U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 40-F
[ ] Registration statement pursuant to section 12 of the Securities Exchange
Act of 1934
or
[X] Annual report pursuant to section 13(a) or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31 ,2004 Commission File Number 001-13184
TECK COMINCO LIMITED
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(Exact name of Registrant as specified in its charter)
NOT APPLICABLE
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(Translation of Registrant's name into English (if applicable))
CANADA
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(Province or other jurisdiction of incorporation or organization)
1041, 1221, 1021, 1031, 1044, 1061, 1311
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(Primary Standard Industrial Classification Code Number (if applicable))
NOT APPLICABLE
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(I.R.S. Employer Identification Number (if applicable))
Suite 600 - 200 Burrard Street, Vancouver, B.C. V6C 3L9 CANADA (604) 687-1117
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(Address and telephone number of Registrant's principal executive offices)
CT Corporation System, 1633 Broadway, New York, New York, 10019(212) 664-1666
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(Name, address(including zip code) and telephone number (including area code)
of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
Not Applicable
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not Applicable
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(Title of Class)
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
US$200 million 7.00% Notes due 2012
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(Title of Class)
For annual reports, indicate by check mark the information filed with this Form:
[X] Annual information form [X] Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
4,673,453 Class A Common Shares and 196,682,420 Class B
Subordinate Voting Shares
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Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned to
the Registrant in connection with such Rule.
Yes [ ] 82- [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
This Annual Report on Form 40-F shall be incorporated by reference into the
Registrant's Registration Statement on Form F-9 (Registration No. 333-92116).
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PRINCIPAL DOCUMENTS
The following documents have been filed as part of this Annual Information Form
on Form 40-F:
1. Annual Information Form of Teck Cominco Limited for the year ended
December 31, 2004.
2. Audited Consolidated Financial Statements of Teck Cominco Limited for the
years ended December 31, 2004 and 2003.
3. Management's Discussion and Analysis of Financial Position and Operating
Results of Teck Cominco Limited for the year ended December 31, 2004.
Controls and Procedures
A. Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was
carried out by the Registrant's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e)) under the
Securities Act of 1934, as amended). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by the Registrant in
reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
B. Internal Control Over Financial Reporting
During the fiscal year ended December 31, 2004, there were no changes in
the Registrant's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
Notices Pursuant to Regulation BTR
None.
Audit Committee Financial Expert
We have an Audit Committee established by the Board of Directors. The members of
the Audit Committee are Keith E. Steeves, Hugh J. Bolton, David R. Sinclair and
Chris M. Thompson. The Board has designated Hugh J. Bolton as the "Audit
Committee Financial Expert" as that term is defined in the Form 40-F. Mr. Bolton
is independent of the Registrant as that term is defined under the rules of the
American Stock Exchange.
Code of Ethics
We have adopted a code of ethics that applies to all of our employees and
officers, including our principal executive officer, principal financial
officer, principal accounting officer, controller and persons performing similar
functions. Our code of ethics is posted on our website, www.teckcominco.com.
Since the adoption of our code of ethics, there have not been any amendments
thereto or waivers, including implicit waivers, from any provision thereof.
Principal Accountant Fees and Services
The required disclosure is included in the section of this Annual Report on Form
40-F entitled "Audit Committee Information" in the Registrant's "Annual
Information Form" for the fiscal year ended December 31, 2004.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements required to be disclosed in this
Annual Report on Form 40-F.
Tabular Disclosure of Contractual Obligations
The required disclosure is included in the section of this Annual Report on Form
40-F entitled "Principal Documents", under the heading "Contractual and Other
Obligations" in the Registrant's "Management's Discussion and Analysis of
Financial Position and Operating Results" for the fiscal year ended December 31,
2004.
Undertaking and Consent to Service of Process
A. Undertaking
Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and
to furnish promptly, when requested to do so by the Commission staff,
information relating to: the securities registered pursuant to Form 40-F;
the securities in relation to which the obligation to file an annual
report on Form 40-F arises; or transactions in said securities.
B. Consent to Service of Process
A Form F-X signed by the Registrant and its agent for service of process
was filed with the commission together with the Registrant's Registration
Statement of Form F-9, No. 333-92116.
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that
it meets all of the requirements for filing on Form 40-F and has duly caused
this annual report to be signed on its behalf by the undersigned, thereto duly
authorized.
Registrant: TECK COMINCO LIMITED
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By (Signature and Title): /s/ Karen L. Dunfee
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Karen L. Dunfee
Corporate Secretary
Date: March 31, 2005
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LIST OF EXHIBITS
23.1 Consent of PricewaterhouseCoopers, Independent Accountants
23.2 Consent of William P. Armstrong, P. Eng.
23.3 Consent of Dan Gurtler, P. Eng.
23.4 Consent of Colin J. McKenny, P. Geol.
31.1 Certification of David A. Thompson, Chief Executive Officer, pursuant to
Rule 13a-14(a) or 15d-14 of the Securities Exchange Act of 1934
31.2 Certification of John G. Taylor, Chief Financial Officer, pursuant to Rule
13a-14(a) or 15d-14 of the Securities Exchange Act of 1934
32.1 Certification of David A. Thompson, Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of John G. Taylor, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
[GRAPHIC OMITTED]
teckcominco
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ANNUAL INFORMATION FORM
March 22, 2005
TECK COMINCO LIMITED
Suite 600, 200 Burrard Street
Vancouver, British Columbia
V6C 3L9
An additional copy of this Annual Information Form
may be obtained upon request from the Corporate Secretary,
Teck Cominco Limited at the above address or from the company's
Internet World Wide Web site - http://www.teckcominco.com
TABLE OF CONTENTS
NOMENCLATURE .............................................................III
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION ......................III
CORPORATE STRUCTURE ....................................................... 1
NAME, ADDRESS AND INCORPORATION ....................................... 1
INTERCORPORATE RELATIONSHIPS .......................................... 2
GENERAL DEVELOPMENT OF THE BUSINESS ....................................... 2
THREE-YEAR HISTORY .................................................... 2
2002 ............................................................... 2
2003 ............................................................... 3
2004 ............................................................... 4
SIGNIFICANT ACQUISITIONS AND DISPOSITIONS IN 2004 ..................... 5
Highland Valley Copper ............................................. 5
Elk Valley Coal Partnership ........................................ 5
Cajamarquilla ...................................................... 5
DESCRIPTION OF THE BUSINESS ............................................... 5
GENERAL ............................................................... 5
Product Summary .................................................... 6
INDIVIDUAL OPERATIONS ................................................. 8
Zinc ............................................................... 8
Coal ...............................................................10
Copper .............................................................16
Gold ...............................................................19
Exploration ........................................................21
Mineral Reserves and Resources .....................................22
SAFETY AND ENVIRONMENTAL PROTECTION ...................................27
SOCIAL AND ENVIRONMENTAL POLICIES .....................................27
HUMAN RESOURCES .......................................................28
FOREIGN OPERATIONS ....................................................29
COMPETITIVE CONDITIONS ................................................29
RISK FACTORS ..........................................................30
Risks Inherent in the Mining and Metals Business ...................30
Commodity Price Fluctuations and Hedging ...........................30
Competition for Mining Properties ..................................31
Future Market Access ...............................................31
Mineral Reserve and Resource Estimates .............................31
Currency Fluctuations ..............................................32
Interest Rate Risk .................................................32
Environment ........................................................32
Aboriginal Title Claims ............................................32
Foreign Activities .................................................33
Legal Proceedings ..................................................33
DIVIDENDS .................................................................33
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DESCRIPTION OF CAPITAL STRUCTURE ..........................................33
GENERAL DESCRIPTION OF CAPITAL STRUCTURE ..............................33
RATINGS ...............................................................34
MARKET FOR SECURITIES .....................................................36
TRADING PRICE AND VOLUME ..............................................36
DIRECTORS AND OFFICERS ....................................................37
DIRECTORS .............................................................37
OFFICERS ..............................................................39
AUDIT COMMITTEE INFORMATION ...........................................41
Mandate of Audit Committee .........................................41
Composition of the Audit Committee .................................41
Pre-Approval Policies and Procedures ...............................41
External Auditor Service Fees ......................................42
OWNERSHIP BY DIRECTORS AND OFFICERS ...................................43
LEGAL PROCEEDINGS .........................................................43
TRANSFER AGENTS AND REGISTRARS ............................................44
MATERIAL CONTRACTS ........................................................44
INTERESTS OF EXPERTS ......................................................44
ADDITIONAL INFORMATION ....................................................45
SCHEDULE A ...............................................................A-1
AUDIT COMMITTEE MANDATE ..............................................A-1
Note: All currency references are to Canadian dollars unless otherwise noted.
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NOMENCLATURE
In this Annual Information Form, unless the context otherwise dictates, "we" or
"our", "Teck Cominco" or the "Company" refers to Teck Cominco Limited and its
subsidiaries (including Teck Cominco Metals Ltd.), and a reference to Teck
Cominco Metals refers to Teck Cominco Metals Ltd. and its subsidiaries.
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This Annual Information Form and the material incorporated by reference therein
contain certain forward-looking statements within the meaning of the United
States Private Securities Litigation Reform Act of 1995. These forward-looking
statements include estimates, forecasts, and statements as to management's
expectations with respect to, among other things, the size and quality of our
mineral reserves and mineral resources, future trends for our business, progress
in development of our mineral properties, future production, capital and mine
production costs, estimates of reclamation and other costs related to
environmental protection, demand and market outlook for commodities, future
commodity prices and treatment and refining charges, the outcome of legal
proceedings we are involved in, and our financial results. These forward-looking
statements involve numerous assumptions, risks and uncertainties and actual
results may vary.
Factors that may cause actual results to vary include, but are not limited to,
acquisitions or divestitures of assets, changes in commodity and power prices,
changes in interest and currency exchange rates, changes in environmental or
other regulations or the interpretation of those regulations, 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, disputes with business partners or joint
venturers, industrial disturbances or other job action, changes in our ability
to secure adequate transportation for our products, and unanticipated events
related to health, safety and environmental matters), political risk, social
unrest, and changes in general economic conditions or conditions in the
financial markets.
Statements relating to estimates of reserves and resources are forward-looking
statements, as they involve risks and assumptions (including but not limited to
assumptions with respect to future commodity prices and production economics)
that the reserves and resources described exist in the quantities and grades
estimated, and are capable of economic extraction.
We do not assume the obligation to revise or update these forward-looking
statements after the date of this Annual Information Form, or to revise them to
reflect the occurrence of future unanticipated events, except as may be required
under applicable securities laws.
* * *
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CORPORATE STRUCTURE
NAME, ADDRESS AND INCORPORATION
Teck Cominco Limited, previously Teck Corporation, was continued under the
Canada Business Corporations Act in 1978. It is the continuing company resulting
from the merger in 1963 of the interests of The Teck-Hughes Gold Mines Ltd.,
Lamaque Gold Mines Limited and Canadian Devonian Petroleum Ltd., companies
incorporated in 1913, 1937 and 1951 respectively. Over the years, several other
reorganizations have been undertaken. These include our merger with Brameda
Resources Limited and The Yukon Consolidated Gold Corporation in 1979, the
merger with Highmont Mining Corporation and Iso Mines Limited in 1979, the
consolidation with Afton Mines Ltd. in 1981 and the merger with Copperfields
Mining Corporation in 1983. On July 20, 2001, we completed a merger with Cominco
Ltd. by acquiring all of the issued and outstanding share capital of Cominco
Ltd. that we did not previously own by way of a plan of arrangement under the
Canada Business Corporations Act. Pursuant to the plan of arrangement, Cominco
Ltd. shareholders received 1.8 Class B subordinate voting shares of the Company
plus six dollars in cash for each Cominco Ltd. common share held. On July 23,
2001, Cominco Ltd. changed its name to Teck Cominco Metals Ltd. and on September
12, 2001, we changed our name to Teck Cominco Limited.
Since 1978, the Articles of the Company have been amended on several occasions
to provide for various series of preferred shares and other corporate purposes.
On January 19, 1988, our Articles were amended to provide for the subdivision of
our Class A common shares and Class B subordinate voting shares on a two-for-one
basis. On September 12, 2001, the Articles were amended to effect the name
change described above and to convert each outstanding Class A common share into
one new Class A common share and 0.2 Class B subordinate voting shares and to
enact "coattail" takeover bid protection in favour of the Class B subordinate
voting shares. See "Description of Capital Structure" at page 33 of this Annual
Information Form for a description of the attributes of the Class A common
shares and Class B subordinate voting shares.
On November 28, 2003 our Articles were amended to provide for the designation of
790,000 preference shares as "Preference Shares Series 1" and by designating
550,000 preference shares as "Preference Shares Series 2." See "Description of
Capital Structure" at page 33 of this Annual Information Form for a description
of the attributes of the Series 1 and Series 2 preferred shares.
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Teck Cominco Limited - 2004 Annual Information Form Page 1
The registered and principal offices of Teck Cominco are located at 200 Burrard
Street, Vancouver, British Columbia. The Company's other Canadian offices are
located in Toronto and Kamloops. Foreign offices are located in Fairbanks,
Alaska; Anchorage, Alaska, Spokane, Washington; Guadalajara, Mexico; Santiago,
Chile; Lima, Peru; Rio de Janeiro, Brazil; Ankara, Turkey; Windhoek, Namibia and
Perth, Australia.
INTERCORPORATE RELATIONSHIPS
Our financial statements consolidate the accounts of all of our subsidiaries.
Our material subsidiaries as at December 31, 2004 which are wholly-owned are
listed below. Indentation indicates that the voting securities of the relevant
subsidiary are held by the subsidiary listed immediately above.
Jurisdiction of Incorporation/Formation/
Company Name Continuation
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Teck Financial Ltd. Bermuda
Teck Base Metals Ltd. Bermuda
Teck Cominco Metals Ltd. Canada
Cominco Mining Partnership British Columbia
Teck Cominco American Incorporated Washington, U.S.A.
Teck Cominco Alaska Incorporated Alaska, U.S.A.
Teck-Hemlo Inc. Ontario
Teck Bullmoose Coal Inc. British Columbia
Teck Gold Limited Canada
Teck-Pogo Inc. Alaska, U.S.A.
Teck Resources Inc. Colorado, U.S.A.
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In addition to the wholly-owned subsidiaries listed above, we own, directly and
indirectly: a 97.5% partnership interest in the Highland Valley Copper
partnership; through Teck Cominco Coal Partnership, a 38% partnership interest
in the Elk Valley Coal Partnership; and, through Teck Base Metals Ltd., a 22.5%
indirect share interest in Compania Minera de Antamina S.A., which owns the
Antamina copper zinc mine in Peru.
GENERAL DEVELOPMENT OF THE BUSINESS
THREE-YEAR HISTORY
2002
Our earnings in 2002 were severely affected by lower prices for many of our
principal products. Electrical power prices were unusually high in 2001,
averaging US$174 per MW.h., but declined to US$23 per MW.h. in 2002. Zinc and
copper prices averaged US$0.35 and US$0.71 per pound respectively in 2002,
compared with US$0.40 and US$0.73 per pound in 2001. Partially offsetting the
effects of low zinc and copper prices were higher gold prices, which averaged
US$314 per ounce compared with US$282 per ounce in 2001, and higher coal prices
which at an average price of US$44 per tonne were 10% higher than in 2001.
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Teck Cominco Limited - 2004 Annual Information Form Page 2
Lower zinc prices contributed to an operating loss of $28 million for the year
at Red Dog compared to an operating profit of $4 million in the prior year.
Operating profit from gold operations declined from $35 million to $20 million
during the year due to reduced production as a result of ground control problems
and the November 2001 sale of the Company's interest in PacMin, despite higher
gold prices during the year. Operating profit from coal operations increased
from $87 million in 2001 to $116 million in 2002 as a result of higher prices
with similar sales volumes.
Major investments included completion of the funding of the Antamina project
($26 million), ongoing construction of the Pend Oreille mine in Washington State
($33 million), and upgrades to power generation assets at the Waneta Dam ($35
million). The latter two projects continued into 2003.
2003
Realized zinc and copper prices averaged US$0.38 and US$0.85 per pound
respectively compared with US$0.35 and US$0.71 per pound in 2002. Gold prices
continued to increase during the year, with an average realized price of US$359
per ounce, up from US$314 per ounce in 2002. Partially offsetting the effect of
higher metal prices were lower coal prices, which declined from an average of
US$44 per tonne to US$43 per tonne in 2003 and a weaker U.S. dollar.
On February 28, 2003, we completed a transaction with Fording Inc. ("Fording"),
Westshore Terminals Income Fund, Sherritt International Corporation and the
Ontario Teachers' Pension Plan Board to combine the metallurgical coal assets of
Fording, Luscar Energy Partnership and Teck Cominco in the Elk Valley Coal
Partnership ( "Elk Valley Coal"). We contributed our Elkview mine and US$125
million in cash to obtain an initial 35% interest in Elk Valley Coal. Under the
agreement between the Company, Fording, Quintette Coal Partnership and
Teck-Bullmoose Inc. providing for the formation and operation of Elk Valley Coal
(the "Partnership Agreement"), our interest could be increased to 40% should Elk
Valley Coal attain certain synergies and realize certain cash flows from the
Elkview mine during the four year period ended March 31, 2007. See "Significant
Acquisitions and Dispositions" below. We also paid US$150 million for a 9.1%
interest in the Fording Canadian Coal Trust ("FCCT"), formed by the
reorganization of Fording into an income trust. FCCT owns the remainder of Elk
Valley Coal and certain other assets.
In April 2003, the Bullmoose metallurgical coal mine closed after exhausting its
coal reserves following twenty years of operation.
We had provided the lenders of senior debt financing of the Antamina mine with a
guarantee of its 22.5% share of project debt. Effective July 1, 2003, the
project debt became non recourse to the project sponsors when certain completion
tests were met. Completion resulted in the removal of certain voting
restrictions imposed on the Company in relation to the management of Antamina.
Consequently, we began to proportionately consolidate our investment in Antamina
effective July 1, 2003.
In October 2003, we sold our interest in the Los Filos gold property in Mexico
for US$48.4 million in cash.
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Teck Cominco Limited - 2004 Annual Information Form Page 3
In November 2003, we completed our acquisition of the Lennard Shelf zinc mines
in the Kimberley region of Western Australia for AUS$26 million plus taxes and
transaction costs. We subsequently agreed to sell a 50% interest in Lennard
Shelf to Noranda Inc. Noranda can earn its interest by matching our investment
in Lennard Shelf. The Lennard Shelf mines were placed on care and maintenance by
the vendor prior to our acquisition. Studies are underway to determine the
feasibility of reopening the Lennard Shelf mines. A decision to restart the
mines will depend on the outcome of this program, as well as on zinc market
conditions and exchange rates.
2004
Realized prices for our principal products increased substantially during 2004,
following changes in market conditions which commenced in the fourth quarter of
2003. Realized zinc and copper prices averaged $0.48 and $1.35 per pound
respectively compared with US$0.38 and US$0.85 in 2003. Realized molybdenum
prices increased to an average of $19 per pound in 2004 from $5 per pound in
2003. At the end of the year, the molybdenum price was US$30.00 per pound. Coal
prices also increased from US$45 per tonne to US$52 per tonne in 2004. These
price increases were somewhat offset by a weaker U.S. dollar. Higher prices
dramatically improved earnings and cash flows at all of our major operations.
In March 2004, we completed the purchase of an additional 33.57% interest in
HVC. The additional interest contributed $75 million to earnings during 2004. We
began studies at the Highland Valley Copper mine to determine the feasibility of
extending the life of the mine by four years to 2013. A final decision on the
extension is expected to be taken in 2006, after geotechnical studies have been
completed.
Pursuant to the Partnership Agreement governing Elk Valley Coal, our interest in
Elk Valley Coal was increased to 38% effective April 1, 2004 (see "Significant
Acquisitions and Dispositions" below).
In December 2004, we completed the sale of our interest in the Cajamarquilla
refinery (see "Significant Acquisitions and Dispositions" below).
In May 2004, following the withdrawal of an appeal in relation to the issuance
of a key environmental permit, site construction began at the Pogo gold project
in Alaska. Elk Valley Coal also commenced the development of the Cheviot Creek
pit at the Cardinal River mine.
As a result of the record earnings and operating cash flow in 2004, we finished
the year with cash balances of over $900 million against long-term debt of $627
million. In November 2004, we announced that we were increasing the semi-annual
dividend payable to shareholders of record on December 31, 2004 from $0.10 to
$0.20, bringing the total annual dividend for 2004 to $0.30 per share. Our
dividend policy contemplates the payment of two semi-annual dividends at $0.20
per share in 2005.
Coal and copper production in 2005 are expected to increase by 17% and 10%
respectively, while molybdenum production is expected to decrease by 38%
compared with 2004.
Our metal sales are priced at prevailing market prices. The majority of our
metallurgical coal sales are sold at negotiated contract prices. Substantially
all of the hard coking coal sales for the coal year commencing April 1, 2005
have been contracted at an average price of US$125 per tonne, a significant
increase from the average of US$52 per tonne in the 2004/2005 coal year.
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Teck Cominco Limited - 2004 Annual Information Form Page 4
SIGNIFICANT ACQUISITIONS AND DISPOSITIONS IN 2004
Highland Valley Copper
On March 2, 2004 we completed the acquisition, through the exercise of a right
of first refusal, of the 33.57% interest of Rio Algom Limited in the Highland
Valley Copper partnership ("HVC") for US$73 million in cash, bringing our direct
and indirect interest in HVC to 97.5%.
