 million last year. Significant
items in the first quarter included foreign exchange losses totalling
$244 million and a $41 million loss on our copper and other commodity
derivative positions. Partly offsetting these items were gains
totalling $205 million from the sale of our Lobo-Marte gold project and
our investment in El Brocal. The non-cash foreign exchange translation
loss on our debt totalled $457 million, of which $241 million was
recorded in other income and $216 million in other comprehensive
income. The portion charged to other comprehensive income relates to
that portion of our US dollar debt that is designated as a hedge
against our investments in subsidiaries whose functional currency is
the US dollar.
Non-controlling interest expense was $11 million in the first quarter
compared with $27 million in the same period last year. The decrease
was due to lower earnings from our Quebrada Blanca and Andacollo
operations in which third parties hold a 23.5% and 10% interest in each
property.
Our provision for income taxes was reduced by $30 million as a result
of the reduction of future tax rates in British Columbia, which caused
us to revalue our net future tax liabilities. Before this reduction,
our consolidated tax rate was 45% compared with 33% a year earlier. This
increase in the effective rate is a result of higher interest charges
and lower operating profits. Operating profits earned in Canada are
subject to mineral taxes while interest and general corporate overhead
are not deductible for mineral tax purposes.
Income tax pools arising out of the Fording transaction shield us from
cash income taxes in Canada, but we remain subject to cash taxes in
foreign jurisdictions and mineral taxes in Canada. Approximately 40% of
our tax provision was deferred as a result of this and other items.
Equity Earnings
We recorded a $1 million equity loss in the first quarter of 2009
related to care and maintenance costs from our interest in the Galore
Creek Partnership. In the first quarter of 2008, we recorded equity
earnings of $9 million from our investment in Fording.
Discontinued Operations
Our earnings from discontinued operations relate to our Hemlo gold
operations and to a price participation provision in the agreement from
the sale of our Cajamarquilla zinc refinery in 2004. In February
of 2009, we reached an agreement to sell our 50% interest in the Hemlo
mines. The transaction has an effective date of January 1, 2009 and is
expected to close in the second quarter of 2009. Earnings from the
Hemlo operations were $10 million, while the Cajamarquilla agreement
resulted in a further gain of $2 million.
We expect that the sale of our interest in Hemlo will close in the
second quarter of 2009. At that time we will receive proceeds of US$65
million, less any cash flow received from the mine since January 1, 2009. A pre-tax
gain of approximately $45 million will be recorded at that time.
FINANCIAL POSITION AND LIQUIDITY
Our cash position increased during the first quarter by $782 million to
$1.6 billion at March 31, 2009. Cash flow from operations increased
significantly to $1.1 billion in the first quarter compared with $157
million a year ago primarily due to the receipt of tax refunds of
approximately $801 million related to our acquisition of the coal
assets from Fording.
Expenditures on property, plant and equipment were $132 million in the
first quarter and included $64 million on sustaining capital and $68
million on development projects. The largest components of sustaining
expenditures were at Teck Coal, Antamina and Red Dog for equipment
upgrades. Development expenditures included $20 million for preparatory
stripping and capital equipment for Highland Valley Copper's mine life
extension project and $41 million on the development of the hypogene
deposit at Andacollo. Investments in the first quarter totalled $232
million and included $226 million of funding for the Fort Hills oil
sands project.
We repaid US$66 million of our bridge loan with proceeds from asset
sales in the first quarter of 2009. Total debt balances were $13.3
billion at March 31, 2009, of which $11.6 billion (US$9.3 billion)
relates to the financing incurred to acquire the Fording assets. We
also had bank credit facilities aggregating $1.3 billion, 91% of which
mature in 2012 and beyond. Our unused credit lines under these
facilities after drawn letters of credit amounted to $1.1 billion. Our
senior unsecured debt is currently rated Ba3 by Moody's Investor
Services, BB+ by Standard and Poor's and BBB by Dominion Bond Rating
Service, all with negative outlooks.
As of the date of this report, US$5.2 billion of the bridge facility
and US$4 billion of the term facility are outstanding. All of the
bridge facility and US$1.1 billion of the term facility is due on or
before October 29, 2009. We are currently in compliance with the
financial covenants under our credit agreements, which require us to
maintain a maximum debt to debt plus equity ratio of 60% at the end of
each calendar quarter until it declines to 50% at September 30, 2009. At
March 31, 2009, our debt to debt plus equity ratio was 54%.
Based on expected free cash flow we will not generate sufficient funds
from operations to repay the entire obligation on the bridge facility
that is due on October 29, 2009, and will need to generate funds from
other sources to do so, or will need an extension or refinancing of the
bridge loan. We are in advanced negotiations with our lenders to amend
the bridge and term loan facilities in order to provide us with
additional time to generate cash and/or access appropriate sources of
long-term financing to repay these loans. There can be no assurance
that these negotiations will be successful.
Although we have approximately $1.1 billion in unused credit lines
under various bank credit facilities, there can be no assurance, given
our current financial condition, that these credit lines will be
available to us if we should need to draw on them, or that our maturing
credit lines of US$50 million and miscellaneous letters of credit
totalling $258 million will be renewed in the ordinary course. Our debt
levels will constrain our capital spending and that may have an adverse
effect on our operations. Our debt levels will also limit our ability
to expand our operations or make other investments that would enhance
our competitiveness.
Our ability to repay or refinance the bridge facility prior to its
maturity and make the quarterly installment payments on the term
facility depends on a number of factors, some of which are beyond our
control. These include general global economic, credit and capital
market conditions, and the demand for and selling price of our
products, in particular, metallurgical coal. There can be no assurance
that our credit ratings will not be downgraded further, which would
further increase our costs of borrowing and further limit our ability
to refinance our existing debt. There is no assurance that the expected
cash flows from operations in combination with asset sales and other
steps being taken will allow us to meet these obligations as they
become due, or that we will continue to meet the financial covenants
under our various lending agreements.