Elk Valley Coal Partnership
The Partnership Agreement establishing Elk Valley Coal provided that we could
increase our interest in Elk Valley Coal by up to 5% from an initial 35%, to the
extent that operating synergies realized by Elk Valley Coal and distributable
cash generated by the Elkview mine (collectively, "Incremental Returns")
exceeded certain cumulative targets during the four year period from April 1,
2003 to March 31, 2007. An independent engineering firm was retained to assist
in the determination of Incremental Returns. Following receipt of the opinion of
the independent engineer, the Company and Fording reached agreement in July 2004
on the amount of Incremental Returns and the resulting adjustments to our
interest in Elk Valley Coal. Our initial 35% interest was increased by 3%
effective April 1, 2004, and will be increased by an additional 1% on April 1,
2005 and on April 1, 2006, bringing our total direct interest in Elk Valley Coal
to 40% on April 1, 2006.
Cajamarquilla
On December 15, 2004, we completed the sale of our 85% interest in Refineria de
Cajamarquilla S.A., which owns the Cajamarquilla zinc refinery in Peru, for
proceeds of US$168 million after repayment of debt related to Cajamarquilla of
US$56 million. Under the agreement of purchase and sale, we are entitled to
receive additional price-linked payments of approximately US$365,000 for each
US$0.01 that the average annual price of zinc exceeds US$0.454 per pound in each
of the years from 2005 to 2009 inclusive. In addition, if the purchaser elects
to expand the refinery during the first three years following the sale, we are
entitled to an additional payment of US$12.75 million in year one, declining to
US$4.25 million in year three.
DESCRIPTION OF THE BUSINESS
GENERAL
Teck Cominco is engaged primarily in the exploration for, and the development
and production of, natural resources. We are a producer of zinc, coal, copper,
gold, lead, as well as various specialty metals such as germanium and indium. We
have interests in the following principal mining and processing operations as at
March 15, 2005:
Type of Operation Jurisdiction
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Red Dog Zinc/Lead Alaska, USA
Pend Oreille Zinc/Lead Washington, USA
Trail Zinc/Lead British Columbia, Canada
Elkview Coal British Columbia, Canada
Fording River Coal British Columbia, Canada
Greenhills Coal British Columbia, Canada
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Teck Cominco Limited - 2004 Annual Information Form Page 5
Type of Operation Jurisdiction
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Coal Mountain Coal British Columbia, Canada
Line Creek Coal British Columbia, Canada
Cardinal River Coal Alberta, Canada
Antamina Copper/Zinc Peru
Highland Valley Copper/Molybdenum British Columbia, Canada
David Bell/Williams Gold Ontario, Canada
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Our principal products are zinc concentrate, zinc metal, metallurgical coal and
copper concentrate.
The following table sets out our revenue by product for each of our last two
financial years
Revenue by product
Product 2004 2003
$(000's) % $(000's) %
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Zinc(1) 964 28% 739 33%
Copper 870 25% 360 16%
Coal 645 19% 548 25%
Other 948 28% 581 26%
Total 3,427 100% 2,228 100%
(1) Zinc revenues include sales of refined zinc and zinc concentrate
(2) Other revenues include gold, lead, molybdenum, specialty metals,
and power sales
Product Summary
Zinc
Our principal markets for zinc concentrates are Asia and Europe. Approximately
25% of Red Dog's concentrate production is sold to our metallurgical operation
at Trail, BC. The balance of Red Dog's production is distributed to customers in
Europe and Asia by barge and ship.
Our principal markets for refined zinc are, in order of importance, United
States, Asia and Europe. Refined zinc produced at Trail is distributed to
customers in the United States by rail and/or truck and to customers in Europe
and Asia by ship.
.. All of our revenues from sales of refined zinc and zinc concentrates (other
than Red Dog zinc concentrates treated at Trail) are derived from sales to third
parties. Zinc concentrates and refined zinc are fungible commodities. We strive
to differentiate our products by producing the sizes and shapes best suited to
our major customers' needs.
All of the zinc concentrates produced by our Pend Oreille mine in Washington
State are shipped by truck to the Trail metallurgical operations. Trail's supply
of zinc and lead concentrates other than those sourced from our own mines is
provided through long-term and spot contracts with mine producers in North
America and South America.
We have substantial long-term frame contracts for the sale of zinc concentrates
from the Red Dog mine to customers in Asia (Korea Zinc) and Europe (Glencore and
Xstrata).
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Teck Cominco Limited - 2004 Annual Information Form Page 6
Metallurgical Coal
Our principal markets for metallurgical coal are the hard coking coal markets in
Asia and Europe. Processed coal is shipped by rail to the Westshore and Neptune
Terminals in the lower mainland of British Columbia or directly by rail to North
American customers or by rail and barge through Thunder Bay Terminals in Thunder
Bay, Ontario. Rail service to the five Elk Valley mines is provided by Canadian
Pacific Railway (see "Coal Transportation and Sales", on page 12 for a summary
of a recent dispute with respect to this contract).
All of Elk Valley Coal's production is fully contracted for the remainder of the
2004 coal year and all of the 2005 coal year, with more than 95% of volumes
contracted under evergreen or long-term agreements.
Elk Valley Coal competes primarily with producers in Australia and the United
States. The supply of coal in global markets and the demand for hard coking coal
among world steel producers has historically provided for a competitive seaborne
market. Coal pricing is generally established in US dollars and the competitive
positioning among producers can be significantly affected by exchange rates. The
competitive position of Elk Valley Coal continues to be determined primarily by
the quality of its various coal products and its reputation as a reliable
supplier, as well as by its production and transportation costs compared to
other producers throughout the world.
The seaborne hard coking coal markets are cyclical in nature. Over-supply in the
years 1997 - 2000 and the economic downturn in a number of Asian countries
caused prices to drop by more than 30%. Demand strengthened in 2003 and has
remained strong through 2004 and 2005. Integrated steel mills and coke producers
around the world are finding it difficult to secure sufficient quantities of
hard coking coal. In addition, steel production in China is forecast to increase
in the next few years, which could result in increased demand. Sales and
production for the 2005 coal year are expected to be at or near capacity.
Copper Concentrates
Our principal market for copper concentrates is Asia. Copper concentrates
produced at Highland Valley Copper are distributed to customers in Asia by rail
to a storage facility in Vancouver, British Columbia, and from there by ship to
customers in Asia. Copper concentrates produced at Antamina are transported by a
slurry pipeline to a port at Huarmey, Peru and from there by ship to customers
in Europe and Asia.
The copper concentrate business is cyclical. Treatment charges rise and fall
depending upon the supply of copper concentrates in the market and the demand
for custom copper concentrates by the copper smelting and refining industry. In
2003, treatment charges fell in response to a shortage of custom copper
concentrates due to reduced mine production and increased smelting and refining
capacity in Asia. As the price of copper rose through 2003 and 2004, mine
production increased and treatment charges returned to more normal levels. The
price of copper fluctuates with the comparative supply and demand for refined
copper. Increased demand for refined copper in China has, in large part, driven
the relatively high price of refined copper in the last two years.
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Teck Cominco Limited - 2004 Annual Information Form Page 7
INDIVIDUAL OPERATIONS
Zinc
Mining Operations
Red Dog Mine, United States (Zinc, Lead)
The Red Dog zinc-lead mine, concentrator and shipping facility in the Northwest
Arctic Borough near Kotzebue, Alaska, commenced production in December 1989 and
began shipping concentrates in July 1990. The Red Dog mine is 100% owned and
operated by Teck Cominco Alaska Incorporated, subject to a royalty as described
below.
The mining method employed is conventional drill and blast open pit mining. The
main pit has an expected life of 7 years at current rates of production.
Additional reserves have been identified in the vicinity of the processing
facilities sufficient to extend the life of the operation by a further 16 years
for a total mine life of 23 years. The mineral processing facilities employ
conventional grinding and sulphide flotation methods to produce zinc and lead
concentrates.
The mine and concentrator properties are leased from, and are being developed
under the terms of a development and operating agreement with, the NANA Regional
Corporation, Inc. ("NANA"), a native Alaskan development corporation. NANA
receives an annual advance royalty equal to the greater of 4.5% of the value of
annual production or US$1 million until our business has recovered its capital
investment, interest and the advance royalties previously paid to NANA. After
those amounts have been recovered NANA will have a carried interest in the net
proceeds of production from the mine, starting at 25% and increasing to 50% by
successive increments of 5% at five-year intervals. In addition to the royalties
payable to NANA, the operation is subject to State and federal income taxes.
All contaminated water from the mine area and waste dumps is collected and
contained in a tailings impoundment and seasonally discharged through a water
treatment plant. Mill process water is reclaimed from the tailings pond. The
mine and an associated port facility operate under effluent permits issued by
the United States Environmental Protection Agency and air permits issued by the
State of Alaska. The operation is in material compliance with all of its permits
or related regulatory instruments and has obtained all of the permits that are
material to its operations. Permit renewal applications are underway. Additional
permits will be required for future development at Red Dog.
In addition to the original capital invested to establish mining, mineral
processing and transportation infrastructure, substantial additional capital has
been invested at Red Dog to increase production and optimize mineral processing
and transportation facilities.
A project to optimize the mill and increase production from 900,000 tonnes of
zinc concentrate per year to 1,100,000 tonnes per year was completed at the end
of 2001. This project also improved the grade of the concentrate and the
recovery of zinc in 2002.
Red Dog is comprised of a number of sedimentary hosted exhalative (SEDEX)
lead-zinc sulfide deposits hosted in Mississippian-age to Pennsylvanian-age
sedimentary rocks. The orebodies are lens shaped and occur within structurally
controlled (thrust faults) plates, are relatively flat lying and are hosted by
marine clastic rocks (shales, siltstones, turbidites) and lesser chert and
carbonate rocks. Barite rock is common in and above the sulfide units.
Silicification is the dominant alteration type.
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Teck Cominco Limited - 2004 Annual Information Form Page 8
The sulfide mineralization consists of semi-massive to massive sphalerite,
pyrite, marcasite and galena. Common textures within the sulfide zone include
massive, fragmental, veined and rarely sedimentary layering.
Approximately 25% of the zinc concentrate produced at Red Dog is shipped to our
metallurgical facilities at Trail, British Columbia and the balance to customers
in Asia and Europe. The lead concentrate production is shipped to customers in
Asia and Europe. The majority of concentrate sales are pursuant to long-term
contracts at market prices subject to annually negotiated treatment and refining
charges. The balance is sold on the spot market at prices based on prevailing
market quotations. Because the shipping season at Red Dog is restricted to
approximately 100 days per year because of sea ice conditions, Red Dog's sales
are seasonal with the majority of sales in the last five months of each year.
Concentrate is stockpiled at the port facility and is typically shipped between
July and October.
Pend Oreille Mine, United States (Zinc, Lead)
Construction was completed at the Pend Oreille mine, near Metaline Falls,
Washington, in early 2004 at a total cost of US$74 million and the mine is in
commercial production. We own 100% of the Pend Oreille mine. A probable reserve
of 5.7 million tonnes grading 7.7% zinc and 1.4% lead is expected to provide a
mine life of 8 years with some potential for extension. Inferred and indicated
resources of 3.3 million tonnes grading 6.6% zinc and 1.3% lead identified on
the main Washington Rock zone and in a separate zone to the north require
further drilling and evaluation to qualify as reserves. Several significant new
drill targets have been identified in the immediate area using downhole
geophysical techniques.
Pend Oreille holds all permits necessary for its operation and is in material
compliance with these permits. Certain provisions of the mine's National
Pollutant Discharge Elimination System permit are the subject of an appeal. The
appeal is not expected to affect operations at the mine.
The Pend Oreille mine is a carbonate hosted zinc-lead ore body situated within
the Metaline Formation in the southern portion of the Kootenay arc, an arcuate,
narrow belt of sedimentary, volcanic and metamorphic rocks separating
Precambrian metasediments to the east and Mesozoic volcanic and sedimentary
units to the west. Metaline carbonates host the known zinc-lead deposits within
the district.
Mineralization at the Pend Oreille mine is located within the Yellowhead horizon
of the Metaline Formation, an intensely altered stratabound dolomitic solution
breccia, which has been invaded and replaced by fine grained pyrite with lesser
Zn and Pb sulfides. The sulfide zone has relatively simple mineralogy.
Sphalerite and Galena are the two ore minerals of interest. Gangue minerals
include pyrite, dolomite and calcite.
The Pend Oreille mine is an underground mine. The mineral processing facilities
employ conventional grinding and sulphide flotation methods to produce high
quality zinc and lead concentrates. Annual production is forecast to be 730,000
tonnes per year of ore to produce 83,000 tonnes per year of zinc concentrate and
13,000 tonnes per year of lead concentrate. The concentrates are hauled by truck
to Trail Metallurgical Operations.
Refining and Lead Smelting
Trail Metallurgical Operations
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Teck Cominco Limited - 2004 Annual Information Form Page 9
Teck Cominco Metals owns and operates the integrated smelting and refining
complex at Trail, British Columbia. The complex's principal products include
refined zinc, lead, silver and gold. Germanium dioxide, indium, cadmium and
copper compounds are also produced as metal co-products, along with a variety of
sulphur products and ammonium sulphate fertilizers.
Trail's zinc operations consist of six major metallurgical plants, one
fertilizer plant and two specialty metal plants. The facility has an annual
capacity of approximately 295,000 tonnes of refined zinc. Zinc concentrates are
initially treated in roasters or pressure leach facilities. The zinc and other
elements are put into solutionbefore the zinc is purified and electroplated in
an electrolytic refining plant onto cathodes. Refined zinc is produced by
remelting the zinc cathodes and then casting the zinc into various shapes,
grades and alloys to meet customer requirements. The specialty metals processes
extract co-products to produce valuable metals. Construction of the lead smelter
modernization project, including the KIVCET furnace and a slag fuming plant, was
completed and the plants were started up in 1997. Lead concentrates, recycled
batteries, residues from the zinc circuits and various other lead and
silver-bearing materials are treated in the KIVCET flash furnace and refined
into lead in the cell electro-refinery. Silver and gold are also recovered from
this circuit after further processing.
Drainage water from the smelter site and metallurgical effluent is collected in
ponds and treated through a water treatment plant. The smelter operates under
effluent and air emission permits issued by the British Columbia Ministry of
Water, Land and Air Protection. The operation is in material compliance with all
of its permits and has obtained all of the permits that are material to its
operations.
Teck Cominco Metals also owns the Waneta hydroelectric power plant near Trail.
It has an installed capacity of 450 megawatts and an annual average output of
approximately 2,700 gigawatt hours of energy. Included in the above numbers are
the capacity increases completed in 2003. The second and third turbines were
upgraded resulting in 50 MW more capacity and approximately 135 gigawatt hours
per annum more energy available for sale. This plant, together with agreements
with B.C. Hydro and Fortis Inc., provides electric power to the Trail
metallurgical operation. The operation of various other hydroelectric plants in
the watershed is coordinated through contractual arrangements with B.C. Hydro
and other related parties under which we receive 2,690 gigawatt hours per year
of energy even during low water years. We also own a 15 kilometre transmission
line from Waneta to the United States' power distribution system. Power that is
surplus to our needs at Trail is sold in Canada and in the United States.
Coal
Elk Valley Coal Partnership
We hold our metallurgical coal mining interests through our 38% interest in Elk
Valley Coal (other than the Bullmoose mine which will be transferred to Elk
Valley Coal when reclamation is complete). We hold a 37.833% interest in Elk
Valley Coal through the Teck Cominco Coal Partnership, a partnership between
Teck Cominco (99.992%) and Teck Bullmoose Coal Inc. (0.008%). Quintette Coal
Partnership (which is directly and indirectly wholly-owned by us) owns an
additional 0.164% interest in Elk Valley Coal. Teck Cominco Coal Partnership is
the managing partner of Elk Valley Coal. The remaining 62% interest in Elk
Valley Coal is held by Fording, a wholly-owned subsidiary of FCCT. Under the
terms of the Partnership Agreement providing for the formation of Elk Valley
Coal, we could increase our interest in Elk Valley Coal by up to 5%, bringing
our interest to 40%, to the extent that certain operating synergies realized by
Elk Valley Coal and distributable cash generated by the Elkview mine
(collectively, "Incremental Returns") cumulatively reached certain specified
targets in the four year period from April
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Teck Cominco Limited - 2004 Annual Information Form Page 10
2003 to March 31, 2007. An independent engineering firm was engaged to assist in
the calculation of Incremental Returns, and following receipt of the expert's
opinion in respect of Incremental Returns realized during the coal year ended
March 31, 2004, we reached agreement with Fording in July 2004 on the amount of
Incremental Returns and the resulting adjustments to the interest in Elk Valley
Coal. As a result, our 35% direct and indirect interest in Elk Valley Coal was
increased by 3% effective April 1, 2004, and will be increased by an additional
1% on April 1, 2005 and on April 1, 2006.
Elk Valley Coal is a general partnership established under the laws of the
Province of Alberta. In its capacity as managing partner of Elk Valley Coal,
Teck Cominco Coal Partnership manages and makes all decisions relating to the
business and affairs of Elk Valley Coal, subject to obtaining, in respect of
certain matters, the approval of Fording. These matters include certain
fundamental changes with respect to Elk Valley Coal, and approval of an annual
operating and capital plan and budget for Elk Valley Coal.
Elk Valley Coal has a $150 million five-year revolving floating rate, annually
extendible credit facility that can be used for general operating purposes.Elk
Valley Coal has also given an unsecured guarantee, limited in recourse as
against Teck Cominco to the assets of Elk Valley Coal and our interest therein,
with respect to borrowings by Fording under that corporation's $400 million
credit facility, which was initially incurred principally in connection with the
financing of the transaction pursuant to which we acquired our interest in Elk
Valley Coal. The Fording and Elk Valley Coal credit facilities have the same
attributes, terms and conditions. At December 31, 2004, $201 million of the
Fording facility was drawn and $71 million of Elk Valley Coal's facility was
used to support outstanding letters of credit and guarantees.
The Partnership Agreement provides that while the foregoing guarantee is in
place, Fording may not sell its interest in Elk Valley Coal or carry on any
business other than in respect of Elk Valley Coal or its industrial minerals
business substantially as currently conducted, unless in our reasonable judgment
the carrying on of such business could not, under any reasonably foreseeable
circumstances, have an adverse effect on the financial condition of Fording.
Elk Valley Coal has six operating mines. It wholly owns Elkview, Fording River,
Coal Mountain, Line Creek and Cardinal River and has an 80% joint venture
interest in the Greenhills mine. It has agreed in principle to sell a 5%
interest in the Elkview mine to Nippon Steel Corporation and POSCO of Korea.
Five of the six mines are located in close proximity to each other in the Elk
Valley region of southeast British Columbia. The Cardinal River mine is located
in west central Alberta. All of Elk Valley Coal's mines are open pit operations
and are designed to operate on a continuous basis, 24 hours per day, 365 days
per year. Operating schedules can be varied depending on market conditions. All
of the mines are accessed by two lane all-weather roads which connect to public
highways. All the mines operate under permits granted by Provincial and Federal
regulatory authorities. Provincial remediation reclamation permits are placed to
permit all facets of the mining process. From time to time each of the mines may
require additional permits in respect of the location of additional dumps and
tailings impoundment areas that will be required as mining operations proceed.
All permits necessary for the current operations of the mines are in hand and in
good standing.
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Teck Cominco Limited - 2004 Annual Information Form Page 11
The following chart lists significant coal rights held by Elk Valley Coal as at
December 31, 2004:
Crown Lease
Mineral Holdings (thousand hectares) Fee Simple and License Total
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Coal
British Columbia 39 67 106
Alberta 1 49 50
All Mines and Minerals except
Petroleum & Natural Gas
British Columbia 10 - 10
Total(1) 50 116 166
Notes:
(1) Numbers have been rounded.
In British Columbia, coal licenses are issued for one-year terms and have an
initial cost of $7 per hectare, increasing by $5 per hectare every five years to
a maximum of $30 per hectare. Elk Valley Coal currently pays license fees
ranging from $7 to $30 per hectare. Coal leases are granted for periods of 30
years and have an annual cost of $10 per hectare. In Alberta, Crown leases are
granted by the provincial government and are generally issued for 15 years.
Annual lease rentals are approximately $4 per hectare. In the past, renewals of
these licences and leases have generally been granted although there can be no
assurance that this will continue in the future.
Five of Elk Valley Coal's six coal mines operate in British Columbia and are
therefore subject to mineral taxes. British Columbia mineral tax is a 2-tier tax
with a minimum rate of 2% and a maximum rate of 13%. A minimum tax of 2% applies
to operating cash flows, as defined by the regulations. A maximum tax rate of
13% applies to cash flows after taking available deductions for capital
expenditures and other permitted deductions.
Elk Valley Coal's mines employ conventional open-pit mining techniques and coal
preparation plants. Following mining, the coal is washed using a variety of
conventional techniques and conveyed to coal-fired dryers for drying. Processed
coal is conveyed to clean coal silos or other storage facilities for storage and
load-out to railcars.
Coal Transportation and Sales
Coal from the coal mines owned by Elk Valley Coal is principally transported by
rail pursuant to long-term rail contracts to the Roberts Bank coal port near
Vancouver operated by Westshore Terminals Ltd. ("Westshore"). Westshore provides
coal loading services under long-term agreements with Elk Valley Coal.
Rail service to the five mines located in the Elk Valley is provided by the
Canadian Pacific Railway Company ("CPR"). Service to the Fording River,
Greenhills and Coal Mountain mines is provided pursuant to an agreement expiring
March 31, 2007. Separate agreements for rail service to the Elkview and Line
Creek mines expired on March 31, 2004. Rail service in respect of the Cardinal
River mine is provided by Canadian National Railway.
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Teck Cominco Limited - 2004 Annual Information Form Page 12
Elk Valley Coal and CPR are in a dispute concerning the manner in which freight
rates for coal shipped to west coast ports from the five mines is to be
determined. Legal proceedings in relation to the dispute have been initiated by
CPR in the Alberta Court of Queen's Bench and by Elk Valley Coal Corporation in
a final offer arbitration under the Canadian Transportation Act ("CTA") in
respect of the Elkview Mine. On December 13, 2004, an arbitrator accepted CPR's
final offer in the arbitration, which could determine the rate payable by Elk
Valley Coal for coal shipped from the Elkview Mine to the west coast ports. The
arbitrated rate is confidential and cannot be disclosed. However, CPR has also
challenged the Canadian Transportation Agency's jurisdiction under the CTA to
refer the determination of freight rates for the Elkview Mine to the arbitrator.
If that challenge is successful, it would supersede the decision of the
arbitrator. If CPR's jurisdictional challenge is not successful, the arbitrated
rate for the Elkview Mine may apply to some or all of the other four mines,
depending on the outcome of the Alberta Court of Queen's Bench action.
Regardless of the outcome of the proceedings, rail rates for westbound coal will
increase and such increase is likely to be material. An unfavourable outcome of
one or both of the legal proceedings will also result in a material increase in
rail rates charged to Elk Valley Coal for westbound coal.
In January 2005, Elk Valley Coal and CPR agreed to engage in a confidential
mediation/negotiation process to attempt to resolve the dispute and that process
is ongoing. CPR has stated that the dispute is not expected to adversely affect
the shipment of coal from the Elk Valley mines.
Rail service provided by CPR to eastern destinations from the Elk Valley Mines
is not the subject of either legal proceeding.
Westshore Terminals Ltd. provides ship-loading services at Roberts Bank for
approximately 75% of Elk Valley Coal's metallurgical coal pursuant to long-term
contracts. Neptune Terminals, in which Elk Valley Coal has a 46.4% ownership
interest, provides ship-loading services for approximately 12% of Elk Valley
Coal's metallurgical coal. The remaining 13% of Elk Valley Coal's metallurgical
coal products are shipped from the sites to eastern North American customers
either directly by rail or by rail and barge via Thunder Bay Terminals in
Thunder Bay, Ontario. A small amount of product is shipped by truck to customers
in western Canada.
Elk Valley Coal's coal is sold principally under evergreen contracts at annually
negotiated prices.
Elkview Mine, Canada
The Elkview mine is an open pit coal mine located in the Elk Valley in
southeastern British Columbia. The mine has a current annual design capacity of
6 million tonnes of clean coal with an ability to expand to 7 million tonnes.
Elk Valley Coal currently intends to increase the annual capacity of Elkview to
7 million tonnes at a cost of approximately US$50 million, using the proceeds of
a proposed investment by Nippon Steel Corporation and POSCO, a Korean steel
producer, who have agreed in principle, subject to due diligence, completion of
definitive documentation and board approval, to acquire a 5% interest in the
Elkview mine. At current production rates, the Elkview mine is estimated to have
a remaining reserve life of 35 years.
The mine is a conventional open pit operation comprised of 23,000 hectares of
coal lands of which 3,526 hectares have been mined or are scheduled for mining.
The mine proper and the associated fee simple lands at Elkview mine cover a
portion of the Crowsnest coal field that runs from just north of the Elkview
property to 20 kilometers south of the City of Fernie, British Columbia. The
mineral reserves associated with the Elkview mine lie in the Mist Mountain
formation of the Crowsnest coal field with the mine
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Teck Cominco Limited - 2004 Annual Information Form Page 13
exploiting 16 coal seams in the area of Baldy and Natal Ridge, just outside the
Town of Sparwood, British Columbia, bounded by Michel Creek to the south and the
Elk River to the west.
Annual in-fill drilling programs are conducted to confirm and update the
geological model used to develop the yearly mine plans.
The coal produced is a high quality mid-volatile hard coking coal. Lesser
quantities of lower grade hard coking coal are also produced. The Elkview mine
uses conventional open pit truck/shovel mining methods. The preparation plant,
which has a capacity of 7 million tonnes per year of clean coal, is a
conventional coal washing plant, using standard technology of cycloning and
heavy media flotation.
Fording River Mine, Canada
The Fording River mine is located 29 kilometres northeast of the community of
Elkford, in southeastern British Columbia. The mine is a conventional open pit
operation comprised of 20,304 hectares of coal lands of which 3,955 hectares
have been mined or are scheduled for mining.
Construction of Fording River as a 3 million tonne per year operation was
commenced in 1969. It has operated continuously since that time. Coal mined at
Fording River is primarily metallurgical coal, although a small amount of
thermal coal is also produced. The current annual production capacities of the
mine and preparation plant are 10 and 9.5 million tonnes, respectively. In the
fourth quarter of 2004 work began to increase the annual plant capacity to 10.5
million tonnes. The mine is expected to reach the higher production rate in the
third quarter of 2005. Annual in-fill drilling programs are conducted to refine
mine plans and confirm and update the geological model.
The majority of current production is derived from the Eagle Mountain pit.
Proven and probable reserves at Fording River are projected to support mining at
2004 production rates through 2029. Fording River's reserve areas include Eagle
Mountain, Greenhills, Turnbull, Henrietta, and Castle Mountain. The majority of
current production is derived from the Eagle Mountain pit.
Greenhills, Canada
The Greenhills mine is located eight kilometres northeast of the community of
Elkford, in southeastern British Columbia. The mine site is comprised of 10,092
hectares of coal lands of which approximately 2,155 hectares have been mined or
are scheduled for mining. Greenhills holds a forest licence and manages a 7,610
hectare forest located outside the active mining area.
The Greenhills operation was constructed in the early 1980s and has operated
continuously since 1993. Coal mined at Greenhills is primarily metallurgical
coal, although a small amount of thermal coal is also produced. The current
annual production capacities of the mine and preparation plant are 4.5 and 5.5
million tonnes, respectively.
Greenhills is operated under a joint venture agreement (the "Greenhills Joint
Venture Agreement") among Elk Valley Coal, POSCO Canada Limited ("POSCAN") and
POSCAN's parent, POSCO. Pursuant to the agreement, Elk Valley Coal has an 80%
interest in the joint venture while POSCAN has a 20% interest. The mine
equipment and preparation plant are owned by Elk Valley Coal and POSCAN in
proportion to their respective joint venture interests. Under the Greenhills
Joint Venture Agreement, Elk Valley Coal is the manager and operator of
Greenhills. Elk Valley Coal and POSCAN bear all costs and expenses incurred in
operating Greenhills in proportion to their respective joint venture interests.
POSCAN, pursuant to a property rights grant, has a right to 20% of all of the
coal mined at Greenhills from certain defined lands
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Teck Cominco Limited - 2004 Annual Information Form Page 14
until the Greenhills Joint Venture Agreement terminates. Pursuant to an
extension agreement reached between the parties in 2003, the Greenhills Joint
Venture Agreement terminates on the earlier of: (i) the date the reserves on the
defined lands have been depleted; and (ii) March 31, 2012.
Coal mined at the Greenhills mine is primarily metallurgical coal, although a
small amount of thermal coal is also produced. Production is derived from the
Cougar reserve, which is divided into two distinct pits, Cougar North and Cougar
South. Cougar North has been fully developed and currently produces the bulk of
the coal for the mine. Development and pre-stripping of Cougar South is underway
and is expected to provide a long-term source of coal. Proven and probable
reserves at Greenhills are projected to support mining at 2003 production rates
through 2026.
Coal Mountain, Canada
The Coal Mountain mine is located 30 kilometres southeast of Sparwood in
southeastern British Columbia. The mine site is comprised of 2,521 hectares of
coal lands of which approximately 650 hectares are currently being mined or are
scheduled for mining. Coal Mountain produces both metallurgical and thermal
coal. The current annual production capacities of the mine and preparation plant
are 2.5 and 3.2 million tonnes, respectively. Proven and probable reserves at
Coal Mountain are projected to support mining at 2004 production rates until
2015.
Line Creek, Canada
The Line Creek mine is located approximately 25 kilometres north of Sparwood in
southeastern British Columbia. Line Creek supplies metallurgical and thermal
coal to a variety of international and domestic steel producers and Pacific Rim
electric utilities. The Line Creek property consists of 8,124 hectares of coal
lands of which approximately 1,450 hectares are currently being mined or are
scheduled for mining.
The mine is a conventional open pit operation. Raw coal is transferred to an 11
kilometre coal conveyor for transportation to a processing plant, where it is
crushed, cleaned, and dried using conventional technology.
The metallurgical and thermal coal at Line Creek is mined from 9 seams lying in
a syncline. The seams average 2 to 13 metres in thickness, with the thickest
seam reaching 15 metres in several places. Line Creek has an estimated remaining
reserve life of approximately 7 years.
Cardinal River Mine, Canada
The Cardinal River mine is located approximately 42 kilometres south of Hinton,
Alberta. In March 2004, Elk Valley Coal commenced the development of the Cheviot
Creek pit located approximately 20 kilometres south of the Cardinal River coal
plant. The total capital cost in relation to the haul road, pit development,
plant refurbishment and mobile fleet is approximately $120 million. When
complete, Cheviot Creek will have a production capacity of 2.8 million tonnes
per year. Completion is expected to be achieved in the third quarter of 2005.
Cheviot Creek is expected to have a mine life of approximately 20 years.
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Teck Cominco Limited - 2004 Annual Information Form Page 15
Copper
Copper Operations
Antamina Mine, Peru (Copper, Zinc)
In July 1998 we acquired 25% of the Antamina copper, zinc project in Peru, with
the balance then held by BHP Billiton, through Rio Algom, and Noranda Inc.
("Noranda"). Subsequently, in October 1999, Mitsubishi Corporation acquired a
10% interest in the Antamina project, resulting in a reduction of the other
participants' interests to 33.75% for each of BHP Billiton and Noranda and 22.5%
for us. The participants' interests are represented by shares of Compania Minera
Antamina S.A. ("CMA"), the Peruvian company that owns and operates the project.
Our interest is subject to a net profits royalty of 1.667% on the project's free
cash flow after recovery of capital costs and an interest factor on 60% of
project expenditures.
The Antamina project property consists of numerous mining concessions and mining
claims (including surface rights) covering an area of approximately 14,000
hectares. CMA also owns a port facility located at Huarmey and an electrical
substation located at Huallanca. In addition, CMA holds title to all easements
and rights of way for the 302 kilometer concentrate pipeline from the mine to
CMA's port at Huarmey.
Project financing was arranged in the amount of US$1.32 billion of senior loans
with a consortium of 20 banks and export/import credit agencies. The balance of
required funding was arranged pro rata by the CMA shareholders.
Our share of the project cost to completion was approximately US$490 million, of
which US$300 million was provided by the project financing. Total development
cost was US$2.206 billion. In July 2003, CMA achieved completion under the
project finance documentation and the project debt became non-recourse to the
CMA project sponsors, including Teck Cominco.
The deposit is located at an average elevation of 4,200 meters, 385 kilometers
by road and 270 kilometers by air north of Lima, Peru. Antamina lies on the
eastern side of the Western Cordillera in the upper part of the Rio Maranon
basin, a tributary of the Amazon River.
The open pit is a truck/shovel operation. The ore is crushed at the rim of the
pit and conveyed through a 2.7 kilometer tunnel to a coarse ore stockpile at the
mill. It is then processed utilizing a SAG mill, followed by ball mill, grinding
and flotation to produce separate copper, zinc, molybdenum and lead/bismuth
concentrates. A 302 kilometer long slurry concentrate pipeline, approximately 9
inch diameter, with a single pump station at the minesite transports copper and
zinc concentrates to the port where they are dewatered and stored prior to
loading onto vessels for shipment to refineries and smelters world-wide.
Power for the mine is taken from the Peru national energy grid through an
electrical substation constructed at Huallanca. Water requirements are sourced
from a dam-created reservoir upstream from the tailings impoundment facility.
The tailings impoundment facility is located next to the mill and waste dumps
are located adjacent to the pit. Fresh water from mill operations is collected
and contained in a tailings impoundment area. Mill process water is reclaimed
from the tailings pond. The operation is subject to water and air permits issued
by the Government of Peru and is in material compliance with those permits. The
operation holds all of the permits that are material to its operations
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Teck Cominco Limited - 2004 Annual Information Form Page 16
The Antamina polymetallic deposit is skarn hosted. It is unusual in its
persistent mineralization and predictable zonation, and has a SW-SE strike
length of more than 2,500 meters and a width of up to 1,000 meters. The deposit
is located mainly between elevation 4,350 and 3,790 meters, but outcrops up to
elevation 4,650 meters. The deepest drill hole, which terminated at 3,632 meters
elevation, was still in mineralized skarn. The skarn is well zoned symmetrically
on either side of the central intrusion with the zoning used as the basis for
four major subdivisions of the skarn being a brown garnet skarn, green garnet
skarn, wollastonite/diopside/green garnet skarn and a marbleized limestone with
veins or mantos of wollastonite. Other types of skarn, including the massive
sulfides, massive magnetite, and chlorite skarn, represent the remainder of the
skarn and are randomly distributed throughout the deposit.
Antamina has entered into long-term copper and zinc concentrate agreements with
major smelting companies and refineries which in aggregate account for over 70%
of the mine's production of copper and zinc concentrates. The price of copper
and zinc concentrate sales under these long-term sales agreements are based on
LME prices at the time of the sale with treatment and refining charges
determined by reference to current world market terms. The remaining copper and
zinc concentrate is sold to affiliates of the Antamina project sponsors.
Molybdenum concentrates are sold to third party refiners on market terms.
Little exploration has been conducted outside the pit area. In-fill definition
drilling has, however, been conducted within the pit area and is ongoing.
Highland Valley Mine, Canada (Copper)
We have an aggregate 97.5% partnership interest in the Highland Valley copper
mine located near Kamloops, British Columbia. The remaining 2.5% is held by
Highmont Mining Company (excluding our interest in the Highmont Partnership).
Highland Valley is also a significant producer of molybdenum.
Our current interest is held through an 11.4% direct interest in the HVCand a
50.001% interest in the Highmont Partnership, which holds a 5% interest in HVC.
Our remaining 83.6% interest is held directly and indirectly through Teck
Cominco Metals. The property comprising the Highland Valley Copper mine consists
of mineral leases, mineral claims and crown grants which will be kept in good
standing beyond the shutdown of operations. The mine covers a surface area of
approximately 34,000 hectares and HVC holds the surface rights to such area
pursuant to various leases, claims and licenses.
The HVC operation is located adjacent to a highway connecting Merritt, Logan
Lake, and Ashcroft. The mine itself is approximately 80 kilometers southwest of
Kamloops, and approximately 200 kilometers northeast of Vancouver. The mine
operates throughout the year. Power is supplied by B.C. Hydro through a 138kv
line which terminates at the Trans Canada Highway west of Spuzzum in the
Thompson Valley. Mine personnel live in nearby areas, primarily Logan Lake,
Kamloops, Ashcroft, Cache Creek, and Merritt.
The mine is an open pit operation. The mill, which uses semi-autogenous grinding
and conventional flotation to separate metal in concentrate form from the ore,
has the capacity to process 136,000 tonnes of ore per day. Water from mill
operations is collected and contained in a tailings impoundment area. Mill
process water is reclaimed from the tailings pond. The operation is subject to
water and air permits issued by the Province of British Columbia and is in
material compliance with those permits. The operation holds all of the permits
that are material to its operations.
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Teck Cominco Limited - 2004 Annual Information Form Page 17
Ore is mined from two sources, the Lornex and Valley mines. Both are located in
the Guichon Batholith which hosts all of the ore bodies located in the area. The
Lornex ore body occurs in Skeena Quartz Diorite host rock, intruded by younger
pre-mineral Quartz Porphyry and Aplite Dykes. The Skeena Quartz Diorite is an
intermediate phase of the Guichon Batholith and is generally a medium to coarse
grained equigranular rock distinguished by interstitial quartz and moderate
ferromagnesian minerals. The sulphide ore is primarily fracture fillings of
chalcopyrite, bornite and molybdenite with minor pyrite, magnetite, sphalerite
and galena.
The host rocks of the Valley deposit are mainly porphyritic quartz monzonites
and granodiorites of the Bethsaida phase of the Batholith. These rocks are
medium to coarse-grained with large phenocrysts of quartz and biotite. The rocks
of the deposit were subjected to hydrothermal alteration followed by extensive
quartz veining, quartz-sericite veining, and silicification. Bornite,
chalcopyrite and molybdenum were introduced with the quartz and quartz-sericite
veins and typically fill angular openings in them. Accessory minerals consist of
hornblende, magnetite, hematite, sphene, apatite and zircon. Pre-mineral
porphyry and aplite dykes intrude the host rocks of the deposit.
In January 2004, HVC entered into a new three year collective agreement with the
United Steelworkers of America.
At current rates of production the operation has an expected life of 4 1/2
years. In 2004 we began studies to assess the feasibility of extending the mine
life to 2013. A decision to proceed with the extension will depend on the
resolution of some geotechnical issues as well as on the outlook for copper
prices. A final decision will be made in 2006.
Concentrates are transported to Vancouver for shipment, with the majority being
sold under long-term sales contracts to smelters in several countries. Treatment
and refining charges under long term contracts are adjusted annually. The
balance is sold on the spot market.
Louvicourt Mine, Canada (Copper, Zinc)
In 1993, we earned a 25% joint venture interest in the Louvicourt copper, zinc
mine and milling facility located near Val d'Or, Quebec. Aur Resources Inc., the
operator of the mine, has a 30% joint venture interest in the mine and the
remaining 45% interest is held by Novicourt Inc., a subsidiary of Noranda.
The Louvicourt mine is an underground copper, zinc operation. The mill, which
operates at a daily capacity of 4,300 tonnes, uses semi-autogenous grinding,
froth flotation and pressure filters for the recovery of metal concentrates. The
reserves will be exhausted by mid-2005 and the mine will be closed.
Our share of the copper concentrates produced from the Louvicourt mine is
currently sold under a long-term contract to a subsidiary of Noranda, Noranda
Metallurgy Inc., and shipped by rail and smelted at its smelter in Rouyn,
Quebec.
Our share of the zinc concentrates is currently sold to a Noranda subsidiary and
shipped by rail to and smelted at its smelter in Valleyfield, Quebec.
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Teck Cominco Limited - 2004 Annual Information Form Page 18
Copper Projects
San Nicolas Project, Mexico (Copper, Zinc)
The San Nicolas property, which is located in Zacatecas State, Mexico, is a
major massive sulphide deposit containing copper, zinc, gold and silver. The
property is held by Minas de San Nicolas S.A. de C.V. ("MSN"), which is owned
40% directly by us and 60% by Minera Tama S.A. de C.V. ("Tama"). Tama in turn is
owned 65% by us and 35% by Western Copper Holdings Ltd. ("Western Copper")
resulting in our holding a net 79% interest in the property. Our interest may
vary depending on certain financing elections the parties may make under the
agreements governing the project.
We completed and delivered a feasibility study to Western Copper on December 21,
2001. The project is being held on a care and maintenance basis pending the
resolution of certain commercial issues
Gold
Gold Operations
Hemlo Gold Operations, Canada (Gold)
We have a 50% joint venture interest in two gold mines in the Hemlo Gold Camp
located near Marathon, Ontario: the Williams and David Bell gold mines (the
"Hemlo Operations"). Homestake Canada Inc., a wholly-owned subsidiary of Barrick
Gold Corporation ("Homestake"), holds the remaining 50% joint venture interest.
Our share of production is subject to a 2.25% net smelter return royalty at
Williams and a 3% net smelter return royalty at David Bell.
The Hemlo Operations lie adjacent to the Trans-Canada Highway in the Hemlo
district of Ontario, and operate throughout the year. The mill located at the
Williams mine processes ore for both the Williams mine and the David Bell mine.
Power for the Hemlo Operations is taken from the Ontario Hydro grid, and back-up
standby diesel generators are available at the site to provide some emergency
support should the grid not be able to supply power. Water requirements are
sourced from Cedar Creek and personnel from both mines live in nearby areas, the
majority in Marathon, Ontario.
The Hemlo Operations operate a combined tailings management system including a
tailings basin and polishing pond. The property includes one tailings pond,
located approximately four kilometers from the Williams mill, and four waste
stockpiles located adjacent to the Williams open pit. The Williams effluent
treatment plant employs polishing pond water as feed water and the Williams mill
reclaims water from both the tailings basin and the polishing pond. The David
Bell mine reclaims mine water for use in the backfill process along with raw
water from Cedar Creek. Both operations comply with certificates of approval for
industrial wastewater and air, which are administered by the provincial
regulatory authorities. The Williams mill and both mines hold all the necessary
permits and certificates that are material to the operations.
The Hemlo Operations are located in a small east-west trending Archean
Greenstone Belt in central Ontario known as the Hemlo zone. The Williams mine is
located at the western end of the Hemlo zone, the David Bell mine is located at
the eastern end of the Hemlo zone, and Newmont Mining Corporation's Golden Giant
mine is located between the Williams and David Bell mines along the Hemlo zone.
The total length of the mineralized zone comprising the Williams, David Bell and
Golden Giant mines is over three kilometers.