COMPREHENSIVE INCOME
We recorded comprehensive income of $359 million in the first quarter,
comprising $241 million of a regular net earnings and $118 million of
other comprehensive income. The most significant components of other
comprehensive earnings in the quarter was mark-to-market gains of $61
million on our portfolio of available-for-sale marketable securities. These
marketable securities consist primarily of investments in publicly
traded companies with whom we partner in exploration or development
projects. Currency translation gains and losses are held in accumulated
other comprehensive income, net of taxes, until they are realized, at
which time they are included in net earnings.
OUTLOOK
The information below is in addition to the disclosure concerning
specific operations included above in the Operations and Corporate
Development sections of this document.
General Economic Conditions
Exchange traded commodity prices, including base metals, have improved
significantly in recent months, but remain significantly lower than a
year ago. Volatility in these markets has also declined in the quarter.
It is difficult in these conditions to forecast commodity prices or
customer demand for our products. Credit market conditions have also
increased the cost of obtaining capital and limited the availability of
funds.
Capital Expenditures
Our capital expenditures for the remainder of 2009, excluding the Fort
Hills project, are expected to be approximately $370 million, including
$190 million of sustaining capital expenditures and $180 million on
development projects. Our development expenditures estimate of $180
million includes $135 million for Andacollo's hypogene project and $45
million for Highland Valley's mine expansion. We also expect to spend
approximately $100 million on our share of costs for the Fort Hills oil
sands project in the remainder of 2009. We continue to review our
discretionary capital spending in light of current market conditions
and our debt reduction targets.
Financing and Exchange Rates
In order to finance the Fording transaction we arranged debt financing
of US$9.8 billion, of which US$9.3 billion is outstanding. Interest
charges on these facilities are based on LIBOR or US prime rates and
our credit rating. The additional debt has resulted in a substantial
increase in our existing interest expense.
Our US dollar denominated debt will be subject to revaluation based on
changes in the Canadian/US dollar exchange rate. We have designated approximately
one-half of our US dollar denominated debt as a hedge against our US
dollar denominated foreign operations. As a result, approximately 50%
of any foreign exchange gains or losses arising on our debt will be
recorded in net earnings with the remainder in other comprehensive
income. The earnings impact of these revaluations will be reduced as we
pay down the debt, although exchange rate fluctuations will also affect
our debt to equity ratio and our interest expense.
ADOPTION OF NEW ACCOUNTING STANDARDS
Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Section 3064, "Goodwill and Intangible
Assets," which replaces Section 3062, "Goodwill and Other
Intangible Assets". This new standard provides guidance on the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. Concurrent with the adoption of this standard, CICA
Emerging Issues Committee Abstract 27, "Revenues and Expenditures
in the Pre-operating Period," ("EIC-27") was withdrawn.
The standard is effective for our fiscal year beginning January 1,
2009. Adoption of this standard did not have a significant impact on
our financial statements.
Credit Risk and Fair Value of Financial Assets and Liabilities
In January 2009, the CICA issued EIC-173, "Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities". The EIC
provides guidance on how to take into account credit risk of an entity
and counterparty when determining the fair value of financial assets
and financial liabilities, including derivative instruments.
This standard is effective for our fiscal year beginning January 1,
2009 with retrospective application. The application of this EIC did
not have a significant effect on our financial statements.
Mining Exploration Costs
In March 2009, the CICA issued EIC-174, "Mining Exploration
Costs". The EIC provides guidance on accounting for capitalization
and impairment of exploration costs.
This standard is effective for our fiscal year beginning January 1,
2009. The application of this EIC did not have an effect on our
financial statements.
International Financial Reporting Standards (IFRS) changeover plan
Canadian GAAP for publicly listed entities will convert to
International Financial Reporting Standards ("IFRS") on
January 1, 2011. The transition from Canadian GAAP to IFRS is a
significant undertaking, and as such, we have established a detailed
plan for the conversion and hired a project manager to lead this
process.
We have identified four phases to our conversion: scoping and planning,
detailed assessment, implementation and post implementation. The
scoping and planning phase involves establishing a project team and
organizational structure, including oversight of the process; this
includes a project charter, project management plan, stakeholder
analysis and communication strategy. This phase also entails an initial
assessment of the key areas where IFRS transition may have a
significant impact and present significant challenges. This scoping and
planning phase is substantially complete. The second phase, detailed
assessment, involves in-depth technical analysis that will result in
understanding potential impacts, decisions on accounting policy choices
and the drafting of accounting policies. In addition this will result
in identifying resource and training requirements, processes for
preparing financial statements, establishing IT system requirements and
preparing detailed transition plans. We are currently completing this
phase and expect to complete this detailed technical analysis by end of
third quarter of 2009. The implementation phase will identify and carry
out the implementation requirements to effect management's accounting
choices, develop sample financial statements, implement business and
internal control requirements, calculate the opening balance sheet at
January 1, 2010 and other transitional reconciliations and disclosure
requirements. The last phase of post implementation will involve
continuous monitoring of changes in IFRS throughout the implementation
process in 2011 and later as the Roadmap for US consideration for
adopting IFRS is established.
We are developing our IFRS competencies by addressing training
requirements at various levels of the organization. These sessions are
ongoing and are provided by external advisors. We will continually
assess resource and training requirements as the project progresses.
FINANCIAL INSTRUMENTS AND DERIVATIVES
We hold a number of financial instruments and derivatives, the most
significant of which are marketable securities, foreign exchange
forward sales contracts, fixed price forward metal sales contracts and
settlements receivable. The financial instruments and derivatives are
all recorded at fair values on our balance sheet with gains and losses
in each period included in other comprehensive income, net earnings
from continuing operations and net earnings from discontinued
operations as appropriate. Some of our gains and losses on
metal-related financial instruments are affected by smelter price
participation and are taken into account in determining royalties and
other expenses. All are subject to varying rates of taxation depending
on their nature and jurisdiction.
The after-tax effect of financial instruments on our net earnings for
the following periods is set out in the table below:
Three months ended March 31 2009 2008 ---------------------------------------------------- Price adjustments On prior quarter sales $ 14 $ 50 On current quarter sales 29 24 --------------------------------------------------- 43 74 Other financial instruments Derivatives gains (losses) (26) (2) Cajamarquilla sale price participation (discontinued operations) 2 2 --------------------------------------------------- (24) - ---------------------------------------------------- Total 19 74 ---------------------------------------------------- ---------------------------------------------------- QUARTERLY EARNINGS AND CASH FLOW (in millions, except for share data) 2009 2008 2007 -------------------- --------------------------- --------------------------- Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 -------------------- --------------------------- --------------------------- Revenues $1,708 $1,634 $1,773 $1,836 $1,542 $1,501 $1,905 $1,533 $1,309 Operating profit 636 195 685 875 611 454 898 768 622 Net earnings (loss) 241 (607) 424 497 345 280 490 485 360 Earnings (loss) per share 0.50 (1.28) 0.95 1.12 0.78 0.64 1.15 1.14 0.83 Cash flow from operations 1,127 595 869 492 157 602 808 192 149 -------------------- --------------------------- ---------------------------
OUTSTANDING SHARE DATA
On April 17, 2009 there were 477,556,086 Class B subordinate voting
shares and 9,353,470 Class A common shares outstanding. In addition,
there were 6,538,530 director and employee stock options outstanding
with exercise prices ranging between $4.15 and $49.17 per share. More
information on these instruments and the terms of their conversion is
set out in Note 15 of our 2008 year end financial statements.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Any system of internal
control over financial reporting, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. There have been no
changes in our internal control over financial reporting during the
quarter ended March 31, 2009 that have materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting.
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This news release contains certain forward-looking information and
forward-looking statements as defined in applicable securities laws.
All statements other than statements of historical fact are forward
looking statements. These forward-looking statements, principally under
the heading "Outlook," but also elsewhere in this document,
include estimates, forecasts, and statements as to management's
expectations with respect to, among other things, our future earnings
and cash flow, our plans to reduce our outstanding indebtedness and the
expected impact of steps that we have taken to reduce spending,
potential sources of funds to repay indebtedness, our planned sales of
assets, discussions with our lenders, the future availability of unused
credit lines, the possibility that we will breach our debt covenants,
expected progress and costs of our Andacollo concentrate project, the
sensitivity of our earnings to changes in commodity prices and exchange
rates, the potential impact of transportation and other potential
production disruptions, the impact of currency exchange rates, future
trends for the company, progress in development of mineral properties,
future production and sales volumes, capital expenditures and mine
production costs, demand and market outlook for commodities, future commodity
prices and treatment and refining charges, the settlement of coal
contracts with customers, the outcome of mine permitting currently
underway, our assessment of the quantum of potential natural resource
damages in connection with the Upper Columbia River Basin and the
outcome of legal proceedings involving the company. These
forward-looking statements involve numerous assumptions, risks and
uncertainties and actual results may vary materially.
These statements are based on a number of assumptions, including, but
not limited to, assumptions regarding general business and economic
conditions, interest rates, the supply and demand for, deliveries of,
and the level and volatility of prices of, zinc, copper, coal and gold
and other primary metals and minerals as well as oil, and related
products, the timing of the receipt of regulatory and governmental
approvals for our development projects and other operations, our costs
of production and production and productivity levels, as well as those
of our competitors, power prices, market competition, the accuracy of
our reserve estimates (including with respect to size, grade and
recoverability) and the geological, operational and price assumptions
on which these are based, conditions in financial markets and the future
financial performance of the company. The foregoing list of assumptions
is not exhaustive. Events or circumstances could cause actual results
to vary materially.
Factors that may cause actual results to vary materially include, but
are not limited to, changes in commodity and power prices, changes in
interest and currency exchange rates, acts of foreign governments and
the outcome of legal proceedings, 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, adverse weather conditions and
unanticipated events related to health, safety and environmental
matters), political risk, social unrest, failure of customers or
counterparties to perform their contractual obligations, the additional
costs and covenants associated with the refinancing of our existing
indebtedness, the results of our ongoing efforts to sell assets,
further changes in our credit ratings, and changes or further
deterioration in general economic conditions or continuation of current
severe disruptions in credit and financial markets.
Statements concerning future production costs or volumes, and the
sensitivity of the company's earnings to changes in commodity prices
and exchange rates are based on numerous assumptions of management
regarding operating matters and on assumptions that demand for products
develops as anticipated, that customers and other counterparties
perform their contractual obligations, that operating and capital plans
will not be disrupted by issues such as mechanical failure,
unavailability of parts and supplies, labour disturbances, interruption
in transportation or utilities, adverse weather conditions, and that
there are no material unanticipated variations in the cost of energy or
supplies.
We assume no obligation to update forward-looking statements except as
required under securities laws. Further information concerning risks
and uncertainties associated with these forward looking statements and
our business can be found in our Annual Information Form for the year
ended December 31, 2008, filed on SEDAR and on EDGAR under cover of
Form 40F.
WEBCAST
Teck will host an Investor Conference Call to discuss its Q1/2009
financial results at 11:00 AM Eastern time, 8:00 AM Pacific time, on
Tuesday, April 21, 2009.
A live audio webcast of the conference call,
together with supporting presentation slides, will be available at the
company's website at www.teck.com.