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Teck Cominco Limited - 2004 Annual Information Form Page 19
The Williams and David Bell ore bodies lie at the contact between overlying
metasedimentary rocks and underlying felsic metavolcanic rocks. The Williams ore
zone dips north at 60-70 degrees and the David Bell ore zone dips north at 50-60
degrees. The ore zones continue to approximately 1,200 meters below the surface
and vary in width from 45 meters to 1 meter at Williams and from 15 meters to 1
meter at David Bell. The ore at both mines is hosted by three principal rock
types, feldspathised porphyry, muscovite schist and biotite fragmental, and is
characterized by gold, pyrite, molybdenite, and barite and various arsenic,
mercury, and antimony mineral species. Both main ore bodies are composed of fine
grained quartz-feldspar rock with gold occurring as finely disseminated
particles within the groundmass as well as with pyrite grains.
Our share of gold production from the Hemlo Operations is sold on a spot basis
at prevailing market prices at the time of production. We have also entered into
certain hedging contracts in respect of certain portions of our production.
Williams Mine
The Williams mine, primarily an underground operation with some open-pit mining,
has been operating since the fall of 1985. The property comprising the Williams
mine consists of 11 patented mining claims and 6 leased claims. The mine covers
a surface area of approximately 270 hectares.
The Williams mine is one of the largest gold-producing mines in Canada. The
underground mine is accessed by a 1,300 meter production shaft, and mining is
carried out by longhole stoping with paste backfill. The Williams open pit mine
lies immediately above and adjacent to the underground mine, and ore from these
two sources and the David Bell mine is treated in the Williams mill. The mill
started production in 1985 at the rate of approximately 3,000 tonnes per day,
and capacity was expanded to 6,000 tonnes per day in late 1988. The Williams
mill presently operates at the rate of approximately 10,000 tonnes per day. The
Williams mill uses semi-autogenous grinding and a carbon-in-pulp gold recovery
circuit. Approximately 20% of the gold is recovered by a gravity circuit. At the
present rate of mining, the Williams mine has an expected mine life of over 10
years.
David Bell Mine
The property comprising the David Bell underground mine consists of granted
mining leases and mining claims, covering a surface area of approximately 274
hectares.
The David Bell mine was developed through a 1,160 meter production shaft, and
mining is by longhole stoping with delayed cemented hydraulic backfill. The
David Bell mill is currently on care and maintenance, and all ore from the David
Bell mine is transported to, and processed at, the nearby Williams mill. At the
present rate of mining, the David Bell mine has an expected further mine life of
approximately 5 years.
Gold Advanced Project
Pogo Project, United States (Gold)
In June 1997, we entered into an agreement with Sumitomo Metal Mining America
Inc. and SC Minerals America Inc. to earn a 40% joint venture interest in the
Pogo gold deposit located in Alaska, 40 air miles (64 kilometers) from Delta
Junction at the terminus of the Alaska Highway. The Pogo property is
approximately 16,700 hectares in size. The mine area is the subject of a mining
lease, which requires
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Teck Cominco Limited - 2004 Annual Information Form Page 20
annual rental payments. The balance of the property is comprised of 1,281 State
mining claims, each requiring a specified nominal amount of annual assessment
work.
Our 40% interest was earned by delivering a production commitment. Our interest
is subject to divestment should we not complete construction of the project
substantially in accordance with the feasibility study. We are the project
operator.
The property is subject to a 1.5% net smelter return royalty payable by the
venturers on the first two million ounces of gold produced. After the first two
million ounces of gold is produced, the 1.5% net smelter return royalty is no
longer payable. However, we (through our indirect wholly-owned subsidiary,
Teck-Pogo Inc. ("TPI")) must then pay Sumitomo Metal Mining America Inc. and
S.C. Minerals America Inc. a production royalty on TPI's share of any additional
ounces of gold that it takes as its share of production from the property. This
royalty on each ounce of gold to TPI's account is equal to the greater of 5% of
the price of gold and US$25. We are entitled to a management fee as the project
operator.
Following receipt of the National Pollution Discharge Elimination System (NPDES)
permit issued by the United States EPA in the first quarter of 2004, site
construction began.
The project consists of an underground mine and 2,500 tonne per day mill
expected to produce an average of 400,000 ounces of gold per year over a 10 year
mine life. The proposed mining methods are cut and fill and drift and fill. The
mill will utilize conventional milling, and gravity and carbon-in-pulp
technology. The gold from both the gravity and carbon-in-pulp circuits will be
produced as dore bullion. Access to the site is provided by a new 50 mile
all-season road from the Richardson Highway north of Delta Junction to the
property. The project capital cost is currently estimated at US$321 million and
the mine is expected commence production by the beginning of 2006.
Surface exploration programs have been conducted on the property over the past 4
years and have identified a discontinuous trend of mineralization known as the
Pogo Trend. Within this trend, several gold drill targets are defined and these
will be tested in future drilling programs.
Exploration
In 2004, we spent approximately $42 million on exploration, and approximately
$22 million was spent by third parties on properties in which we retain
significant back-in rights. Approximately 62% of expenditures were dedicated to
exploration for gold and copper and the balance on base metal, polymetallic and
diamond projects.
Of total exploration expenditures, approximately 24% were spent in Canada and
approximately 16% in Mexico, with the remainder being spent primarily in Peru,
Chile, Australia and the United States.
Exploration is carried out through sole funding and joint ventures with major
and junior exploration companies. Exploration is focused on areas in proximity
to our existing operations or development projects in regions which we consider
to have high potential for discovery. Exploration successes in 2004 included the
discovery of significant copper mineralization at the 100% owned Zafranal
project in Peru and ongoing drilling on the Morelos Norte (El Limon) project in
Mexico. Planned expenditures for 2005 are approximately $50 million, with a
similar geographic and commodity focus.
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Teck Cominco Limited - 2004 Annual Information Form Page 21
Mineral Reserves and Resources
Mineral Reserves at December 31, 2004
Mineral Reserves (1)
Proven Probable Total
tonnes grade tonnes grade tonnes grade Teck Cominco
(000's) (g/t)(2) (000's) (g/t) (000's) (g/t) Interest (%)
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Gold Williams 50
Underground 3,680 5.57 2,060 5.04 5,740 5.38
Open-pit 10,280 1.65 7,610 1.70 17,890 1.67
David Bell 1,670 10.57 1,670 10.57 50
Pogo 7,000 16.12 7,000 16.12 40
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tonnes grade tonnes grade tonnes grade
(000's) (%) (000's) (%) (000's)(%)
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Copper Antamina 251,000 1.26 217,000 1.17 468,000 1.22 22.5
Highland Valley 136,100 0.43 30,400 0.43 166,500 0.43 97.5
Louvicourt 600 2.43 600 2.43 25
Zinc Antamina 251,000 1.04 217,000 0.89 468,000 0.97 22.5
Red Dog 22,900 20.5 52,700 16.7 75,600 17.9 100
Louvicourt 600 1.9 600 1.9 25
Pend Oreille 4,900 7.6 400 7.0 5,300 7.5 100
Lead Red Dog 22,900 5.7 52,700 4.3 75,600 4.7 100
Pend Oreille 4,900 1.3 400 0.5 5,300 1.2 100
Molybdenum Antamina(4) 251,000 0.030 217,000 0.029 468,000 0.030 22.5
Highland Valley 136,100 0.007 30,400 0.007 166,500 0.007 97.5
Coal(5) Fording River 145,000 112,000 257,000 43.4(6)
Elkview 184,000 65,000 249,000 43.4
Greenhills 91,000 7,000 98,000 34.8
Coal Mountain 27,000 1,000 28,000 43.4
Line Creek 19,000 19,000 43.4
Cardinal River(7) 36,000 25,000 61,000 43.4
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Teck Cominco Limited - 2004 Annual Information Form Page 22
Mineral Resources at December 31, 2004
Mineral Reserves (1)
Measured Indicated Inferred
tonnes grade tonnes grade tonnes grade Teck Cominco
(000's) (g/t)(2) (000's) (g/t) (000's) (g/t) Interest (%)
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Gold Williams 50
Underground 1,000 4.43 2,930 6.71 6,820 5.32
Open-pit 2,020 1.78 2,650 1.74 860 1.93
David Bell 50
Underground 240 8.64
Open-pit 680 3.77
Pogo 770 8.92 1,230 16.90 40
Lobo-Marte 60
Lobo 64,210 1.79 5,660 1.70
Marte 33,470 1.58 3,590 1.35
Morelos 30,650 3.27 78.8
Kudz Ze Kayah 11,300 1.30 1,500 2.00 100
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tonnes grade tonnes grade tonnes grade
(000's) (%) (000's) (%) (000's) (%)
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Copper Antamina 28,000 0.51 30,000 0.47 27,000 0.79 22.5
Highland Valley 197,400 0.45 97.5
San Nicolas 1,880 0.73 78,080 1.34 7,020 1.28 79
Kudz Ze Kayah 11,300 0.90 1,500 0.14 100
Zinc Antamina 28,000 0.21 30,000 0.27 27,000 1.00 22.5
Red Dog 7,700 18.8 30,200 15.5 100
San Nicolas 1,880 3.6 78,080 1.8 7,020 1.4 79
Pend Oreille 3,300 6.6 100
Lennard Shelf 1,400 8.8 1,400 8.1 300 8.2 50
Kudz Ze Kayah 11,300 5.9 1,500 6.4 100
Sa Dena Hes 2,190 10.4 50
Lead Red Dog 7,700 5.3 30,200 4.5 100
Pend Oreille 3,300 1.3 100
Lennard Shelf 1,400 2.2 1,400 1.8 300 1.7 50
Kudz Ze Kayah 11,300 1.5 1,500 3.1 100
Sa Dena Hes 2,190 2.6 50
Molybdenum Antamina 28,000 0.034 30,000 0.030 27,000 0.016 22.5
Highland Valley 197,400 0.007 97.5
Titanium White Earth(3) 428,000 11 1,031,000 10 100
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Coal(4) Fording River 460,000 194,000 2,721,000 43.4(5)
Elkview 1,318,000 308,000 181,000 43.4
Greenhills 5,000 325,000 650,000 34.8
Coal Mountain 66,000 41,000 24,000 43.4
Line Creek 65,000 177,000 119,000 43.4
Cardinal River(7) 2,000 9,000 4,000 43.4
Other8) 213,000 274,000 473,000 43.4
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Teck Cominco Limited - 2004 Annual Information Form Page 23
Notes to Mineral Reserves and Resources Tables
(1) Mineral reserves and resources are mine and property totals and are not
limited to Teck Cominco's interest.
(2) g/t = grams per tonne.
(3) Grade reported as %TiO2
(4) Molybdenum recovery at Antamina is affected by the type of ore being
processed. The operation is unable to recover molybdenum from ore that is
high in bismuth. This affects approximately one half of the reserves and
resources at Antamina.
(5) Coal reserves expressed as tonnes of clean coal. Coal resources are
expressed as in situ tonnes.
(6) Representing a 38% interest in Elk Valley Coal Partnership plus a 5.4%
indirect interest through investment in Fording Canadian Coal Trust.
(7) Cardinal River processes coal from the Cheviot Creek pit.
(8) Other refers to the aggregated measured, indicated and inferred resources
associated with five undeveloped or non-operating properties. Tonnages
represent Elk Valley Coal Partnership's interest in these properties.
Standard
Proven and Probable Mineral Reserves and Measured, Indicated and Inferred
Mineral Resources have been estimated in accordance with the definitions of
these terms adopted by the Canadian Institute of Mining, Metallurgy and
Petroleum in November 2004 and incorporated in National Instrument 43-101,
"Standards of Disclosure for Mineral Projects", by Canadian Securities
Regulatory Authorities. Estimates of coal reserves and resources have been
prepared and classified using guidance from GSC Paper 88-21. Classification
terminology conforms with NI 43-101. Mineral Resources are reported separately
from, and do not include that portion of the Mineral Resources that is
classified as Mineral Reserves. That portion of Mineral Resource which is not
classified as Mineral Reserve does not have demonstrated economic value. There
are no known environmental, permitting, legal, title, taxation, socio political,
marketing or other relevant issues that would materially affect these mineral
reserve and resource estimates.
Definitions
A Mineral Resource is a concentration or occurrence of natural, solid, inorganic
or fossilized organic material in or on the Earth's crust in such form and
quantity and of such a grade or quality that it has reasonable prospects for
economic extraction. The location, quantity, grade, geological characteristics
and continuity of a Mineral Resource are known, estimated or interpreted from
specific geological evidence and knowledge.
An Inferred Mineral Resource is that part of a Mineral Resource for which
quantity and grade or quality can be estimated on the basis of geological
evidence and limited sampling and reasonably assumed, but not verified,
geological and grade continuity. The estimate is based on limited information
and sampling gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings and drill holes.
An Indicated Mineral Resource is that part of a Mineral Resource for which
quantity, grade or quality, densities, shape and physical characteristics, can
be estimated with a level of confidence sufficient to allow the appropriate
application of technical and economic parameters, to support mine planning and
evaluation of the economic viability of the deposit. The estimate is based on
detailed and reliable exploration and testing information gathered through
appropriate techniques from locations such as
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Teck Cominco Limited - 2004 Annual Information Form Page 24
outcrops, trenches, pits, workings and drill holes that are spaced closely
enough for geological and grade continuity to be reasonably assumed.
A Measured Mineral Resource is that part of a Mineral Resource for which
quantity, grade or quality, densities, shape and physical characteristics are so
well established that they can be estimated with confidence sufficient to allow
the appropriate application of technical and economic parameters, to support
production planning and evaluation of the economic viability of the deposit. The
estimate is based on detailed and reliable exploration, sampling and testing
information gathered through appropriate techniques from locations such as
outcrops, trenches, pits, workings and drill holes that are spaced closely
enough to confirm both geological and grade continuity.
A Mineral Reserve is the economically mineable part of a Measured or Indicated
Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This
Study must include adequate information on mining, processing, metallurgical,
economic and other relevant factors that demonstrate, at the time of reporting,
that economic extraction can be justified. A Mineral Reserve includes diluting
materials and allowances for losses that may occur when the material is mined.
A Probable Mineral Reserve is the economically mineable part of an Indicated and
in some circumstances, a Measured Mineral Resource demonstrated by at least a
Preliminary Feasibility Study. This Study must include adequate information on
mining, processing, metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic extraction can be
justified.
A Proven Mineral Reserve is the economically mineable part of a Measured Mineral
Resource demonstrated by at least a Preliminary Feasibility Study that economic
extraction can be justified. This Study must include adequate information on
mining, processing, metallurgical, economic, and other relevant factors that
demonstrate, at the time of reporting, that economic extraction is justified.
Mineral reserves at Williams and David Bell have been estimated on the basis of
an assumed gold price of US$350/oz and mineral resources have been estimated
based on an assumed gold price of US$400/oz. Underground mineral reserves would
not be materially increased should the price of gold increase, since the
extraction sequence has been established on the basis of geotechnical
considerations as well as economics, and has largely been fixed. Open-pit
mineral reserves are sensitive to price, cost of processing, metallurgical
recovery and other factors, and are subject to change should these factors
change.
Mineral reserves at Pogo have been estimated on the basis of US$300/oz, which
was the assumed price of gold used in the feasibility study on which the
production decision was made. At the current gold price of US$420/oz, some
additional mineralization on the fringes of the ore body may become economic but
this will not materially increase the reserves. Mineral resources at Pogo and
Morelos have been estimated using an assumed gold price of US$400/oz while those
at Lobo-Marte have been estimated on the basis of an assumed gold price of
US$360/oz.
Highland Valley Copper
Copper mineral reserves at Highland Valley Copper are estimated on the basis of
an assumed copper price of US$0.70/lb. Mineral resources are estimated on an
assumed price of US$0.90/lb. Conversion of the mineral resources to reserves,
which would extend the mine life to 2013, will be contingent upon further
geotechnical investigations and the development of satisfactory designs for
extraction of this material.
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Teck Cominco Limited - 2004 Annual Information Form Page 25
Antamina
Mineral reserves at Antamina have been estimated using an assumed copper price
of US$0.90/lb and US$0.50/lb for zinc. Extensive programs of diamond drilling
were carried out in 2003 and 2004 to improve local estimates and to better
define the distribution of impurities within the ore body. In 2005, the reserves
will be re-estimated incorporating this new information and a new ultimate pit
will be designed. This may result in changes to the mineral reserves. Ore at
Antamina comprises two general types: copper ores, from which copper and
molybdenum concentrates may be produced, and copper zinc ores, from which copper
and zinc, but not molybdenum, concentrates are produced. Proven reserves include
stockpiled material which is expected to be processed later in the life of the
mine.
Red Dog
At Red Dog, mineral reserves and mineral resources mineable by open pit have
been estimated at an assumed zinc price of US$0.55/lb. Underground inferred
resources at Red Dog, extraction of which is expected to take place more than 23
years in the future, have been estimated on the basis of an assumed zinc price
of US$0.70/lb.
Pend Oreille
Mineral reserves and resources at Pend Oreille have been estimated using an
assumed zinc price of US$0.45/lb which was the price used in the feasibility.
Higher metal prices will not result in significant increases in reserves and
resources, since the boundaries of the ore body are geological features.
Conversion of resources to reserves would require positive results from
additional drilling and engineering studies.
Coal Properties
Coal reserves are coal quantities that are anticipated to be mineable, based on
feasibility studies, utilizing existing technology, under prevailing economic
conditions and which have no legal impediments to mining. The coking coal price
assumed in reserve determination is approximately US$39 to US$43 per tonne FOB
(free on board) at Roberts Bank terminal. Coal reserves are reported in metric
tonnes of clean coal after mining and processing losses but including coal used
in plant operations.
Other Resources
Mineral resources at Sa Dena Hes, Kudz Ze Kayah, San Nicolas and Lennard Shelf
are based on assumed prices between US$0.45 and US$0.60/lb for zinc and, in the
case of San Nicolas, US$0.90/lb for copper.
Qualified Persons
Estimates of the mineral reserves and resources for the Company's material
properties have been prepared under the general supervision of William P.
Armstrong, P.Eng., who is an employee of Teck Cominco. Mineral reserve and
resource estimates for Antamina have been prepared under the supervision of Dan
Gurtler, AIMM, who is an employee of Compania Minera Antamina. Messrs. Armstrong
and Gurtler are Qualified Persons for the purposes of National Instrument
43-101. Estimates of reserves and resources at Elkview, Fording River,
Greenhills, Coal Mountain, Line Creek and Cardinal River were prepared under the
general supervision of Colin McKenny, P. Geol., an employee of Elk Valley Coal
Partnership, who is the Qualified Person for the purposes of National Instrument
43-101.
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Teck Cominco Limited - 2004 Annual Information Form Page 26
SAFETY AND ENVIRONMENTAL PROTECTION
Our current and future operations, including development activities and
commencement of production on our properties or areas in which we have an
interest, are subject to laws and regulations in Canada and elsewhere governing
occupational health, waste disposal, protection and remediation of the
environment, reclamation, mine safety, management of toxic substances and
similar matters. Compliance with these laws and regulations affects the costs of
and can affect the schedule for planning, designing, drilling, developing,
constructing, operating and closing the Company's mines, refineries and other
facilities.
Whether in Canada or abroad, we attempt to apply technically proven and
economically feasible measures to protect the environment throughout
exploration, mining, processing and closure. Although we believe that our
operations and facilities are currently in substantial compliance in all
material respects with all existing laws, regulations and permits, there can be
no assurance that additional significant costs will not be incurred to comply
with current and future regulations or that liabilities associated with
non-compliance will not occur.
Safety performance is a key priority for us. Safety statistics are collected
from each operation monthly. Targets for safety performance are set each year
and are used in determining management compensation. Safety incidents are
investigated and finding reports are shared across our business to assist in the
prevention of recurrence of the incident.
For accounting purposes, current costs associated with permit compliance are
treated as normal operating costs necessary to maintain operations on an ongoing
basis. In addition, amounts are accrued in our accounts to provide for certain
future reclamation, site restoration and other closure costs. Financial
guarantees of various forms are posted, if required, with various governmental
authorities as security to cover estimated reclamation obligations. Our
provisions for future reclamation and site restoration are based on known
requirements. It is not currently possible to estimate the impact on operating
results, if any, of future legislative or regulatory developments.
We conduct regular environmental and safety and health audits. The overall
objective of our audits is to identify environment, health and safety risks,
assess regulatory compliance and conformance with applicable laws and assess
conformance with appropriate environment, health and safety management systems
and good management practices.
All of our mining operations have closure and reclamation plans in place and
these undergo regular updates. The reclamation programs are guided by land
capability assessments, which integrate several factors in the reclamation
approach including biological diversity, establishment of sustainable
vegetation, diversity of physical landforms and requirements for wildlife
habitat. In addition to reclamation of operating mines, certain idle and closed
mines are under continuous care and maintenance as well as progressive closure.
Our Code requires that sites be reclaimed in an appropriate manner. We manage a
number of decommissioned mine sites in Canada and conduct regular inspections to
verify the success of reclamation activities.
SOCIAL AND ENVIRONMENTAL POLICIES
We have adopted and implemented social and environmental policies that are
fundamental to our operations. Our operating practices are governed by the
principles set out in our Charter of Corporate Responsibility (the "Charter")
and Code of Business, Environmental and Health and Safety Practices (the
"Code"). The Charter sets out corporate commitments related to ethical business
conduct, providing a
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Teck Cominco Limited - 2004 Annual Information Form Page 27
workplace free of discrimination, open and fair dealings with all stakeholders,
and support for sustainable development.