The webcast is also available at www.earnings.com. The webcast will be archived at www.teck.com.
Teck Cominco Limited Consolidated Statements of Earnings (Unaudited) ------------------------------------------------------------------- Three months ended March 31 (Cdn $ in millions, except for share data) 2009 2008 ------------------------------------------------------------------- Revenues $ 1,708 $ 1,542 Operating expenses (873) (826) ------------------------------------------------------------------- 835 716 Depreciation and amortization (199) (105) ------------------------------------------------------------------- Operating profit 636 611 Other expenses General and administration (31) (30) Interest and financing (Note 10) (137) (20) Exploration (11) (19) Research and development (6) (8) Other income (expense) (Note 11) (69) 4 ------------------------------------------------------------------- Earnings before the undernoted items 382 538 Provision for income and resource taxes (141) (176) Non-controlling interests (11) (27) Equity earnings (loss) (1) 9 ------------------------------------------------------------------- Net earnings from continuing operations 229 344 Net earnings from discontinued operations (Note 4) 12 1 ------------------------------------------------------------------- Net earnings $ 241 $ 345 ------------------------------------------------------------------- ------------------------------------------------------------------- Earnings per share Basic $ 0.50 $ 0.78 Basic from continuing operations $ 0.47 $ 0.78 Diluted $ 0.50 $ 0.78 Diluted from continuing operations $ 0.47 $ 0.77 Weighted average shares outstanding (millions) 486.9 442.7 Shares outstanding at end of period (millions) 486.9 442.9 ------------------------------------------------------------------- ------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. Teck Cominco Limited Consolidated Statements of Cash Flows (Unaudited) ------------------------------------------------------------------------- Three months ended March 31 (Cdn $ in millions) 2009 2008 ------------------------------------------------------------------------- Operating activities Net earnings from continuing operations $ 229 $ 344 Items not affecting cash Depreciation and amortization 199 105 Provision for future income and resource taxes 58 9 Equity (earnings) loss 1 (9) Non-controlling interests 11 27 Gain on sale of investments and assets (205) (1) Unrealized foreign exchange translation losses 244 7 Other 23 10 Distributions received from equity accounted investments - 15 ------------------------------------------------------------------------- 560 507 Net change in non-cash working capital items 567 (350) ------------------------------------------------------------------------- 1,127 157 Investing activities Property, plant and equipment (132) (130) Investment in oil sands and other assets (232) (203) Proceeds from the sale of investments and assets 95 2 Increase in temporary investments (2) - ------------------------------------------------------------------------- (271) (331) Financing activities Repayment of debt (82) (31) Repayment of capital leases (9) - Issuance of Class B subordinate voting shares - 2 Dividends paid - (221) Distributions to non-controlling interests (13) - ------------------------------------------------------------------------- (104) (250) Effect of exchange rate changes on cash and cash equivalents held in U.S. dollars 17 36 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents from continuing operations 769 (388) Cash received from discontinued operations 13 40 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 782 (348) Cash and cash equivalents at beginning of period 850 1,408 ------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,632 $ 1,060 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. Teck Cominco Limited Consolidated Balance Sheets (Unaudited) ----------------------------------------------------------------- March 31, December 31, (Cdn $ in millions) 2009 2008 ----------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 1,632 $ 850 Temporary and short-term investments 139 11 Income taxes receivable 258 1,130 Accounts receivable 635 769 Inventories 1,415 1,339 ----------------------------------------------------------------- 4,079 4,099 Investments (Note 5) 1,235 948 Property, plant and equipment 24,020 23,909 Other assets (Note 6) 882 853 Goodwill 1,754 1,724 ----------------------------------------------------------------- $ 31,970 $ 31,533 ----------------------------------------------------------------- ----------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities $ 1,018 $ 1,506 Short-term debt 6,577 6,436 Current portion of long-term debt 1,851 1,336 ----------------------------------------------------------------- 9,446 9,278 Long-term debt 4,849 5,102 Other liabilities (Note 7) 1,202 1,184 Future income and resource taxes 5,106 4,965 Non-controlling interests 105 104 Shareholders' equity (Note 8) 11,262 10,900 ----------------------------------------------------------------- $ 31,970 $ 31,533 ----------------------------------------------------------------- ----------------------------------------------------------------- Contingencies (Note 15) Subsequent events (Notes 2, 4 and 14) The accompanying notes are an integral part of these financial statements. Teck Cominco Limited Consolidated Statements of Shareholders' Equity (Unaudited) --------------------------------------------------------------------------- Three months ended March 31 (Cdn$ in millions) 2009 2008 --------------------------------------------------------------------------- Share capital Class A common shares $ 7 $ 7 Class B subordinate voting shares 5,072 3,276 --------------------------------------------------------------------------- 5,079 3,283 Contributed surplus 85 73 Accumulated comprehensive income Retained earnings at beginning of period 5,476 5,038 Net earnings 241 345 --------------------------------------------------------------------------- Retained earnings at end of period 5,717 5,383 Accumulated other comprehensive income (loss) (Note 9) 381 (576) -------------------------------------------------------------------------- 6,098 4,807 --------------------------------------------------------------------------- $ 11,262 $ 8,163 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Consolidated Statements of Comprehensive Income (Unaudited) --------------------------------------------------------------------------- Three months ended March 31 (Cdn $ in millions) 2009 2008 --------------------------------------------------------------------------- Net earnings $ 241 $ 345 Other comprehensive income (loss) in the period Currency translation adjustment: Unrealized gains (losses) 219 184 Exchange differences on debt designated as hedge of self-sustaining foreign subsidiaries (186) (49) --------------------------------------------------------------------------- 33 135 Available-for-sale instruments: Unrealized gains (losses) (net of taxes of $7 and $6) 61 (43) --------------------------------------------------------------------------- Derivatives designated as cash flow hedges: Unrealized gains (losses) (net of taxes of ($5) and $nil) (17) - Losses reclassified to net earnings on realization (net of tax of $26 and $1) 41 3 --------------------------------------------------------------------------- 24 3 --------------------------------------------------------------------------- Total other comprehensive income 118 95 --------------------------------------------------------------------------- Comprehensive income $ 359 $ 440 --------------------------------------------------------------------------- --------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Teck Cominco Limited
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Our interim consolidated financial statements have been prepared in
accordance with Canadian Generally Accepted Accounting Principles
("GAAP") using standards for interim financial statements and
do not contain all of the information required for annual financial
statements. Our statements follow the same accounting policies and
methods of application as our most recent annual financial statements,
except as described in Note 3. Accordingly, they should be read in
conjunction with our most recent annual financial statements. All
dollar amounts are disclosed in Canadian currency unless otherwise
noted.