The Code sets out specific requirements in areas related to (i) legal compliance
and ethical business conduct, (ii) prohibition of discriminatory conduct and
commitment to decision-making on job selection on the basis of merit and
ability, (iii) striving to identify, control and promote safety and health
performance, (iv) sound environmental conduct and continuous improvement in
performance, (v) regular auditing of environmental, health, safety and emergency
preparedness, (vi) continual improvement of environmental, health and safety
management systems, (vii) closure and reclamation planning as a component of all
development projects, (viii) the safe use, reuse and recycling of products, (ix)
support for research on environmental, health and safety performance, (x)
fostering dialogue with stakeholders and respect for the rights, interests, and
aspirations of indigenous people, and (xi) supporting local communities and
their development.
In addition to the Charter and Code, we have adopted a Health and Safety Policy,
a Health and Safety Guide for Exploration, and a Code of Ethics. We have taken
steps to implement the Charter, Code and policies through adoption of
Environmental, Health and Safety Management Standards, which provide direction
to all operations and auditable criteria against which the standards are
measured.
We set objectives in these areas for improvement on an annual basis and these
are used to determine specific objectives for corporate and operational groups
within our organization. Overall responsibility for achievement of objectives
rest with senior personnel. Our Environmental, Health and Safety Committee of
the Board, which reports to the Board of Directors and our Corporate Environment
and Risk Management Committee and our Product Stewardship Committee, which are
comprised or members of senior management, provide oversight in these areas.
We measure our performance on an ongoing and comprehensive basis. Internal
monthly and quarterly environmental reporting tracks performance indicators
including compliance with permits, environmental monitoring, health and safety
performance, materials inputs and outputs, community concerns expressed and
actions taken in response, and amount of reclaimed land. We report publicly on
our performance through our Sustainability Report and website.
HUMAN RESOURCES
As at December 31, 2004 there were 6,710 employees (2003 - 7,225 employees)
working at the various operations we managed. The decrease in the number of
employees in 2004 was primarily due to our sale of the Cajamarquilla zinc
refinery. Collective bargaining agreements covering unionized employees at our
various operations are as follows:
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Teck Cominco Limited - 2004 Annual Information Form Page 28
Expiry Date of Collective Agreement
-------------------------------------------------------------------------
Trail May 31, 2005
David Bell October 31, 2007
Sullivan December 31, 2003(1)
Quintette December 31, 2004(1)
Antamina July 24, 2006
Highland Valley Copper September 30, 2006
Elkview October 31, 2005
Coal Mountain December 31, 2004
Line Creek May 31, 2005
Fording River April 30, 2006
Cardinal River June 30, 2007
========================================================================
(1) The collective agreements at Sullivan, Bullmoose and Quintette cover the
remaining bargaining unit employees working at these locations all of which
are closed and in the process of being reclaimed.
FOREIGN OPERATIONS
The Red Dog mine and the Pogo development project located in Alaska, U.S.A., the
Pend Oreille project in Washington State and the Antamina mine located in Peru,
are our significant assets located outside of Canada. In 2004 we sold our
interest in the Cajamarquilla zinc refinery in Peru. We hold our 22.5% interest
in Antamina directly through our equity interest in the operating company of the
project, CMA. We hold a 100% interest in the Red Dog mine. The Red Dog mine,
Pend Oreille and the Antamina mine accounted for 28% of our 2004 consolidated
revenue and, together with Pogo, represented approximately 38% of our total
assets in 2004.
We also have interests in various exploration and development projects in
various foreign countries, with significant activities in the United States,
Mexico, Peru, Chile, Brazil, Australia, Turkey and Namibia. We currently have
foreign exploration offices in all of the foregoing countries.
See "Risks and Uncertainties - Foreign Activities" for further information on
the risks associated with these foreign properties.
COMPETITIVE CONDITIONS
Our business is to sell base metals, metal concentrates, by-product metals and
concentrate, metallurgical coal and gold at prices determined by world markets
over which we have no influence or control. Our competitive position is
determined by our costs compared to those of other producers throughout the
world, and by our ability to maintain our financial integrity through metal and
coal price cycles and currency fluctuations. Costs are governed principally by
the location, grade and nature of ore bodies and mineral deposits, the location
of our metal refining facility and its cost of power and, as well, by operating
and management skill. We reduce our exposure to metal price cycles and currency
fluctuations through our hedging program. See "Commodity Price Fluctuations and
Hedging" on page 30 for further details.
Over the long term, our competitive position is determined by our ability to
locate, acquire and develop economic ore bodies and replace current production.
In this regard, we also compete with other mining companies for mineral
properties, for joint venture agreements and for the acquisition of investments
in other mining companies.
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Teck Cominco Limited - 2004 Annual Information Form Page 29
RISK FACTORS
The following discussion pertains to the outlook and conditions currently known
to management which could have a material impact on the financial condition and
results of operations of our business. This discussion, by its nature, is not
all-inclusive. It is not a guarantee that other factors will or will not affect
us in the future. This discussion should be read in conjunction with material
contained in other sections of this Annual Information Form.
Risks Inherent in the Mining and Metals Business
The business of exploring for minerals is inherently risky. Few properties
explored are ultimately developed into producing mines.
Mineral properties are often non-productive for reasons that cannot be
anticipated in advance. Even after the commencement of mining operations, such
operations may be subject to risks and hazards, including environmental hazards,
industrial accidents, unusual or unexpected geological formations, unanticipated
metallurgical difficulties, ground control problems and flooding. The Trail
metallurgical operations, concentrate mills and coal preparation plants are also
subject to risks of process upsets and equipment malfunctions. The occurrence of
any of the foregoing could result in damage to or destruction of mineral
properties and production facilities, personal injuries, environmental damage,
delays or interruption of production, increases in production costs, monetary
losses, legal liability and adverse governmental action.
Our property, business interruption and liability insurance may not provide
sufficient coverage for losses related to these or other hazards. Insurance
against certain risks, including certain liabilities for environmental
pollution, may not be available to us or to other companies within the industry.
In addition, insurance coverage may not continue to be available at economically
feasible premiums, or at all. Any such event could have a material adverse
effect on our business.
Commodity Price Fluctuations and Hedging
The results of our operations are significantly affected by the market price of
base metals, specialty metals, metallurgical coal and gold which are cyclical
and subject to substantial price fluctuations. Our earnings are particularly
sensitive to changes in the market price of zinc, copper and metallurgical coal.
Market prices can be affected by numerous factors beyond our control, including
levels of supply and demand for a broad range of industrial products,
expectations with respect to the rate of inflation, the relative strength of the
U.S. dollar and of certain other currencies, interest rates, global or regional
political or economic crises and sales of gold and base metals by holders in
response to such factors. If prices should decline below our cash costs of
production and remain at such levels for any sustained period, we could
determine that it is not economically feasible to continue commercial production
at any or all of our mines.
The objectives of our hedging programs are to reduce the risk of a commodity's
market price while optimizing upside participation, to maintain adequate cash
flows and profitability to contribute to the long-term viability of our
business. There are, however, risks associated with hedging programs including
(among other things), an increase in the price of the relevant commodity, an
increase in gold lease rates (in the case of gold hedging), an increase in
interest rates, rising operating costs, counter-party risks and production
interruption events. Prices of diesel and electricity also fluctuate and these
fluctuations affect the costs of production at various operations.
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Teck Cominco Limited - 2004 Annual Information Form Page 30
We do not hedge our exposure to changes in the price of metallurgical coal.
Competition for Mining Properties
Because the life of a mine is limited by its ore reserves, we are continually
seeking to replace and expand our reserves through the exploration of our
existing properties as well as through acquisitions of interests in new
properties or of interests in companies which own such properties. We encounter
strong competition from other mining companies in connection with the
acquisition of properties.
Future Market Access
Access to our markets is subject to the risk of interruptions or the
establishment of trade barriers due to policies and tariffs of individual
countries, and the actions of certain interest groups to restrict the import of
certain commodities. Although there are currently no significant trade barriers
existing or impending of which we are aware that do, or could, materially affect
our access to certain markets, there can be no assurance that our access to
these markets will not be restricted in the future.
Mineral Reserve and Resource Estimates
Disclosed reserve estimates should not be interpreted as assurances of mine life
or of the profitability of current or future operations. We estimate our mineral
reserves in accordance with the requirements of the applicable Canadian
securities regulatory authorities and established mining standards.
The Securities and Exchange Commission (the "SEC") does not permit mining
companies in their filings with the SEC to disclose estimates other than mineral
reserves. However, because we prepare this Annual Information Form in accordance
with Canadian disclosure requirements, this annual information form incorporates
estimates of mineral resources. Mineral resources are concentrations or
occurrences of minerals that are judged to have reasonable prospects for
economic extraction, but for which the economics of extraction have not been
assessed, whether because of insufficiency of geological information or lack of
feasibility analysis, or for which economic extraction cannot be justified at
the time of reporting. Consequently, mineral resources are of a higher risk and
are less likely to be accurately estimated or economically recovered than
mineral reserves.
Our reserves and resources are estimated by persons who are employees of the
respective operating entities for each of our operations under the supervision
of our employees. These individuals are not "independent" for purposes of
applicable securities legislation. We do not use outside sources to verify
reserves or resources. The mineral reserve and resource figures incorporated in
this Annual Information Form are estimates based on the interpretation of
limited sampling and subjective judgments regarding the grade, continuity and
existence of mineralization, as well as the application of economic assumptions,
including assumptions as to operating costs, foreign exchange rates and future
metal prices. The sampling, interpretations or assumptions underlying any
reserve or resource estimate may be incorrect, and the impact on mineral
reserves or resources may be material. In addition, short term operating factors
relating to mineral reserves, such as the need for orderly development of ore
bodies or the processing of new or different ores, may cause mineral reserve
estimates to be modified or operations to be unprofitable in any particular
fiscal period.
There can be no assurance that the indicated amount of minerals will be
recovered or that they will be recovered at the prices assumed for purposes of
estimating reserves.
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Teck Cominco Limited - 2004 Annual Information Form Page 31
Currency Fluctuations
Our operating results and cash flow are affected by changes in the Canadian
dollar exchange rate relative to the currencies of other countries. Exchange
rate movements can have a significant impact on results as a significant portion
of our operating costs are incurred in Canadian and other currencies and almost
all revenues are earned in U.S. dollars. To reduce the exposure to currency
fluctuations, we enter into limited foreign exchange contracts from time to
time, but such hedges do not eliminate the potential that such fluctuations may
have an adverse effect on our business. In addition, foreign exchange contracts
expose us to the risk of default by the counterparties to such contracts, which
could have a material adverse effect on our business.
Interest Rate Risk
Our exposure to changes in interest rates results from investing and borrowing
activities undertaken to manage liquidity and capital requirements. We have
incurred indebtedness that bears interest at fixed and floating rates, and have
entered into interest rate swap agreements to effectively convert some fixed
rate exposure to floating rate exposure. There can be no assurance that we will
not be materially adversely affected by interest rate changes in the future. In
addition, our use of interest rate swaps exposes us to the risk of default by
the counterparties to such arrangements. Any such default could have a material
adverse effect on our business.
Environment
Environmental legislation affects nearly all aspects of our operations.
Compliance with environmental legislation can require significant expenditures
and failure to comply with environmental legislation may result in the
imposition of fines and penalties, clean up costs arising out of contaminated
properties, damages and the loss of important permits. Exposure to these
liabilities arises not only from existing operations, but from operations that
have been closed or sold to third parties. Our historical operations have
generated significant environmental contamination. There can be no assurances
that we will at all times be in compliance with all environmental regulations or
that steps to achieve compliance would not materially adversely affect our
business.
Environmental laws and regulations are evolving in all jurisdictions where we
have activities. We are not able to determine the specific impact that future
changes in environmental laws and regulations may have on our operations and
activities, and its resulting financial position; however, we anticipate that
capital expenditures and operating expenses will increase in the future as a
result of the implementation of new and increasingly stringent environment
regulation. Further changes in environmental laws, new information on existing
environmental conditions or other events, including legal proceedings based upon
such conditions or an inability to obtain necessary permits, could require
increased financial reserves or compliance expenditures or otherwise have a
material adverse effect on our business. Changes in environmental legislation
could also have a material adverse effect on product demand, product quality and
methods of production and distribution.
Aboriginal Title Claims
Recent Canadian jurisprudence requires governments to consult with aboriginal
peoples with respect to grants of mineral rights and the issuance or amendment
of project authorizations. This may affect our ability to acquire within a
reasonable time frame effective mineral titles in some parts of Canada,
particularly British Columbia, in which aboriginal title is claimed. The risk of
unforeseen aboriginal title
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Teck Cominco Limited - 2004 Annual Information Form Page 32
claims also exists in foreign jurisdictions and also could affect existing
operations as well as development projects and future acquisitions. These legal
requirements may affect our ability to expand or transfer existing operations or
to develop new projects.
Foreign Activities
Our business operates in a number of foreign countries where there are added
risks and uncertainties due to the different economic, cultural and political
environments. Some of these risks include nationalization and expropriation,
social unrest and political instability, uncertainties in perfecting mineral
titles, trade barriers and exchange controls and material changes in taxation.
Further, developing country status or unfavourable political climate may make it
difficult for us to obtain financing for projects in some countries.
Legal Proceedings
The nature of our business subjects the Company to numerous regulatory
investigations, claims, lawsuits and other proceedings in the ordinary course of
business. The results of these legal proceedings cannot be predicted with
certainty. There can be no assurances that these matters will not have a
material adverse effect on our business.
DIVIDENDS
Our Class A common shares and Class B subordinate voting shares rank equally as
to the payment of dividends. We may not pay dividends on the Class A common
shares and Class B subordinate voting shares unless all dividends on any
preferred shares outstanding have been paid to date. Dividends of $0.20 per
share were paid in 2002 and 2003 on both the Class A common shares and the Class
B subordinate voting shares. In November 2004, we announced that we were
increasing the semi-annual dividend payable to shareholders of record on
December 31, 2004 from $0.10 to $0.20, bringing the total annual dividend for
2004 to $0.30 per share. Our dividend policy contemplates the payment of two
semi-annual $0.20 per share dividends in 2005.
DESCRIPTION OF CAPITAL STRUCTURE
GENERAL DESCRIPTION OF CAPITAL STRUCTURE
The Company is authorized to issue an unlimited number of Class A common shares
and Class B subordinate voting shares and an unlimited number of preference
shares, issuable in series.
Class A common shares carry the right to 100 votes per share. Class B
subordinate voting shares carry the right to one vote per share. Each Class A
common share is convertible, at the option of the holder, into one Class B
subordinate voting share. In all other respects, the Class A common shares and
Class B subordinate voting shares rank equally.
The attributes of the Class B subordinate voting shares contain so called
"coattail provisions" which provide that, in the event that an offer (an
"Exclusionary Offer") to purchase Class A common shares which is required to be
made to all or substantially all holders thereof, is not made concurrently with
an offer to purchase Class B subordinate voting shares on identical terms, then
each Class B subordinate voting share
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Teck Cominco Limited - 2004 Annual Information Form Page 33
will be convertible into one Class A common share. The Class B subordinate
voting shares will not be convertible in the event that an Exclusionary Offer is
not accepted by holders of a majority of the Class A common shares (excluding
those shares held by the person making the Exclusionary Offer). If an offer to
purchase Class A common shares does not, under applicable securities legislation
or the requirements of any stock exchange having jurisdiction, constitute a
"take-over bid" or is otherwise exempt from any requirement that such offer be
made to all or substantially all holders of Class A common shares, the coattail
provisions will not apply.
The voting rights attached to Class B subordinate voting shares represent 29.68%
of the aggregate voting rights attached to the Class A common shares and Class B
subordinate voting shares.
In November 2003, the Company issued 790,000 Series 1 and 550,000 Series 2
preference shares to replace certain preference shares issued by Teck Cominco
Metals. These shares entitle the holders to receive dividends and redemptions
based upon a rate of return index governed by world prices for lead and silver.
The rate of return index to date has been insufficient to trigger any dividend
or redemption. Based on foreseeable metal prices, these shares are expected to
expire in March 2006 without any dividends or redemptions.
RATINGS
The following table sets forth the current ratings that we have received from
rating agencies in respect of our outstanding securities.
Dominion Board Rating
Moody's Standard & Poor's Service
Senior Unsecured/Long-term Rating Baa3 BBB BBB (high)m
Debentures exchangeable for common -- -- BBB (high)
shares of Inco Limited
Trend/Outlook Stable Stable Stable
Credit ratings are intended to provide investors with an independent measure of
the credit quality of an issue of securities and are indicators of the
likelihood of payment and of the capacity and willingness of a company to meet
its financial commitment on an obligation in accordance with the terms of the
obligation. A description of the rating categories of each of the rating
agencies in the table above is set out below.
Credit ratings are not recommendations to purchase, hold or sell securities and
do not address the market price or suitability of a specific security for a
particular investor. Credit ratings may not reflect the potential impact of all
risks on the value of securities. In addition, real or anticipated changes in
the rating assigned to a security will generally affect the market value of that
security. We cannot assure you that a rating will remain in effect for any given
period of time or that a rating will not be revised or withdrawn entirely by a
rating agency in the future.
Moody's Investor Services (Moody's)
Moody's long-term credit ratings are on a rating scale that ranges from Aaa to
C, which represents the range from highest to lowest quality of securities
rated. Moody's Baa3 rating assigned to our senior unsecured debt instruments is
the fourth highest rating of nine rating categories. Obligations rated "Baa" are
considered medium-grade and as such may possess certain speculative
characteristics. Moody's appends numerical modifiers from 1 to 3 to its
long-term debt ratings, which indicates where the
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Teck Cominco Limited - 2004 Annual Information Form Page 34
obligation ranks within its ranking category, with 1 being the highest. Moody's
has also assigned a stable outlook to the rating, which is its assessment
regarding the likely direction of the rating over the medium-term.
Standard & Poor's (S&P)
S&P's long-term credit ratings are on a rating scale that ranges from AAA to D,
which represents the range from highest to lowest quality of securities rated.
S&P's BBB rating assigned to our senior unsecured debt instruments is the fourth
highest rating of 10 major rating categories. A "BBB" rating indicates that the
obligor's capacity to meet its financial commitment is adequate, but that the
obligation is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than obligations in higher rated
categories. S&P uses "+" or "-" designations to indicate the relative standing
of securities within a particular rating category. S&P has also assigned a
stable outlook to the rating, which is its assessment regarding the potential
direction of the rating over the immediate to long-term.
Dominion Bond Rating Service (DBRS)
DBRS's long-term credit ratings are on a rating scale that ranges from AAA to D,
which represents the range from highest to lowest quality of securities rated.
DBRS's BBB (high) rating assigned to our senior unsecured debt and BBB (high)m
to the exchangeable debentures is the fourth highest of the 10 rating categories
for long-term debt. Debt securities rated "BBB" are of adequate credit quality
and protection of interest and principal is considered acceptable, but the
obligor is fairly susceptible to adverse changes in financial and economic
changes, or there may be other adverse conditions present which reduce the
strength of the obligor. A reference to "high" or "low" reflects the relative
strength within the rating category. A reference to "m" reflects that the
potential for volatility due to market risk factors greatly exceeds what would
be considered normal. DBRS has also assigned a stable outlook to the ratings,
which helps give investors an understanding of DBRS's opinion regarding the
outlook for the ratings.
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Teck Cominco Limited - 2004 Annual Information Form Page 35
MARKET FOR SECURITIES
TRADING PRICE AND VOLUME
Our Class A common shares and Class B subordinate voting shares are listed on
The Toronto Stock Exchange. The following tables set out the monthly price
ranges and volumes traded during 2004 for the Class A common shares and Class B
subordinate voting shares.
Class A common (Source: Bloomberg)
Trading
Month High Low Last Volume
January $24.43 $20.02 $21.00 47967
February $27.00 $20.60 $26.00 63937
March $27.46 $23.12 $25.20 47034
April $26.75 $20.98 $21.75 42169
May $25.00 $21.90 $25.00 29725
June $26.24 $23.75 $25.25 29078
July $26.03 $23.65 $25.00 35365
August $26.50 $23.01 $26.35 29142
September $28.25 $25.26 $27.95 41024
October- $31.50 $26.79 $29.25 32595
November $39.00 $29.71 $38.00 74713
December $38.77 $32.41 $37.06 74662
Class B subordinate voting (Source: Bloomberg)
Trading
Month High Low Last Volume
January $23.70 $19.20 $20.33 25617520
February $25.50 $19.75 $25.20 31831920
March $26.33 $22.55 $24.47 36466378
April $25.65 $20.15 $20.35 26833033
May $23.32 $19.83 $23.18 18642546
June $24.60 $21.98 $24.00 18961120
July $25.40 $22.77 $24.42 15761560
August $25.85 $22.36 $25.75 13461543
September $28.21 $24.80 $27.21 17431670
October $30.17 $26.27 $29.14 23007699
November $37.45 $29.20 $35.98 23187050
December $38.25 $31.80 $36.92 23127651
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Teck Cominco Limited - 2004 Annual Information Form Page 36
DIRECTORS AND OFFICERS
DIRECTORS
Name, Province/State and Country Office Held With Company and Principal Occupations within Director
of Residence Previous Five Years Since
- -----------------------------------------------------------------------------------------------------------------------------------
J. Brian Aune Chairman of St. James Financial Corp. and President of February 1995
(1)(3)(4)(5)Westmount, Quebec, Alderprise Inc. (private investment companies)
Canada
Lloyd I. Barber (3)(4)(6) President Emeritus, University of Regina. September 2001
Regina, Saskatchewan, Canada
Hugh J. Bolton (2) Chairman, Epcor Utilities Inc.,(electrical utility), and September 2001
Edmonton, Alberta, Canada Chairman of Matrikon Inc. (industrial IT company), from 2000
to present; Corporate Director and financial consultant from
1998 to 1999.
Masayuki Hisatsune (5) Director and Vice President, Sumitomo Metal Mining America February 2002
Vancouver, British Columbia, Canada Inc. (mining company) from December 2001 to present; General
Manager, Administration Department, Mineral Resources
Division, Sumitomo Metal Mining Co. from 2000 to 2001.
Norman B. Keevil (1) Chairman and previously Chief Executive Officer of the Company July 1963
West Vancouver, British Columbia, from November 30, 1981 to July 25, 2001, and President of the
Canada Company from November 30, 1981 to June 8, 2000.
Norman B. Keevil III (6) Chief Operating Officer and Vice President of Engineering, April 1997
Victoria, British Columbia, Canada Triton Logging Inc. (log salvage company) from 2004 to
present; President and Chief Executive Officer, Pyramid
Automation Ltd.(manufacturers of special purpose automation
equipment), from 1998 to 2004.
Donald R. Lindsay President of the Company from January 2005 to present; February 2005
Vancouver, British Columbia, Canada President of CIBC World Markets Inc. (investment banking),
from 2001 to 2004; Head, Investment and Corporate Banking from
1997 to 2004; Head, Asia Pacific Region from 2000 to 2004;
Head, Global Mining Group from 1989 to 2004.
Takuro Mochihara (1) Executive Officer, Non-Ferrous Metal Division, Sumitomo Metal September 2000
Tokyo, Japan Mining Co. Ltd. (mining company); from 1998 to June 2000
General Manager, Metals Dept. and prior thereto General
Manager, Base Metals Dept., Mitsubishi Corporation (metal
production).
Warren S. R. Seyffert (6) Counsel at Lang Michener (law firm). August 1989
Toronto, Ontario, Canada
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Teck Cominco Limited - 2004 Annual Information Form Page 37
Name, Province/State and Country Office Held With Company and Principal Occupations within Director
of Residence Previous Five Years Since
- -----------------------------------------------------------------------------------------------------------------------------------
Keith E. Steeves (2)(5) Corporate Director since June 1, 1996; previously Senior Vice October 1981
Richmond, British Columbia, Canada President, Commercial of the Company.
Chris M.T. Thompson(2)(6) Chief Executive Officer and Chairman of the Board of Gold June 2003
Denver, Colorado, United States Fields Ltd. from 1998 to 2002. Currently Chairman of the Board
of Gold Fields Ltd. (gold mining) and Chairman of the World
Gold Council.
David R. Sinclair(1)(2)(4) Corporate Director September 2001
Nanoose Bay, British Columbia,
Canada
David A. Thompson (1) Chief Executive Officer of the Company since July 25, 2001; October 1980
West Vancouver, British Columbia, Deputy Chairman of the Company since June 8, 2000; previously CFO May 1980
Canada Senior Vice President of the Company from July 11, 1988 to
June 8, 2000 and from January 1, 1995 to July 25, 2001,
President and Chief Executive Officer of Cominco Ltd.
Robert J. Wright (1) (3) (4) (5)(6) Deputy Chairman of the Company since June 8, 2000; previously May 1994
Toronto, Ontario, Canada Chairman of the Company from September 7, 1994 to June 8,
2000; President, Glenedin Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Member of the Pension Committee
(5) Member of the Corporate Governance Committee
(6) Member of the Environment, Health & Safety Committee
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Teck Cominco Limited - 2004 Annual Information Form Page 38
Each of the directors is elected to hold office until the annual meeting to be
held on April 27, 2005 or until a successor is duly elected or appointed.
OFFICERS
Name, Province/State and Country Office Held With Company and Principal Occupations within
of Residence Previous Five Years
- -----------------------------------------------------------------------------------------------------------------
Norman B. Keevil Chairman and previously Chief Executive Officer of the Company
West Vancouver, British Columbia from November 30, 1981 to July 25, 2001, and President of the
Canada Company from November 30, 1981 to June 8, 2000.
Robert J. Wright Deputy Chairman of the Company since June 8, 2000; previously
Toronto, Ontario, Canada Chairman and President, Glenedin Inc.
David A. Thompson Chief Executive Officer of the Company since July 25, 2001 and
West Vancouver, British Columbia, Deputy Chairman of the Company since June 8, 2000; previously
Canada Senior Vice President of the Company; President and Chief
Executive Officer of Cominco Ltd.
Donald R. Lindsay President of the Company since January 1, 2005; previously
Vancouver, British Columbia, Canada President, CIBC World Markets Inc.
Roger A. Brain Senior Vice President, Marketing and Refining; previously Vice
North Vancouver, British Columbia, President, Marketing and Sales of Cominco Ltd.
Canada
Douglas H. Horswill Senior Vice President, Environment and Corporate Affairs;
West Vancouver, British Columbia, previously Vice President, Environment & Corporate Affairs of
Canada Cominco Ltd.
Michael P. Lipkewich Senior Vice President, Mining.
West Vancouver, British Columbia,
Canada
John G. Taylor Senior Vice President, Finance and Chief Financial Officer.
Vancouver, British Columbia, Canada
Michael J. Allan Vice President, Engineering, since September 3, 1999;
North Vancouver, British Columbia, previously General Manager, Engineering.
Canada
Jon A. Collins Vice President, Exploration Business Development; previously
Vancouver, British Columbia, Canada Vice President, Exploration of Cominco Ltd.
Fred S. Daley Vice President, Exploration.
Delta, British Columbia, Canada
- -----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Teck Cominco Limited - 2004 Annual Information Form Page 39
Name, Province/State and Country Office Held With Company and Principal Occupations within
of Residence Previous Five Years
- -----------------------------------------------------------------------------------------------------------------
Michel P. Filion Vice President, Environment.
Surrey, British Columbia, Canada
Gary M. Jones Vice President, Business Development.
Burnaby, British Columbia, Canada
G. Leonard Manuel Vice President and General Counsel; previously General Counsel
West Vancouver, British Columbia, and Secretary of Cominco Ltd.
Canada
Richard A. Mundie Vice President, Special Projects, previously Vice President,
West Vancouver, British Columbia, Marketing from February 21, 2001 to September 30, 2002, Vice
Canada President, Commercial, from June 1, 1996 to February 21, 2001.
Peter C. Rozee Vice President, Commercial and Legal Affairs since March 2001;
West Vancouver, British Columbia, previously Vice President, General Counsel and Secretary,
Canada Inmet Mining Corporation.
James A. Utley Vice President, Human Resources, previously Vice President,
West Vancouver, British Columbia, Human Resources of Cominco Ltd.
Canada
John F.H. Thompson Chief Geoscientist.
Vancouver, British Columbia, Canada
Lawrence A. Mackwood Treasurer.
West Vancouver, British Columbia,
Canada
Howard C. Chu Controller.
Vancouver, British Columbia, Canada
Karen L. Dunfee Corporate Secretary.
Richmond, British Columbia, Canada
Anthony A. Zoobkoff Senior Counsel and Assistant Secretary; previously Senior
North Vancouver, British Columbia, Counsel and Assistant Secretary of Cominco Ltd.
Canada
- -----------------------------------------------------------------------------------------------------------------
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Teck Cominco Limited - 2004 Annual Information Form Page 40
AUDIT COMMITTEE INFORMATION
Mandate of Audit Committee
The full text of our Audit Committee's mandate is included as Schedule A to this
Annual Information Form.
Composition of the Audit Committee
Our Audit Committee consists of four members. All of the members of the
Committee are independent and financially literate. The relevant education and
experience of each Audit Committee member is outlined below:
Hugh J. Bolton
Mr. Bolton is a chartered accountant and a graduate of the University of Alberta
(BA Economics). Mr. Bolton was managing partner of Coopers & Lybrand Canada from
1984 to 1990 and its Chairman and CEO from 1991 to 1998. He is presently a
Chairman of Epcor Utilities Inc., Chairman of Matrikon Inc. and a director of
the Toronto Dominion Bank and the Canadian National Company.
David R. Sinclair
Mr. Sinclair is a chartered accountant. From 1955 to 1990, he was a senior
partner of Coopers & Lybrand. He was Chairman of Vista Gold Corporation from
1995 to 2001.
Keith E Steeves
Mr. Steeves received his Chartered Accountant certification in 1963 in Alberta
and in 1964 in British Columbia. Mr. Steeves was Senior Vice President, Finance
and Administration at Bethlehem Copper Corporation until 1981 and an officer of
Teck Corporation from 1981 to 1996.
Chris M. Thompson
Mr. Thompson is a graduate of Rhodes University, SA (BA Law and Economics) and
Bradford University, UK (MSc). Mr. Thompson was Chairman and CEO of the Board of
Gold Fields from 1998 to 2002 and is currently its Non-Executive Chairman.
Pre-Approval Policies and Procedures
The Audit Committee has adopted policies and procedures with respect to the
pre-approval of audit and permitted non-audit services to be provided by
PriceWaterhouseCoopers LLP. All non-audit services are pre-approved by the
Committee prior to commencement. In addition, the Committee has prohibited the
use of the external auditors for the following non-audit services:
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Teck Cominco Limited - 2004 Annual Information Form Page 41
o bookkeeping or other services related to the accounting records or
financial statements;
o financial information systems design and implementation;
o appraisal or valuation services, fairness opinions or contribution-in-kind
reports;
o actuarial services;
o internal audit outsourcing services;
o management functions or human resources functions;
o broker or dealer, investment advisor, or investment banking services;
o legal services;
o expert services unrelated to the audit; and
o all other non-audit services unless there is a strong financial or other
reason for external auditors to provide those services.
External Auditor Service Fees
The following table sets out the fees billed by PriceWaterhouseCoopers LLP and
KPMG LLP to the Company during the last two fiscal years of the Company:
Year Ended Year Ended
2004 ($000) 2003 ($000)
Audit Fees(1) 1,620 1,514
Audit Related Fees(2) 302 256
Tax Fees(3) 256 439
All Other Fees(4) 37 70
Notes
(1) Includes services that are provided by the independent auditor in
connection with statutory and regulatory filings, principally in respect
of this Annual Information Form and our Management Proxy Circular.
(2) Includes assurance and related services by the independent auditor that
are related to the performance of the audit, principally for consultation
concerning financial accounting and reporting standards.
(3) In 2004 fees are for tax services for expatriate employees ($84,000);
domestic and international tax services and advice ($172,000).
(4) In 2004 fees are for ISO 9001 and 14001 certification.
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Teck Cominco Limited - 2004 Annual Information Form Page 42
OWNERSHIP BY DIRECTORS AND OFFICERS
The directors and executive officers as a group beneficially own directly or
indirectly or exercise control or direction over the following shares issued by
the Company:
Shares beneficially owned or over As a % of the total
which control or direction is exercised outstanding of the classS
- -------------------------------------------------------------------------------------------------------------
Class A common shares 210,640 4.5%
Class B subordinate voting shares 845,986 0.43%
- -------------------------------------------------------------------------------------------------------------
In addition, one of our directors is a trustee of a trust which holds shares
carrying 98% of the votes attached to outstanding shares of Keevil Holding
Corporation and is a director of Keevil Holding Corporation. Keevil Holding
Corporation holds 51% of the voting shares of Temagami Mining Company Limited
("Temagami") which holds 2,150,000 Class A common shares, representing 46% of
the shares of this class. Three of our directors are directors of Temagami.
LEGAL PROCEEDINGS
We are subject to two potentially material legal proceedings: a citizens' suit
brought by two members of the Colville Confederated Tribes to enforce a
universal administrative order issued by the U.S. Environmental Protection
Agency in relation to Lake Roosevelt; and a multi-jurisdictional industry-wide
investigation by competition authorities involving major copper concentrate
producers, including HVC. These matters are described below.
On November 11, 2004, the District Court for Eastern Washington State denied a
motion by Teck Cominco Metals to dismiss, for want of jurisdiction, a citizen's
suit brought by two members of the Colville Confederated Tribes supported by the
State of Washington. Teck Cominco Metals has petitioned for appeal of the
decision to the 9th Circuit Court of Appeal.
The Colville suit was brought pursuant to Section 310(a)(i) of the U.S.
Superfund Statute (CERCLA) to enforce a unilateral administrative order issued
by the U.S. Environmental Protection Agency (EPA) purporting to require Teck
Cominco Metals to conduct a remedial investigation and feasibility study with
respect to metal contamination in the sediments of the Upper Columbia River and
Lake Roosevelt. The EPA issued the order shortly after breaking off negotiations
with Teck Cominco Metals during which Teck Cominco Metals offered to fund human
health and ecological studies, at an estimated cost of US$13 million, to address
the possible impact of historical discharges from the Trail Metallurgical
Operations in British Columbia. Both the Canadian government and the Company
have the view that the EPA does not have jurisdiction to apply U.S. law in
Canada.
The Government of Canada and the Government of the United States are continuing
to pursue a bilateral agreement to facilitate the studies and appropriate
remediation to address environmental concerns about the area. Such an agreement
could provide a basis under which Teck Cominco Metal's offer of funding for this
work could be implemented.
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Teck Cominco Limited - 2004 Annual Information Form Page 43
There can be no assurance that the offer to fund the studies will resolve the
matter, or that Teck Cominco Metal or its affiliates will not be faced with
liability in relation to this matter. Until studies of the kind described above
are completed, it is not possible to estimate the extent and cost, if any, of
remediation that may be required.
Teck Cominco Metals, as the marketing agent for HVC, has responded to an Order
issued by the Federal Court of Canada pursuant to the Competition Act to produce
documents relevant to the marketing of custom copper concentrates. We understand
that this is part of an ongoing industry-wide investigation involving major
copper concentrate producers commenced in Canada, the United States and Europe
to determine whether there is evidence of a cartel agreement and related illegal
practices concerning pricing, customer allocation and market sharing in the
copper concentrate sector. We have been advised by the United States Department
of Justice that it intends to close its investigation. There can be no assurance
that the investigation will not result in further regulatory action against us
or HVC in Canada or elsewhere or that we or HVC will not face prosecution or
liability under the Act or otherwise in relation to the investigation. We can
also offer no guidance or assurance as to the course of the ongoing
investigation or when the ongoing investigation will be completed. We are
cooperating in the continuing investigation.
We are subject to a variety of other legal proceedings in the ordinary course of
business. We do not believe that the outcome of any of these proceedings
represents a material risk to our business or properties.
TRANSFER AGENTS AND REGISTRARS
CIBC Mellon Trust Company is the transfer agent and registrar for the Class A
common and Class B subordinate voting shares and maintains registers in
Vancouver, British Columbia and Toronto, Ontario.
MATERIAL CONTRACTS
The only contract entered into by the Company since January 1, 2002 which is
material and not entered into in the ordinary course of business is the
Partnership Agreement dated February 28, 2003, as amended, between the Company,
Fording, Quintette, Elk Valley Coal and Teck-Bullmoose Coal Inc., providing for
the formation and operation of Elk Valley Coal.
INTERESTS OF EXPERTS
PricewaterhouseCoopers LLP, Chartered Accountants, are the Company's auditors
and have prepared an opinion with respect to the Company's consolidated
financial statements as at and for the 12 months ended December 31, 2004.
William P. Armstrong, P.Eng, and Dan Gurtler, AIMM, and Colin McKenny, P.Geol.,
have acted as Qualified Persons in connection with the estimates of reserves and
resources presented in this Annual Information Form. Mr. Armstrong is an
employee of the Company. Mr. McKenny is an employee of Elk Valley Coal
Partnership, of which the Company is the managing partner. Mr. Gurtler is an
employee of Compania Minera Antamina S.A., in which the Company holds a 22.5%
share interest. Messrs. Armstrong, Gurtler and McKenny hold beneficially,
directly or indirectly, less than 1% of any class of the Company's securities.
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Teck Cominco Limited - 2004 Annual Information Form Page 44
ADDITIONAL INFORMATION
(1) Additional information relating to the Company may be found on SEDAR at
www.sedar.com.
(2) Additional information, including directors' and officers' remuneration
and indebtedness to our business, principal holders of the Company's
securities, options to purchase securities and interests of insiders in
material transactions is contained in the Management Proxy Circular to be
issued for our Annual Meeting of Shareholders to be held on April 27,
2005. Additional financial information is also provided in our comparative
financial statements and Management's Discussion and Analysis for 2004.
Copies of these documents are available upon request from our Corporate
Secretary.
(3) Unless otherwise stated information contained herein is as at March 22,
2005.
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Teck Cominco Limited - 2004 Annual Information Form Page 45
SCHEDULE A
AUDIT COMMITTEE MANDATE
Purpose of the Committee
The purpose of the Audit Committee (the "Committee") of the Board of Directors
(the "Board") of Teck Cominco Limited (the "Company") is to provide an open
avenue of communication between management, the external auditor, the internal
auditors and the Board and to assist the Board in its oversight of the:
o integrity, adequacy and timeliness of the Company's financial reporting
and disclosure practices;
o processes for identifying and managing the principal financial risks of
the Company and the Company's internal control systems that ensures fair,
complete and accurate financial reporting;
o Company's compliance with legal and regulatory requirements related to
financial reporting;
o independence and performance of the Company's external auditor; and
o audit plan, programs and results of audits performed by the Company's
internal audit department.
The Committee shall also perform any other activities consistent with this
Charter, the Company's by-laws and governing laws as the Committee or Board
deems necessary or appropriate.
The Committee shall consist of at least three directors. Members of the
Committee and the Chairman shall be appointed by the Board and may be removed by
the Board in its discretion. All members of the Committee shall be independent
directors and have sufficient financial literacy, which means the ability to
read and understand a balance sheet, income statement, cash flow statement and
the notes attached thereto, to enable them to discharge their responsibilities
in accordance with applicable laws and/or requirements of the various stock
exchanges on which the Company's securities trade. At least one member of the
Committee shall have accounting or related financial management expertise that
allows that member to read and understand financial statements and the related
notes attached thereto in accordance with generally accepted accounting
principles ("GAAP").
The Committee's role is one of oversight. Management is responsible for
preparing the Company's financial statements and other financial information and
for the fair presentation of the information set forth in the financial
statements in accordance with GAAP. Management is also responsible for
establishing systems of internal control and for maintaining the appropriate
accounting and financial reporting principles and policies designed to assure
compliance with accounting standards and all applicable laws and regulations.
The external auditor's responsibility is to audit the Company's financial
statements and provide its opinion, based on its audit conducted in accordance
with generally accepted auditing standards, that the financial statements
present fairly, in all material respects, the financial position, results of
operations and cash flows of the Company in accordance with GAAP. The external
auditor is also responsible for
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Teck Cominco Limited - 2004 Annual Information Form Page A-1
issuing an attestation report on management's assessment of the effectiveness
of the Company's systems of internal control as of the end of the Company's 2006
fiscal year end.
The Committee is directly responsible for the appointment, compensation,
evaluation, termination and oversight of the work of the external auditor. The
external auditor shall report directly to the Committee, as they are accountable
to the Board and the Committee as representatives of the Company's shareholders.
As such, it is not the duty or responsibility of the Committee or any of its
members to plan or conduct any type of audit or accounting review or procedure.
Authority and Responsibilities
In performing its oversight responsibilities, the Committee shall:
1. Review and assess the adequacy of this Charter and recommend any proposed
changes to the Board for approval at least once per year.
2. Review the appointments of the Company's Chief Financial Officer and any
other key financial executives involved in the financial reporting
process.
3. Review with management, the external auditor and the director of internal
audit the adequacy and effectiveness of the Company's systems of internal
control and the adequacy and timeliness of its financial reporting
processes.
4. Review with management and the external auditor the annual audited
financial statements, the unaudited quarterly financial statements, the
management discussion and analysis reports and other financial reporting
documents, including the CEO and CFO quarterly certifications, prior to
filing or distribution, including financial matters required to be
reported under applicable legal or regulatory requirements.
5. Review with management and the external auditor and approve earnings news
releases and other financial information and earnings guidance disclosures
contained in such news releases prior to their release.
6. Where appropriate and prior to release, review with management and approve
any other news releases that contain significant financial information
that has not previously been released to the public.
7. Review the Company's financial reporting and accounting standards and
principles and significant changes in such standards or principles or in
their application, including key accounting decisions affecting the
financial statements, alternatives thereto and the rationale for decisions
made.
8. Review the quality and appropriateness, not just the acceptability, of the
accounting policies and the clarity of financial information and
disclosure practices adopted by the Company, including consideration of
the external auditors' judgments about the quality and appropriateness of
the Company's accounting policies. This review shall include discussions
with the external auditor without the presence of management.
9. Review with management, the external auditor and the director of internal
audit significant related party transactions and potential conflicts of
interest.
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Teck Cominco Limited - 2004 Annual Information Form Page A-2
10. Recommend to the Board and shareholders the external auditor selected to
examine the Company's accounts and financial statements. The Committee has
the responsibility to approve all audit engagement terms and fees. The
Committee shall pre-approve all audit, non-audit and assurance services
provided to the Company by the external auditor, but the Chairman or his
appointee may be delegated the responsibility to approve these services
where the fee is not significant.
11. Review with management and the external auditor and approve the annual
audit plan and results of and any problems or difficulties encountered
during any external audits and management's responses thereto.
12. Receive the report of the external auditor on completion of the audit.
13. Monitor the independence of the external auditors by reviewing all
relationships between the independent auditor and the Company and all
audit, non-audit and assurance work performed for the Company by the
independent auditor on at least an a quarterly basis. The Committee will
receive an annual written confirmation of it's independence from the
external auditor.