Certain comparative figures have been reclassified to conform to the
presentation adopted for the current period.
2. LIQUIDITY RISK
Our consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and
liabilities in the normal course of business. Liquidity risk is the
risk that we will not be able to meet our financial obligations as they
become due.
On September 30, 2008, we entered into the definitive financing
agreements related to the bridge and term loan facilities and the
conditions precedent to our purchase of Fording's assets and our
lenders' funding obligations were substantially satisfied. Our original
plan for the acquisition was to refinance a substantial portion of the
acquisition facilities prior to or shortly after closing of the
transaction with various types of long-term debt and to repay the
balance with cash flow from operating activities prior to the maturity
of the term facility. In the fourth quarter of 2008 and prior to the
closing of the transaction, conditions in the credit markets
deteriorated substantially, effectively closing the credit markets to
us. These credit market conditions had a serious impact on the global
economy, which has contributed to a significant and rapid decline in
the demand for and selling price of the products we produce. As a
result of these conditions, our credit ratings were lowered and our
share price is substantially lower than it was prior to the purchase of
the Fording assets.
Current weak global economic conditions and the downgrades in our
credit ratings make access to the credit and capital markets difficult
for us, which may compromise our ability to repay or refinance all or a
portion of the acquisition loans as they become due. We are currently
in compliance with the financial covenants under our credit agreements,
which require us to maintain a maximum debt to debt plus equity ratio
of 60% at the end of each calendar quarter until it declines to 50% at
September 30, 2009. At March 31, 2009, our debt to debt plus equity
ratio was 54%. Based on expected free cash flow we will not generate
sufficient funds from operations to repay the entire obligation on the
bridge facility that is due on October 29, 2009, and will need to
generate funds from other sources to do so, or will need an extension
or refinancing of the bridge loan.
To address our near-term liquidity requirements, we have taken a number
of steps to assist us in meeting our repayment obligations, including
suspending the dividends on our Class A common and Class B subordinate
voting shares, reducing capital and discretionary spending, closing
unprofitable operations and reducing the size of our global workforce
by approximately 13%. To date we have sold our interest in the
Lobo-Marte gold property generating US$141 million of cash, sold our El
Brocal zinc property for US$35 million and announced the sales of our
Hemlo gold operations for expected proceeds of US$65 million, less any
cash flow received since January 1, 2009 and a 75% interest in the gold
production from our Andacollo mine. Andacollo is expected to receive
US$218 million in cash and 1.2 million common shares of Royal Gold,
Inc. We are in various stages of advanced negotiations and discussions
with respect to the sale of other non-core assets. There can be no
assurance that we will be able to complete further asset sales on a
timely basis. We are also in advanced negotiations with our lenders to
amend the bridge and term loan facilities that would provide us with
additional time to generate cash and/or access appropriate sources of
long-term financing to repay these loans. There can be no assurance
that these negotiations will be successful.
Although we have approximately $1.1 billion in unused credit lines
under various bank credit facilities, there can be no assurance, given
our current financial condition, that these credit lines will be
available to us if we should need to draw on them, or that our maturing
credit lines of US$50 million and miscellaneous letters of credit
totalling $258 million will be renewed in the ordinary course. Our debt
levels will constrain our capital spending and that may have an adverse
effect on our operations. Our debt levels will also limit our ability
to expand our operations or make other investments that would enhance
our competitiveness.
In a cyclical industry such as ours, history has shown that periodic
spikes in commodity prices can result in substantial increases in a
company's cash flow. Many of our major operations are long-lived assets
with significant reserves and resources, which have lives exceeding 20+
years based on current production levels. We believe that our access to
financial resources through capital markets transactions has been
limited mainly due to difficult capital markets conditions.
Accordingly, there is some risk that the steps described above will not
be successful in allowing us to meet our obligations, which may require
us to sell core assets or take steps to raise equity capital, which may
have a material adverse effect on our business and on the market prices
of our equity and debt securities.
Our ability to repay or refinance the bridge facility prior to its
maturity and make the quarterly instalment payments on the term
facility depends on a number of factors, some of which are beyond our
control. These include general global economic, credit and capital
market conditions, and the demand for and selling price of our
products, in particular, metallurgical coal. There can be no assurance
that our credit ratings will not be downgraded further, which would
further increase our costs of borrowing and further limit our ability
to refinance our existing debt. There is no assurance that the expected
cash flows from operations in combination with asset sales and other
steps being taken will allow us to meet these obligations as they
become due, or that we will continue to meet the financial covenants
under our various lending agreements.
3. ADOPTION OF NEW ACCOUNTING STANDARDS
Goodwill and Intangible Assets
In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Section 3064, "Goodwill and Intangible
Assets", which replaces Section 3062, "Goodwill and Other
Intangible Assets". This new standard provides guidance on the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. Concurrent with the adoption of this standard, CICA
Emerging Issues Committee Abstract 27, "Revenues and Expenditures
in the Pre-operating Period", ("EIC-27") was withdrawn.
The standard is effective for our fiscal year beginning January 1,
2009. Adoption of this standard did not have a significant effect on
our financial statements.
Credit Risk and Fair Value of Financial Assets and Liabilities
In January 2009, the CICA issued EIC-173, "Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities". The EIC
provides guidance on how to take into account credit risk of an entity
and counterparty when determining the fair value of financial assets
and financial liabilities, including derivative instruments.
This standard is effective for our fiscal year beginning January 1.
Adoption of this EIC did not have a significant effect on the company's
financial statements.
Mining Exploration Costs
In March 2009, the CICA issued EIC-174, "Mining Exploration
Costs". The EIC provides guidance on the accounting and the
impairment review of exploration costs. This standard is effective for
our fiscal year beginning January 1, 2009. The application of this EIC
did not have an effect on the company's financial statements.
4. DISPOSITIONS AND DISCONTINUED OPERATIONS
a) Dispositions
Lobo-Marte
In January 2009, we sold our 60% interest in the Lobo-Marte gold
project in Chile to Kinross Gold Corporation ("Kinross") for
US$40 million in cash and approximately 5.6 million Kinross common
shares valued at US$97 million at the date of the sale. We also
received a 1.75% net smelter return royalty, which shall not exceed
US$40 million, in respect of 60% of the gold produced from Lobo-Marte
payable when gold prices on the London Metal Exchange exceed US$760 per
ounce. A pre-tax gain of C$160 million was realized on the transaction.
In April 2009, we sold the 5.6 million Kinross shares for US$101
million for an additional pre-tax gain of C$11 million. At March 31,
2009, the Kinross shares are classified as short-term investments.
El Brocal
In February 2009 we sold our indirect interest in Sociedad Minera El
Brocal S.A.A. for US$35 million. A pre-tax gain of C$45 million was
realized and included in other income (expense).
Andacollo Gold Stream
On April 6, 2009, Compania Minera Carmen de Andacollo announced the
sale of an interest in the gold production from the Andacollo mine to
Royal Gold, Inc. ("Royal Gold"). Based on Royal Gold's recent
common stock offering, proceeds to Andacollo are expected to be
approximately US$218 million and 1.2 million common shares of Royal
Gold, assuming the underwriters' over-allotment option is not
exercised.
Royal Gold will be entitled to payment based on 75% of the payable gold
produced until total cumulative production reaches 910,000 ounces
of gold, and 50% thereafter.
Closing is subject to customary conditions and is expected to occur in
the second quarter of 2009.
The proceeds received will be accounted for as deferred revenue and
amortized to revenue based on the gold sold over the life of the
Andacollo concentrate project. Accordingly, no gain or loss will be
recorded for this transaction.
b) Discontinued Operations
Hemlo mines
In February 2009, we announced the sale of our interest in the Williams
and David Bell ("Hemlo") mines for US$65 million, less any
cash flow received since January 1, 2009, to an affiliate of Barrick
Gold Corporation. Closing is subject to customary conditions, including
receipt of regulatory approvals and is expected to occur in the second
quarter. An estimated pre-tax gain of C$45 million will be recognized
upon closing. Cash proceeds will be adjusted by the excess of revenues
from gold sales over cash provided to the mines since January 1, 2009.
As a result of the pending sale, the Hemlo operations have been
classified as discontinued operations in these financial statements.
Selected financial information of discontinued operations, including
Hemlo and Cajamarquilla (Note 14(d)), in the consolidated financial
statements include:
--------------------------------------------------------------------------- Three months ended March 31 (Cdn$ millions) 2009 2008 --------------------------------------------------------------------------- Earnings from discontinued operations Revenue 49 29 Cost of sales (33) (26) Other income (expense) 3 (3) Income taxes (7) 1 --------------------------------------------------------------------------- Net earnings 12 1 Cash flows of discontinued operations Operating activities 14 42 Investing activities (1) (2) Financing activities - - --------------------------------------------------------------------------- 13 40 March 31, December 31, 2009 2008 --------------------------------------------------------------------------- Assets and liabilities classified as held-for-sale Current assets 26 30 Property, plant and equipment 34 37 Accounts payable and accrued liabilities (11) (13) Other liabilities (35) (29) --------------------------------------------------------------------------- Net assets 14 25 --------------------------------------------------------------------------- --------------------------------------------------------------------------- 5. INVESTMENTS --------------------------------------------------------------------------- March 31, December 31, (Cdn $ in millions) 2009 2008 --------------------------------------------------------------------------- Available-for-sale investments: Marketable securities $ 161 $ 104 Investments accounted for under the equity method: Galore Creek Partnership (50% interest) 303 299 Fort Hills Energy Limited Partnership (20% interest) 771 545 --------------------- 1,074 844 --------------------- $ 1,235 $ 948 --------------------- --------------------- 6. OTHER ASSETS --------------------------------------------------------------------------- March 31, December 31, (Cdn $ in millions) 2009 2008 --------------------------------------------------------------------------- Pension assets $ 243 $ 241 Future income and resource tax assets 383 357 Derivative assets, net of current portion of $41 million 13 21 Long-term deposits 26 25 Long-term receivables 122 120 Other 95 89 --------------------------------------------------------------------------- $ 882 $ 853 --------------------------------------------------------------------------- --------------------------------------------------------------------------- 7. OTHER LIABILITIES --------------------------------------------------------------------------- March 31, December 31, (Cdn $ in millions) 2009 2008 --------------------------------------------------------------------------- Asset retirement obligations $ 670 $ 653 Other environmental and post-closure costs 108 108 Pension and other employee future benefits 309 305 Long-term contract obligations 65 76 Other 50 42 --------------------------------------------------------------------------- $ 1,202 $ 1,184 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY
Stock-based compensation
During the quarter, we granted 2,342,750 Class B subordinate voting
share options to employees. These options have a weighted exercise
price of $4.15, a term of 10 years and vest in equal amounts over 3
years. The weighted average fair value of Class B subordinate voting
share options issued was estimated at $2.30 per share option at the
grant date using the Black-Scholes option-pricing model. The option
valuations were based on an average expected option life of 4.25 years,
a risk-free interest rate of 2.09%, a dividend yield of 2.0% and an
expected volatility of 74%.