14. Review and approve the functions of the Company's internal audit
department, including:
o its mandate, authority and organizational reporting lines;
o its annual and longer term internal audit plans, budgets and
staffing;
o its performance; and
o the appointment, reassignment or replacement of the director of
internal audit.
This review will include discussions with the director of internal audit
without the presence of management or the external auditor.
15. Review with senior financial management, the independent auditor, the
director of internal audit, and such others as the Committee deems
appropriate, the results of internal audits and any problems or
difficulties encountered during the audits.
16. Review the Company's procedures and establish procedures for the Committee
for the:
o receipt, retention and resolution of complaints regarding
accounting, financial disclosure, internal controls or auditing
matters; and
o confidential, anonymous submission by employees regarding
questionable accounting, auditing and financial reporting and
disclosure matters or violations of the Company's Code of Ethics or
Standard of Business Practices.
17. Conduct or authorize investigations into any matter that the Committee
believes is within the scope of its responsibilities. The Committee has
the authority to retain independent counsel, accountants or other advisors
to assist it in the conduct of any investigation, at the expense of the
Company.
18. The Committee shall report its recommendations and findings to the Board
after each meeting and shall conduct and present to the Board an annual
performance evaluation of the effectiveness of the Committee.
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Teck Cominco Limited - 2004 Annual Information Form Page A-3
[GRAPHIC OMITTED]
[LOGO - PRICEWATERHOUSECOOPERS LLP]
- --------------------------------------------------------------------------------
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
PricewaterhouseCoopers Place
250 Howe Street, Suite 700
Vancouver, British Columbia
Canada V6C 3S7
Telephone +1 604 806 7000
Facsimile +1 604 806 7806
AUDITORS' REPORT
to the Shareholders of Teck Cominco Limited
We have audited the consolidated balance sheets of TECK COMINCO LIMITED as at
December 31, 2004 and 2003 and the consolidated statements of earnings, retained
earnings and cash flows for the each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2004
and 2003 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
(SIGNED) PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
Vancouver, British Columbia
February 4, 2005
COMMENTS BY AUDITORS FOR UNITED STATES READERS ON CANADA-UNITED STATES REPORTING
DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there are
changes in accounting principles that have a material effect on the
comparability of the company's financial statements, such as the changes
described in note 3 to the financial statements. Our report to the shareholders
dated February 4, 2005 is expressed in accordance with Canadian reporting
standards which do not require a reference to such a change in accounting
principles in the auditors' report when the change is properly accounted for and
adequately disclosed in the financial statements.
(SIGNED) PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
Vancouver, British Columbia
February 4, 2005
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and the other member firms of PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity.
- --------------------------------------------------------------------------------
teckcominco
-----------
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Teck Cominco Limited
Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003, 2002
- --------------------------------------------------------------------------------
Teck Cominco Limited
Consolidated Balance Sheets
As at December 31
- -------------------------------------------------------------------------------
($ in millions) 2004 2003
- -------------------------------------------------------------------------------
As restated
(Note 3)
ASSETS
Current assets
Cash (Note 8(a)) $ 907 $ 96
Accounts and settlements receivable 364 315
Production inventories 410 387
Supplies and prepaid expenses 130 135
-----------------------------------------------------------------------
1,811 933
Investments (Note 5) 469 478
Property, plant and equipment (Note 6) 3,488 3,723
Other assets (Note 7) 291 241
- -------------------------------------------------------------------------------
$ 6,059 $ 5,375
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 422 $ 334
Current portion of long-term debt (Note 8) 38 58
-----------------------------------------------------------------------
460 392
Long-term debt (Note 8) 627 1,045
Other liabilities (Note 9) 608 618
Future income and resource taxes (Note 15(c)) 895 645
Debentures exchangeable for Inco shares (Note 12) 248 248
Shareholders' equity (Note 13) 3,221 2,427
- -------------------------------------------------------------------------------
$ 6,059 $ 5,375
===============================================================================
Commitments and contingencies (Note 18)
Approved on behalf of the Board of Directors
- ------------------------------------
- ------------------------------------
The accompanying notes are an integral part of these financial statements.
Teck Cominco Limited
Consolidated Statements of Earnings
Years ended December 31
- ---------------------------------------------------------------------------------------------
($ in millions, except per share data) 2004 2003 2002
- ---------------------------------------------------------------------------------------------
As restated As restated
(Note 3) (Note 3)
Revenues $ 3,428 $ 2,228 $ 2,042
Operating expenses (2,029) (1,735) (1,681)
Depreciation and amortization (275) (223) (206)
- ---------------------------------------------------------------------------------------------
Operating profit 1,124 270 155
Other expenses
General, administration and marketing (68) (55) (56)
Interest on long-term debt (61) (65) (60)
Mineral exploration (42) (30) (34)
Research and development (14) (14) (19)
Other income (expense) (Note 14) 24 1 3
Writedown of investment (Note 5) (64) -- --
Gain on disposition of Los Filos property
(Note 4(e)) -- 58 --
- ---------------------------------------------------------------------------------------------
899 165 (11)
Provision for income and resource taxes (Note 15) (305) (50) 4
Equity earnings (Note 4(d)) -- 10 17
- ---------------------------------------------------------------------------------------------
Net earnings from continuing operations 594 125 10
Net earnings from discontinued operation (Note 4(b)) 23 9 3
- ---------------------------------------------------------------------------------------------
Net earnings $ 617 $ 134 $ 13
=============================================================================================
Basic earnings per share (Note 13(j)) $ 3.18 $ 0.71 $ 0.06
Basic earnings per share from continuing operations $ 3.06 $ 0.66 $ 0.04
Diluted earnings per share $ 2.99 $ 0.68 $ 0.06
Diluted earnings per share from continuing
operations $ 2.88 $ 0.64 $ 0.04
Weighted average shares outstanding (000's) 192,993 184,823 184,526
Shares outstanding at the end of the year (000's) 201,356 186,492 184,537
Teck Cominco Limited
Consolidated Statements of Cash Flows
Years ended December 31
- ---------------------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
- ---------------------------------------------------------------------------------------------
As restated As restated
(Note 3) (Note 3)
Operating activities
Net earnings from continuing operations $ 594 $ 125 $ 10
Items not affecting cash:
Depreciation and amortization 275 223 206
Future income and resource taxes 199 6 (31)
Writedown of investment 64 -- --
Gain on sale of investments and assets (16) (45) --
Other 27 5 --
- ---------------------------------------------------------------------------------------------
1,143 314 185
Net change in non-cash working capital items
(Note 17) (27) 27 25
- ---------------------------------------------------------------------------------------------
1,116 341 210
Financing activities
Short-term bank loans -- -- (80)
Long-term debt -- 250 313
Repayment of long-term debt (124) (259) (247)
Interest on exchangeable debentures (Note 13(c)) (5) (5) (5)
Issuance of Class B Subordinate Voting Shares 126 24 1
Dividends paid (60) (37) (37)
- ---------------------------------------------------------------------------------------------
(63) (27) (55)
Investing activities
Acquisition of interest in Highland Valley Copper
(Note 4(a)) (80) -- --
Property, plant and equipment (216) (158) (177)
Investment in coal partnership and income trust
(Note 4(c)) -- (275) --
Investments (52) (22) (18)
Contributions to pension plans (34) (9) --
Proceeds from sale of investments and assets 21 24 28
Proceeds from disposition of Los Filos
(Note 4(e)) -- 49 --
Proceeds from sale of Cajamarquilla (Note 4(b)) 156 -- --
Deferred payment received from Aur Resources Inc. -- 48 --
Cash recognized upon consolidation of Antamina
(Note 4(d)) -- 41 --
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(205) (302) (167)
Effect of exchange rate changes on cash (40) (6) --
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash from continuing
operations 808 6 (12)
Increase (decrease) in cash from discontinued
operation (Note 4(b)) 3 (1) 2
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash 811 5 (10)
Cash at the beginning of the year 96 91 101
- ---------------------------------------------------------------------------------------------
Cash at the end of the year $ 907 $ 96 $ 91
=============================================================================================
Teck Cominco Limited
Consolidated Statements of Retained Earnings
Years ended December 31
- ---------------------------------------------------------------------------------------------
($ in millions) 2004 2003
- ---------------------------------------------------------------------------------------------
As restated
(Note 3)
Balance as at the beginning of the year $ 581 $ 472
Adjustment on adoption of new accounting
standards (Note 3) (86) (71)
- ---------------------------------------------------------------------------------------------
Balance as at the beginning of the year as restated 495 401
Net earnings 617 134
Dividends (60) (37)
Interest on exchangeable debentures, net of taxes
(Note 13(c)) (3) (3)
- ---------------------------------------------------------------------------------------------
Balance as at the end of the year $ 1,049 $ 495
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Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Teck Cominco Limited (the company) is engaged in mining and base metal
refining businesses including exploration, development, mining,
processing, smelting and refining. The company's major products are zinc,
metallurgical coal, copper, precious metals, lead, molybdenum, electrical
power, fertilizers and specialty metals. Revenue from refined lead,
electrical power, fertilizers and specialty metals earned at smelting
operations are included in zinc smelter revenue for segmented purposes.
All revenue from a mine is included in one segment based upon the
principal product of the mine.
2. SIGNIFICANT ACCOUNTING POLICIES
Generally Accepted Accounting Principles
The consolidated financial statements of the company are prepared using
generally accepted accounting principles in Canada. Note 20 reconciles the
company's earnings and shareholders' equity to results that would have
been obtained had the company's consolidated financial statements been
prepared in accordance with accounting principles generally accepted in
the United States.
Basis of Presentation
These consolidated financial statements include the accounts of the
company and all of its subsidiaries. The significant subsidiaries include
Teck Comino Metals Limited (TCML), Teck Cominco American Inc. (TCAI), and
Teck Cominco Alaska Inc. (TCAK). Many of the company's mining activities
are conducted through interests in joint ventures and partnerships where
the company shares joint control. These joint ventures and partnerships
are accounted for using the proportionate consolidation method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements. Significant areas where management's judgment is applied
include asset and investment valuations, ore reserve determinations,
in-process inventory quantities, plant and equipment lives, contingent
liabilities, tax provisions and future income tax balances, asset
retirement obligations, pension liabilities, and other accrued
liabilities. Ore reserve determinations involve estimates of future costs
and future commodity prices. Actual results could differ from these
estimates.
Translation of Foreign Currencies
For integrated foreign operations, monetary assets and liabilities are
translated at year-end exchange rates and other assets and liabilities are
translated at historical rates. Revenues, expenses and cash flows are
translated at monthly average exchange rates. Gains and losses on
translation of monetary assets and monetary liabilities are charged to
earnings, except where hedge designations exist.
The accounts of self-sustaining foreign operations are translated at
year-end exchange rates, and revenues and expenses are translated at
monthly average exchange rates. Differences arising from these foreign
currency translations are recorded in shareholders' equity as a cumulative
translation adjustment until they are realized by a reduction in the
investment.
Cash
Cash includes cash on account, demand deposits and short-term investments
with original maturities of three months or less.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, continued
Investments
Investments, other than the investment in the Fording Canadian Coal Trust
(FCCT), comprise marketable and other securities. Other investments are
carried at cost less any amounts written off to reflect an impairment in
value which is other than temporary. The investment in FCCT is recorded at
cost plus the company's share of earnings less the cash distributions.
Product Inventories
Product inventories include finished goods, raw materials and in-process
inventories and are valued at the lower of cost and net realizable value.
Cost includes all direct costs incurred in production including freight
and depreciation and amortization charges related to the production of
inventory. For mining operations, inventories are not valued prior to the
production of concentrates or clean coal.
Property, Plant and Equipment
(i) Plant and equipment
Plant and equipment are depreciated over the estimated lives of the
related assets calculated on a units of production or straight-line
basis as appropriate.
(ii) Mineral properties and deferred costs
Exploration costs and costs of acquiring mineral properties are
charged to earnings in the year in which they are incurred, except
where these costs relate to specific properties for which
economically recoverable reserves as shown by an economic study are
believed to exist, in which case they are deferred.
Deferred costs include interest and financing costs relating to the
construction of plant and equipment and operating costs net of
revenues prior to the commencement of commercial production of new
mines. Interest and financing costs are capitalized only for those
projects for which funds have been borrowed.
Upon commencement of production, mineral properties and deferred
costs relating to mines are amortized over the estimated life of the
proven and probable reserves to which they relate calculated on a
units of production basis.
(iii) Underground development costs
Underground development costs are amortized using the block
amortization method, whereby capital costs associated with each
section of the mine are amortized over the reserves of that
particular section of the mine.
(iv) Asset impairment
The company performs impairment tests on its property, plant and
equipment when events or changes in circumstance indicate that the
carrying value of assets may not be recoverable. These tests compare
expected undiscounted future cash flows from these assets to their
carrying values. If shortfalls exist, assets are written down to the
discounted value of the future cash flows based on the company's
average cost of borrowing.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue Recognition
Sales are recognized and revenues are recorded at market prices when title
transfers and the rights and obligations of ownership pass to the
customer. A number of the company's concentrate products are sold under
pricing arrangements where final prices are determined by quoted market
prices in a period subsequent to the date of sale. These concentrates are
provisionally priced at the time of sale based on forward prices for the
expected date of the final settlement. Subsequent variations in the price
are recognized as revenue adjustments as they occur until the price is
finalized.
The company standardized the timing of revenue recognition for all of its
operations in 2003. This resulted in an $8 million increase in net
earnings in 2003 but had no material effect on reported earnings of 2002.
Income and Resource Taxes
Future income tax assets and liabilities are determined based on the
difference between the tax basis of the company's assets and liabilities
and the respective amounts reported in the financial statements. Future
tax assets or liabilities are calculated using the tax rates for the
periods in which the differences are expected to be settled. Future tax
assets are recognized to the extent that they are considered more likely
than not to be realized.
Pension and Other Employee Future Benefits
Pension and other employee future benefits and liabilities are based on
actuarial determinations. The projected benefit method prorated on
services has been used to determine the accrued benefit obligation.
Certain actuarial assumptions used in the determination of defined benefit
pension plan liabilities and other post-retirement benefits are based upon
management's best estimates, including expected plan performance, salary
escalation, expected health care costs, and retirement dates of employees.
The discount rate used to determine the accrued benefit obligation is
determined by reference to the market interest rates at the measurement
date of high quality debt instruments. The expected return on plan assets
is based on the expected long-term rate of return on plan assets and the
fair value of plan assets.
Past service costs and transitional assets or liabilities are amortized on
a straight-line basis over the average remaining service period of active
employees expected to receive benefits under the plan up to the full
eligibility date.
Differences between the actuarial liabilities and the amounts recorded in
financial statements will arise from changes in plan assumptions, changes
in benefits, or through experience as results differ from actuarial
assumptions. Differences which are greater than 10% of the fair value of
the plan assets or the accrued benefit obligation are taken into the
determination of income over the average remaining service life of the
related employees.
The cost of providing benefits through defined contribution plans is
charged to earnings as the obligation to contribute is incurred.
Non-pension post-retirement benefits are funded by the company as they
become due.
Stock-Based Compensation
Effective January 1, 2004, the company adopted the new provisions of the
CICA Handbook Section 3870 on "Stock-Based Compensation and Other
Stock-Based Payments", which uses the fair value method of accounting for
stock-based awards. Under this method, the compensation cost of options
and other stock-based compensation arrangements are estimated at fair
value at the grant date and recognized over the vesting period.
Previously, the company disclosed the pro forma effect of stock-based
compensation expense in the notes to the financial statements.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, continued
Research and Development
Research and development costs are expensed as incurred.
Asset Retirement Obligations
Effective January 1, 2004, the company adopted CICA Handbook Section 3110
on "Asset Retirement Obligations". Under this standard, future obligations
to retire an asset including dismantling, remediation and ongoing
treatment and monitoring of the site are initially recognized and recorded
as a liability at fair value, assuming a credit adjusted risk-free
discount rate and an inflation factor. The liability is adjusted for
changes in the expected amounts and timing of cash flows required to
discharge the liability and accreted to full value over time through
periodic charges to earnings. The amount of the asset retirement liability
initially recognized is capitalized as part of the asset's carrying value
and amortized over the asset's estimated useful life.
Under the standard, future asset retirement obligations are only recorded
when the timing or amount of remediation costs can be reasonably
estimated. The cost and timing of asset retirement obligations for the
company's mines and legacy sites can be estimated and liabilities are
recorded for each of these sites. The company's refining and smelting
facilities are considered to be indefinite life operations and neither the
timing nor amounts that may be required to retire these facilities can be
estimated at this time. In these cases recorded liabilities are limited to
secondary sites and components of the facilities where costs and expected
dates of retirement and remediation are capable of estimation. Previously,
the company accrued reclamation costs on a straight line basis over the
estimated life of each mine.
Earnings Per Share
Earnings per share is calculated based on the weighted average number of
shares outstanding during the year. The company follows the `treasury
stock' method in the calculation of diluted earnings per share. Under this
method, dilution is calculated based upon the net number of common shares
issued should `in the money' options and warrants be exercised and the
proceeds are used to repurchase common shares at the weighted average
market price in the period. Dilution from convertible securities is
calculated based on the number of shares to be issued after taking into
account the reduction of the related after-tax interest expense.
Derivatives and Hedging Activities
The company uses forward foreign exchange and commodity price contracts,
and interest rate swaps to manage exposure to fluctuations in foreign
exchange, metal prices and interest rates. On January 1, 2004, the company
adopted Accounting Guideline 13 (AcG-13) "Hedging Relationships" and EIC
128 "Accounting for Trading, Speculative or Non Trading Derivative
Financial Instruments". No adjustment was required to opening balances as
a result of the adoption of this standard.
Certain of the company's commodity and foreign exchange forward contracts
are accounted for as cash flow hedges of anticipated commodity sales.
Realized gains or losses on these contracts are recognized in revenue. The
Inco exchangeable debenture is also accounted for as a cash flow hedge.
The company's interest rate swaps are accounted for as fair value hedges,
with realized gains or losses recognized in interest expense. The company
also designates a portion of its US dollar debt as a hedge of a portion of
its net investment in foreign subsidiaries whose functional currency is
the US dollar. Foreign exchange gains and losses on the designated debt
are included in the cumulative translation adjustment in shareholders'
equity. Derivative instruments that do not qualify as a hedge under
AcG-13, or are not designated as a hedge, are recorded on the balance
sheet at fair value with changes in fair value recognized in earnings.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
3. ADOPTION OF NEW ACCOUNTING STANDARDS AND PRIOR PERIOD RESTATEMENTS
The following is a summary of the after-tax effect on retained earnings
and net earnings arising from changes in accounting policies, applied
retroactively:
---------------------------------------------------------------------------------------------------
($ in millions) 2004 2003
---------------------------------------------------------------------------------------------------
Retained earnings, at the beginning of period as previously
reported $ 581 $ 472
Asset retirement obligations (a) (74) (62)
Stock-based compensation (b) (8) (5)
Underground development amortization (c) (4) (4)
---------------------------------------------------------------------------------------------------
(86) (71)
---------------------------------------------------------------------------------------------------
Retained earnings, at the beginning of the period
as restated on adoption of new accounting standards $ 495 $ 401
===================================================================================================
---------------------------------------------------------------------------------------------------
($ in millions) 2003 2002
---------------------------------------------------------------------------------------------------
Net earnings, as previously reported $ 149 $ 30
Asset retirement obligations (a) (12) (12)
Stock-based compensation (b) (3) (5)
---------------------------------------------------------------------------------------------------
Net earnings, as restated on adoption of new accounting
standards $ 134 $ 13
===================================================================================================
(a) Asset retirement obligations
On January 1, 2004, the company adopted CICA Handbook Section 3110
"Asset Retirement Obligations". The retroactive adoption of this
standard resulted in a restatement as of January 1, 2004 to increase
long-term liability by $210 million, increase property, plant and
equipment by $113 million, reduce future income tax liabilities by
$23 million and decrease opening retained earnings by $74 million.
(b) Stock-based compensation
Effective January 1, 2004, the company adopted CICA Handbook Section
3870 "Stock-Based Compensation and Other Stock-Based Payments",
which uses the fair value method of accounting for stock-based
awards. The company has applied the new provisions with retroactive
restatement. As a result, a cumulative decrease of $8 million to
retained earnings, an increase of $7 million to contributed surplus
and an increase of $1 million to share capital were recorded on
January 1, 2004 with respect to stock options granted in 2003 and
2002.
(c) Underground development amortization
Effective January 1, 2004, the company has adopted the block
amortization method for amortizing underground development costs.
Under this method capital costs associated with the development of
each section of the mine are amortized over the reserves of that
particular section of the mine. Previously all capitalized
underground development costs were amortized over the reserves of
the mine as a whole. As a result of this change in policy, the
company has recorded an adjustment reducing opening retained
earnings by $4 million; property, plant and equipment by $7 million;
and reducing future income tax liabilities by $3 million.
Adjustments to earnings reported in 2003 and 2002 were not
significant.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
3. ADOPTION OF NEW ACCOUNTING STANDARDS AND PRIOR PERIOD RESTATEMENTS,
continued
(d) Product inventories
A new standard on Generally Accepted Accounting Principles (GAAP)
defines what constitutes Canadian GAAP and establishes a relative
hierarchy for sources of GAAP. The CICA Handbook is confirmed as the
primary source of Canadian GAAP while secondary sources include
International Accounting Standards and US GAAP. Industry practice is
no longer considered a valid source of GAAP. As a result, the
company has amended its inventory valuation policy to include
depreciation and amortization charges in the cost of inventory.