During the quarter, we issued 2,686,544 deferred and restricted share
units to employees and directors. Deferred and restricted share units
issued vest immediately for directors and vest in three years for
employees. The total number of deferred and restricted share units
outstanding at March 31, 2009 was 3,779,080.
Stock-based compensation expense of $8 million (2008 - $11 million) was
recorded for the three months ended March 31, 2009 in respect of
all outstanding share options and units.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------- Three months ended March 31, (Cdn $ in millions) 2009 2008 --------------------------------------------------------------------------- Accumulated other comprehensive income (loss) at beginning of period $ 263 $ (671) Other comprehensive income for the period 118 95 --------------------------------------------------------------------------- Accumulated other comprehensive income (loss) at end of period $ 381 $ (576) --------------------------------------------------------------------------- --------------------------------------------------------------------------- The components of accumulated other comprehensive income are: ---------------------------------------------------------------------- March 31, December 31, (Cdn $ in millions) 2009 2008 ---------------------------------------------------------------------- Currency translation adjustment $ 341 $ 308 Unrealized gains (losses) on investments (net of tax of $(8) and $(1)) 55 (6) Unrealized gains (losses) on cash flow hedges (net of tax of $7 and $28) (15) (39) ---------------------------------------------------------------------- $ 381 $ 263 ---------------------------------------------------------------------- ---------------------------------------------------------------------- 10. INTEREST AND FINANCING COSTS ---------------------------------------------------------------------- Three months ended March 31 (Cdn $ in millions) 2009 2008 ---------------------------------------------------------------------- Interest expense $ 107 $ 23 Amortization of financing fees 40 - Less amounts capitalized (10) (3) ---------------------------------------------------------------------- $ 137 $ 20 ---------------------------------------------------------------------- ---------------------------------------------------------------------- 11. OTHER INCOME (EXPENSE) ---------------------------------------------------------------------- Three months ended March 31 (Cdn $ in millions) 2009 2008 ---------------------------------------------------------------------- Gain on sale of investments and assets $ 205 $ 1 Foreign exchange losses (244) (7) Derivative gain (losses) (41) 3 Interest income 4 12 Reclamation for closed properties (2) (3) Restructuring (25) - Other 34 (2) ---------------------------------------------------------------------- $ (69) $ 4 ---------------------------------------------------------------------- ---------------------------------------------------------------------- 12. EMPLOYEE FUTURE BENEFITS EXPENSE ---------------------------------------------------------------------------- Three months ended March 31 (Cdn $ in millions) 2009 2008 ---------------------------------------------------------------------------- Pension plans $ 17 $ 8 Post-retirement benefit plans 6 8 ---------------------------------------------------------------------------- $ 23 $ 16 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 13. SUPPLEMENTARY CASH FLOW INFORMATION ---------------------------------------------------------------------------- Three months ended March 31 (Cdn $ in millions) 2009 2008 ---------------------------------------------------------------------------- Income and resource taxes paid (received), net $ (804) $ 208 Interest paid $ 122 $ 13 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
14. ACCOUNTING FOR FINANCIAL INSTRUMENTS
Our derivative positions at March 31, 2009 are as follows:
a) Forward sales and purchase contracts
--------------------------------------------------------------------------- 2009 2010 2011 Total Fair Value --------------------------------------------------------------------------- Zinc (millions of lbs) (C$ in millions) Fixed forward sales contracts 48 57 57 162 Average price (US$/lb) 0.72 0.67 0.63 0.67 $ 9 Zinc (millions of lbs)(i) Fixed forward purchase contracts 17 - - 17 Average price (US$/lb) 0.52 - - 0.52 (2) Gold (thousands of ozs) Forward sales contracts 33 - - 33 Average price (US$/oz) 350 - - 350 (23) US dollars (millions of $) Forward sales contracts 39 - - 39 Average rate (US$/C$) 1.02 - - 1.02 (10) Copper (millions of pounds) Forward sales contracts 45 - - 45 Average price (US$/lb) 1.69 - - 1.69 (8) --------------- $ (34) --------------------------------------------------------------------------- (i) From time-to-time, certain customers purchase refined metal products at fixed forward prices from the company's smelter and refinery operations. The forward purchase commitments for these metal products are matched to these fixed price sales commitments to customers.
In April 2009, we entered into forward
sales contracts to fix the copper price for a portion of our copper
sales. These contracts, totalling 38 million pounds, are at an average
price of US$2.05 per pound and mature at varying dates to July, 2009.
b) Interest Rate Swap
We have an interest rate swap on our long-term debt whereby we have
swapped a 7% interest rate on US$100 million to LIBOR plus 2.14%. The
interest rate swap matures in September 2012 and has a fair value gain
of $12 million as at March 31, 2009.
c) Pricing Adjustments
Sales of metals in concentrates are recognized in revenue on a
provisional pricing basis when title transfers and the rights and
obligations of ownership pass to the customer, which usually occurs on
shipment. However, the final pricing for the product sold is not
determined at that time as it is contractually linked to market prices
at a subsequent date. These arrangements have the characteristics of a
derivative instrument as the value of our receivable will vary as
prices for the underlying commodities vary in the metal markets. The
net income impact of gains and losses on these financial instruments is
mitigated by smelter price participation, royalty interests, taxes and
non-controlling interests.
d) Cajamarquilla
As a result of the sale of our Cajamarquilla zinc refinery in 2004, we
are entitled to additional consideration linked to the price of zinc.
This zinc price participation expires in 2009 and is considered an
embedded derivative. This instrument is valued based on discounted cash
flows using a zinc forward price curve, US dollar forward price and our
credit adjusted, risk-free interest rate. A $2 million gain (2008 - $2
million) is included in our earnings as discontinued operations.
15. CONTINGENCIES
We consider provisions for all our outstanding and pending legal claims
to be adequate. The final outcome with respect to actions outstanding
or pending as at March 31, 2009, or with respect to future claims,
cannot be predicted with certainty. Significant commitments and
contingencies not disclosed elsewhere in the notes to our financial
statements are as follows:
Upper Columbia River Basin (Lake Roosevelt)
On December 31, 2008, the EPA approved the work plan required for the
assessment of site conditions which will lead to the development of a
set of sampling and other plans and field work in 2009. A beach
sediment sampling plan was approved in March, 2009. Data from field
work expected to be conducted this summer will be used to determine
whether further studies are required.
Following the denial of our petition for review by the U.S. Supreme
Court in January 2008, the Lake Roosevelt litigation reverted to the
Federal District Court for Eastern Washington. Judgment on the first
phase of the litigation dealing with issues associated with an EPA
order issued in December 2003 and withdrawn in June 2008 was delivered
on September 19, 2008. All of the claims associated with the order were
dismissed. The plaintiffs have appealed the dismissal to the 9th
Circuit Court of Appeal.
In November, 2008, Teck Cominco Metals Ltd. ("TCML") filed a
motion to stay the plaintiffs' CERCLA cost recovery declaratory relief
claim. On December 30, 2008, the Court denied the motion and discovery
and briefing of the liability phase of the litigation will occur in
2009. The hearing for this phase of the litigation is set for October
4, 2010.
On March 9, 2009, the Court granted the plaintiffs motion for an award
of the costs of litigating the CERCLA enforcement proceeding. The Court
certified its order for immediate appeal and we intend to appeal the
decision to the 9th Circuit.
The hearing of the plaintiffs' claims for natural resource damages and
costs has been deferred until the remedial investigation and
feasibility study being conducted by TCML's affiliate Teck American
Incorporated ("TAI") under the EPA Agreement have been
substantially advanced or completed. Natural resource damages
("NRD") are assessed for injury to, destruction of, or loss
of natural resources including the reasonable cost of a damage
assessment. Teck American commissioned a study by recognized experts in
NRD assessment in 2008. Based on the assessment performed, we estimate
that the compensable value of such damage will not be material.
There can be no assurance that TCML will ultimately be successful in
its defense of the litigation or that TCML or its affiliates will not
be faced with further liability in relation to this matter. Until the
studies contemplated by the Agreement and additional damage assessments
are completed, it is not possible to estimate the extent and cost, if
any, of remediation or restoration that may be required or to assess
the company's potential liability for damages. The studies may
conclude, on the basis of risk, cost, technical feasibility or other
grounds, that no remediation should be undertaken. If remediation is
required, the cost of remediation may be material.
16. SEASONALITY OF SALES
Due to ice conditions, the port serving our Red Dog mine is normally
only able to ship concentrates from July to October each year. As a
result, zinc and lead concentrate sales volumes are generally higher in
the third and fourth quarter of each year than in the first and second
quarter.
17. SEGMENTED INFORMATION
We have six reportable segments: copper, coal, zinc, gold, energy and
corporate based on the primary products we produce or are developing.
The corporate segment includes all of our initiatives in other
commodities, our corporate growth activities and groups that provide
administrative, technical, financial and other support to all of our
business units. Other corporate income (expense) includes general and
administrative costs, research and development and other income
(expense).
--------------------------------------------------------------------------- Three months ended March 31, 2009 Cor- (Cdn $ in millions) Copper Coal Zinc Gold Energy porate Total --------------------------------------------------------------------------- Segmented revenues $ 447 $ 874 $ 397 $ 39 $ - $ - $ 1,757 Less inter-segment revenues - - (49) - - - (49) --------------------------------------------------------------------------- Revenues 447 874 348 39 - - 1,708 Operating profit (loss) 158 429 40 9 - - 636 Interest and financing expense (3) - - - - (134) (137) Exploration (9) - (1) (1) - - (11) Other corporate income (expense) (29) - (10) 153 - (220) (106) --------------------------------------------------------------------------- Earnings (loss) before taxes, non-controlling interests, equity earnings and discontinued operations 117 429 29 161 - (354) 382 Capital expenditures 76 37 8 1 7 3 132 --------------------------------------------------------------------------- Total assets 8,236 17,880 2,758 539 1,129 1,428 31,970 --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- Three months ended March 31, 2008 Cor- (Cdn $ in millions) Copper Coal Zinc Gold Energy porate Total --------------------------------------------------------------------------- Segmented revenues $ 716 $ 221 $ 651 $ 32 $ - $ - $ 1,620 Less inter-segment revenues - - (78) - - - (78) --------------------------------------------------------------------------- Revenues 716 221 573 32 - - 1,542 Operating profit 435 15 155 6 - - 611 Interest and financing expense (5) - - - - (15) (20) Exploration (12) - (1) (3) - (3) (19) Other corporate income (expense) 1 - (1) (7) - (27) (34) --------------------------------------------------------------------------- Earnings (loss) before taxes, non-controlling interests, equity earnings and discontinued operations 419 15 153 (4) - (45) 538 Capital expenditures 84 18 17 3 3 5 130 --------------------------------------------------------------------------- Total assets 6,959 1,377 3,002 371 626 1,471 13,806 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
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