Previously amortization and depreciation were charged directly to
earnings based on sales volumes. The new policy does not affect
reported earnings in any prior year but does affect reported
inventory and property, plant and equipment values. As a result, the
company increased the reported value of inventory by $9 million at
January 1, 2004, and reduced fixed assets by the same amount.
4. ACQUISITIONS AND DISPOSITIONS
(a) Acquisition of additional interest in Highland Valley Copper
On March 2, 2004, the company completed the acquisition of a further
33.6% share in the Highland Valley Copper mine in British Columbia
to increase the company's share of the mine to 97.5%. The
transaction has been accounted for using the purchase method as
follows:
---------------------------------------------------------------------------------------------
($ in millions)
---------------------------------------------------------------------------------------------
Purchase price
Cash paid $ 112
Less cash acquired (32)
---------------------------------------------------------------------------------------------
Total cost of acquisition $ 80
=============================================================================================
Assets acquired
Current assets (excluding cash) $ 29
Property, plant and equipment 154
Other assets 9
---------------------------------------------------------------------------------------------
192
---------------------------------------------------------------------------------------------
Liabilities assumed
Current liabilities 8
Long-term liabilities 47
Future income tax liability 57
---------------------------------------------------------------------------------------------
112
---------------------------------------------------------------------------------------------
Net assets acquired $ 80
=============================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
4. ACQUISITIONS AND DISPOSITIONS, continued
(b) Sale of Cajamarquilla (Discontinued Operation)
On December 15, 2004 the company completed the sale of its 85%
interest in the Cajamarquilla zinc refinery for proceeds of $168
million (US$142 million) after repayment of debt of $56 million (US
$47 million). The company recorded an after-tax gain of $12 million
on the transaction.
The agreement for sale also provides that in each of the years from
2005 to 2009 inclusive, additional consideration may be paid to the
company of approximately US$365,000 for each US$0.01 that the
average annual price of zinc exceeds US$0.454 per pound. In
addition, should the acquirer, Votorantim Metais, proceed with the
expansion of the refinery during the first three years following the
sale, additional consideration will be paid of US$12.75 million in
year one, declining to US$4.25 million in year three.
For accounting purposes, Cajamarquilla is considered a discontinued
operation and its results for 2004 and prior years are presented as
a single line item on the Statement of Earnings and Cash Flow. Gain
on sale, earnings and cash flow from Cajamarquilla are as follows:
Gain on sale:
-----------------------------------------------------------------------------------------------
($ in millions)
-----------------------------------------------------------------------------------------------
Total consideration $ 224
Less:
Net assets disposed
Cash $ 5
Working capital 29
Plant and equipment 246
Other assets 10
Long-term debt (including current portion) (56)
Other long-term liabilities (31)
Minority interest (17)
-----------------------------------------------------------------------------------------------
186
Less cumulative foreign exchange losses 26
-----------------------------------------------------------------------------------------------
Gain on sale $ 12
===============================================================================================
Earnings from discontinued operation:
===============================================================================================
($ in millions) 2004 2003 2002
-----------------------------------------------------------------------------------------------
Revenues $ 196 $ 182 $ 145
Cost of sales (173) (164) (133)
-----------------------------------------------------------------------------------------------
23 18 12
Other expenses (7) (7) (8)
Income taxes (5) (2) (1)
-----------------------------------------------------------------------------------------------
Net earnings 11 9 3
Gain on sale 12 -- --
-----------------------------------------------------------------------------------------------
Net earnings from discontinued operation $ 23 $ 9 $ 3
===============================================================================================
Cash flow from discontinued operation:
Operating activities $ 26 $ 13 $ 15
Financing activities (20) (9) (3)
Investing activities (2) (4) (10)
Effect of exchange rate changes on cash (1) (1) --
-----------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ 3 $ (1) $ 2
===============================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
4. ACQUISITIONS AND DISPOSITIONS, continued
(c) Investment in Elk Valley Coal Partnership and Fording Canadian Coal
Trust
On February 28, 2003, the company completed a transaction with
Fording Inc. (Fording), Westshore Terminals Income Fund, Sherritt
International Corporation and the Ontario Teachers Pension Plan
Board to combine the metallurgical coal assets of Fording, Luscar
Energy Partnership and the company. The company contributed its
Elkview mine, with a net book value of $167 million, and $125
million in cash to obtain an initial 35% interest in the resulting
Elk Valley Coal Partnership (Elk Valley Coal). Under the terms of
the Partnership Agreement, Teck Cominco Limited is the manager of
Elk Valley Coal. The company also paid $150 million for a 9.1%
interest in the Fording Canadian Coal Trust (FCCT), which was formed
by the reorganization of Fording into an income trust. FCCT owns the
remainder of Elk Valley Coal and other assets. The company accounts
for its direct interest in Elk Valley Coal on the proportionate
consolidation basis. The company's interest in FCCT is included in
investments and is recorded at cost plus the company's share of
earnings of the trust less cash distributions.
On formation of Elk Valley Coal the net assets were assigned costs
based on their fair values as follows:
---------------------------------------------------------------------------------------------
($ in millions)
---------------------------------------------------------------------------------------------
Purchase price
Book value of net assets contributed to Elk Valley Coal $ 167
Cash contributed 125
---------------------------------------------------------------------------------------------
Total cost of acquisition $ 292
=============================================================================================
Assets acquired
Current assets $ 95
Property, plant and equipment 368
---------------------------------------------------------------------------------------------
463
---------------------------------------------------------------------------------------------
Liabilities assumed
Current liabilities $ 51
Long-term liabilities 43
Future income tax liability 77
---------------------------------------------------------------------------------------------
171
---------------------------------------------------------------------------------------------
Net assets acquired $ 292
=============================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
4. ACQUISITIONS AND DISPOSITIONS, continued
Under the terms of the Partnership Agreement, Teck Cominco Limited
could increase its interest in Elk Valley Coal by up to 5% if Elk
Valley Coal achieved certain specified synergies by March 31, 2007.
Following the issue of the opinion of the independent expert engaged
to assess the synergies of Elk Valley Coal for the coal year ended
March 31, 2004, the company and Fording reached agreement in July
2004 on the synergies realized and the resulting adjustments to Elk
Valley Coal interests.
Teck Cominco's 35% interest was increased by 3% effective April 1,
2004, and will be increased by an additional 1% on April 1, 2005 and
on April 1, 2006, bringing Teck Cominco's total direct interest in
Elk Valley Coal to 40% on April 1, 2006. Including the company's
holding of 4.3 million units or 8.8% interest in the FCCT, the
company's direct and indirect interest in Elk Valley Coal was 43.4%
effective April 1, 2004.
The company has treated the additional interest as part of the
initial consideration for the assets contributed on the formation of
Elk Valley Coal and accordingly no gain has been recorded. The
company has adjusted its balance sheet to reflect the additional 3%
share of the assets and liabilities of Elk Valley Coal and included
its additional share of revenue, expenses and cash flow effective
April 1, 2004.
(d) Consolidation of Antamina
The company owns a 22.5% interest in the Antamina mine in Peru. On
July 31, 2003 the mine achieved completion and the project debt
became non-recourse to the shareholders of the project. This
resulted in the removal of certain voting restrictions on the
company with respect to the management of the mine, and the company
began to proportionately consolidate its investment in Antamina.
Prior to July 31, 2003 the company's investment in Antamina was
equity-accounted.
Values were assigned to the net assets of Antamina at the date of
commencement of proportionate consolidation as follows:
--------------------------------------------------------------------
($ in millions)
--------------------------------------------------------------------
Cash $ 41
Working capital 27
Property, plant and equipment 611
Senior debt (360)
Other liabilities (12)
--------------------------------------------------------------------
Net investment $ 307
====================================================================
(e) Disposition of Los Filos Property
In October 2003, the company sold its 70% interest in the Los Filos
gold property in Mexico to Wheaton River Minerals Ltd. for cash
proceeds of $64 million (US$48 million) before current taxes of $15
million. The company recorded a gain on disposition of $58 million
(US$43 million) before provision for income tax of $17 million.
(f) Acquisition of Lennard Shelf Zinc Mines
In November 2003, the company acquired the mineral properties,
plant, equipment and infrastructure of the Lennard Shelf zinc mines
in Western Australia for $26 million. The mines had been shut down
and placed on care and maintenance prior to the acquisition. In
April 2004, the company entered into an agreement whereby Noranda
Inc. acquired a 50% joint venture interest in these mines by
agreeing to fund maintenance and exploration expenditures for an
amount equal to the company's initial investment.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
5. INVESTMENTS
--------------------------------------------------------------------------
($ in millions) 2004 2003
--------------------------------------------------------------------------
Investments
Inco Limited common shares (Note 12) $ 246 $ 246
Fording Canadian Coal Trust (Note 4(c)) 138 141
Sons of Gwalia Ltd. -- 64
Marketable securities 83 22
Other 2 5
--------------------------------------------------------------------------
$ 469 $ 478
==========================================================================
Investments in FCCT and marketable securities with a carrying value of
$221 million (2003 - $163 million) had a quoted market value of $561
million (2003 - $256 million) at December 31, 2004.
On August 29, 2004, Sons of Gwalia, in which the company has a 9% equity
interest, appointed Voluntary Administrators under the Australia
Corporations Act 2001 and its shares were suspended from trading. The
company has fully provided for its investment in Sons of Gwalia of $64
million ($52 million on an after-tax basis).
6. PROPERTY, PLANT AND EQUIPMENT
--------------------------------------------------------------------------
($ in millions) 2004 2003
--------------------------------------------------------------------------
As restated
(Note 3)
Mines and processing facilities $ 6,118 $ 6,100
Accumulated depreciation and depletion (2,885) (2,720)
--------------------------------------------------------------------------
$ 3,233 3,380
Pogo Gold project 176 109
Mineral properties 79 234
--------------------------------------------------------------------------
$ 3,488 $ 3,723
==========================================================================
7. OTHER ASSETS
--------------------------------------------------------------------------
($ in millions) 2004 2003
--------------------------------------------------------------------------
As restated
(Note 3)
Future income tax assets (Note 15(c)) $ 137 $ 130
Pension assets (Note 11) 83 57
Long-term receivables 44 26
Other 27 28
--------------------------------------------------------------------------
$ 291 $ 241
==========================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT
-------------------------------------------------------------------------------------
($ in millions) 2004 2003
-------------------------------------------------------------------------------------
6.875% debentures due February 2006 (US$150 million) $ 181 $ 194
7% debentures due September 2012 (US$200 million) 238 255
Antamina senior debt (a) (US$204 million; 2003 US$250 million) 245 323
Convertible debentures (b) -- 202
Cajamarquilla debt (c) -- 78
Revolving credit facility (d) and (e) -- 46
Other 1 5
-------------------------------------------------------------------------------------
665 1,103
Less current portion (f) (38) (58)
-------------------------------------------------------------------------------------
$ 627 $ 1,045
=====================================================================================
(a) In 1999, Compania Minera Antamina S.A. (Antamina) completed senior
debt financing for the Antamina project. All material assets and
agreements of Antamina and the common shares and subordinated debt
of Antamina held by the company are pledged as security for the
senior debt. The interest rates on the senior debt are based on
LIBOR plus a variable spread. At December 31, 2004, the average
interest rate on senior debt was 5.68% (2003 - 4.69%). The repayment
terms of the principal amount of the various senior debt facilities
vary from 6.5 to 10.5 years from the first repayment date which was
September 2002, with minimum semi-annual repayments of US$16
million. Certain conditions must be met prior to distributions by
Antamina to shareholders including the requirement to make
prepayments on the senior debt. In addition, Antamina must maintain
cash balances for the benefit and interest of the senior lenders
which may only be used to make principal payments. The company's
share of these balances totalled $28 million at December 31, 2004.
Following Antamina achieving completion on July 31, 2003, the senior
project debt became non-recourse to the company and other
shareholders of Antamina.
(b) On October 12, 2004, the company issued 7.3 million Class B
Subordinate Voting Shares on conversion of US$156 million stated
amount at maturity of its convertible subordinated debentures due
2006, which was called for redemption. Debentures with a stated
amount of maturity of US$13.8 million were redeemed for cash.
(c) The company sold its interest in Cajamarquilla in December 2004 and
the project debt was repaid.
(d) The Elk Valley Coal Partnership has a $120 million revolving credit
facility for working capital purposes, of which the company's 38%
share is $46 million. At December 31, 2004, Elk Valley Coal had
issued outstanding letters of credit and guarantees totalling $71
million.
The Highland Valley Copper Partnership (HVC) has a US$20 million
demand revolving facility for working capital purposes. At December
31, 2004, HVC had issued letters of credit for $10 million.
(e) At December 31, 2004, the company had revolving credit facilities
aggregating $768 million. The amount of the company's revolving
credit facilities becoming due is $81 million in 2005, $612 million
in 2007, $25 million in 2008 and $50 million in 2009. The company
has issued $113 million of letters of credit with the unused portion
of the credit facility amounting to $655 million as at December 31,
2004.
(f) Scheduled repayments on long-term debt are $38 million in 2005, $219
million in 2006, $38 million in 2007, $38 million in 2008, $38
million in 2009 and $294 million thereafter. The current portion of
long-term debt of $38 million (US$32 million) is in respect of the
Antamina senior debt financing.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
9. OTHER LIABILITIES
--------------------------------------------------------------------------
($ in millions) 2004 2003
--------------------------------------------------------------------------
As restated
(Note 3)
Asset retirement obligations (Note 10) $ 348 $ 346
Other post-closure costs 35 25
Accrued pension liability (Note 11(a))
Defined benefit pension plan 31 39
Other post-retirement benefits 151 130
Provision for worker compensation benefits 24 24
Minority interests 10 24
Other 9 30
--------------------------------------------------------------------------
$ 608 $ 618
==========================================================================
10. ASSET RETIREMENT OBLIGATIONS
The following table summarizes the movements in the asset retirement
obligation activities for the years ended December 31, 2004 and 2003:
--------------------------------------------------------------------------
($ in millions) 2004 2003
--------------------------------------------------------------------------
At January 1 $ 373 $ 394
Changes in cash flow estimates 30 19
Expenditures and settlements (53) (54)
Accretion expense 21 22
Obligations assumed on acquisitions 27 26
Foreign currency translation adjustments (15) (34)
--------------------------------------------------------------------------
At December 31 383 373
Current portion (35) (27)
==========================================================================
$ 348 $ 346
==========================================================================
The asset retirement obligations have been recorded as a liability at fair
value, assuming a credit adjusted risk-free discount rate of 5.75% and an
inflation factor of 2.75%. The liability for retirement and remediation on
an undiscounted basis before an inflation factor of 2.75% is estimated to
be approximately $335 million. In addition, for ongoing treatment and
monitoring of the sites, the estimated undiscounted payments in current
dollars before inflation adjustment are $2 million per annum for 2005-2030
and $8 million per annum for 2031-2104. Due to the nature of closure
plans, cash expenditures are expected to occur over a significant period
of time, being from one year for plans which are already in progress to
over 100 years for the longest plan.
The change in cash flow estimates included $15 million in 2004 relating to
closed properties asset retirement obligations which have been recognized
in other expense (note 14).
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
11. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS
The company has defined contribution pension plans for some employees. The
company's share of contribution to these plans is expensed in the year it
is earned by the employee.
The company also has various defined benefit pension plans that provide
benefits based principally on employees' years of service. These plans are
only eligible to certain qualifying employees. The plans are
'flat-benefit' or 'final-pay' plans which are not indexed. Annual
contributions to these plans are actuarially determined and made at or in
excess of minimum requirements prescribed by legislation.
The company has several post-retirement plans, which generally provide
post-retirement medical and life insurance benefits to certain qualifying
employees.
All pension plans are actuarially evaluated for funding purposes on a
three-year cycle. The most significant plan, which accounts for 62% of the
accrued benefit obligation at December 31, 2004, was last actuarially
evaluated on December 31, 2001. The actuarial valuation for December 31,
2004 will be submitted to pension regulators by August 2005. The
measurement date used to determine substantially all of the accrued
benefit obligation and plan assets for determination of accounting
information was December 31, 2004.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
11. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
(a) Actuarial valuation of funding surplus (deficit)
--------------------------------------------------------------------------------------------------
($ in millions) 2004 2003
--------------------------------------------------------------------------------------------------
Defined Other post- Defined Other post-
benefit retirement benefit retirement
pension benefit pension benefit
plans plans plans plans
--------------------------------------------------------------------------------------------------
Accrued benefit obligation
Balance at beginning of year $ 894 $ 203 $ 835 $ 172
Changes in methodology and assumptions -- 1 -- 2
Current service cost 18 4 15 2
Benefits paid (66) (8) (59) (8)
Interest cost 59 13 55 11
Actuarial revaluation 50 16 2 28
Past service costs arising 26 -- 8 --
Foreign currency exchange rate changes (6) (2) (16) (7)
Transfers from other plans 59 5 54 3
Other 2 (3) -- --
--------------------------------------------------------------------------------------------------
Balance at end of year 1,036 229 894 203
Plan assets
Fair value at beginning of year 816 -- 693 --
Actual return on plan assets 94 -- 102 --
Benefits paid (66) (8) (59) (8)
Foreign currency exchange rate changes (4) -- (10) --
Contributions 78 8 49 8
Transfer from other plans 55 -- 41 --
Other 2 -- -- --
--------------------------------------------------------------------------------------------------
Fair value at end of year 975 -- 816 --
--------------------------------------------------------------------------------------------------
Funding surplus (deficit) (61) (229) (78) (203)
Unamortized transitional adjustments 72 78 87 73
Unamortized past service costs 41 -- 9 --
--------------------------------------------------------------------------------------------------
Total accrued asset (liability) $ 52 $ (151) $ 18 $ (130)
==================================================================================================
Represented by
Pension assets (Note 7) $ 83 $ -- $ 57 $ --
Accrued pension liability (Note 9) (31) (151) (39) (130)
--------------------------------------------------------------------------------------------------
$ 52 $ (151) $ 18 $ (130)
==================================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
11. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
(b) Funding status
The funding status of the company's defined benefits pension plans
are as follows:
------------------------------------------------------------------------------------------------------------------------
($ in millions) 2004 2003
------------------------------------------------------------------------------------------------------------------------
Plans where Plans where Plans where Plans where
assets exceed benefit assets exceed benefit
benefit obligations benefit obligations
obligations exceed assets Total obligations exceed assets Total
------------------------------------------------------------------------------------------------------------------------
Plan assets $ 258 $ 717 $ 975 $ 123 $ 693 $ 816
Benefit obligations 241 795 1,036 115 779 894
------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan assets over
benefit obligations $ 17 $ (78) $ (61) $ 8 $ (86) $ (78)
========================================================================================================================
(c) Significant assumptions
The assumptions used to calculate annual expenses are those used to
calculate the accrued liability at the end of the previous year.
Weighted average assumptions used to calculate benefit obligation at
the end of year are as follows:
-------------------------------------------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------------------------------------------
Defined Other post- Defined Other post- Defined Other post-
benefit retirement benefit retirement benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
-------------------------------------------------------------------------------------------------------------------
Discount rate 6% 6% 6.25% 6.25% 6.5% 6.5%
Assumed long-term rate of return on assets 7.25% -- 7.5% -- 7.5% --
Rate of increase in future compensation 4% 4% 4% 4% 4% 4%
Initial medical trend rate -- 11% -- 12% -- 8.5%
Ultimate medical trend rate -- 5% -- 5% -- 5%
Years to reach ultimate medical trend rate -- 6 -- 7 -- 7
Dental trend rates -- 4% -- 4% -- 3%
-------------------------------------------------------------------------------------------------------------------
(d) Employee future benefits expense
-------------------------------------------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
-------------------------------------------------------------------------------------------------------------------
Defined Other post- Defined Other post- Defined Other post-
benefit retirement benefit retirement benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
-------------------------------------------------------------------------------------------------------------------
Current service cost $ 18 $ 4 $ 15 $ 2 $ 14 $ 3
Interest cost 59 13 56 11 53 10
Expected gain on assets (63) -- (54) -- (50) --
Actuarial loss recognized 7 5 11 2 -- --
Amortization of unaccrued deficiency -- -- -- -- 2 1
Early retirement window 3 -- 3 -- -- --
Past service cost recognized 4 -- 1 -- -- --
Other 7 -- 1 -- -- --
-------------------------------------------------------------------------------------------------------------------
Expense recognized for the year $ 35 $ 22 $ 33 $ 15 $ 19 $ 14
===================================================================================================================
The defined contribution expense for 2004 is $5 million (2003 - $6
million; 2002 - $5 million).
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
11. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
Certain employee future benefit costs incurred in the year and the
actual return on plan assets in excess or short of the actuarially
assumed return are not taken into income and are amortized over
certain periods. Employee future benefit expenses recognized in the
year are reconciled to employee future benefit costs incurred as
follows:
---------------------------------------------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Defined Other post Defined Other post Defined Other post
benefit retirement benefit retiremenet benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
---------------------------------------------------------------------------------------------------------------------
Expense recognized $ 35 $ 22 $ 33 $ 15 $ 19 $ 14
Difference between expected and actual return on
plan assets (31) -- (48) -- 56 --
Difference between actuarial losses (gains)
amortized and actuarial losses (gains) arising 43 11 (9) 26 20 17
Difference between past service costs amortized
and past service costs arising 23 -- 7 -- (1) --
Other (7) -- (1) -- -- --
--------------------------------------------------------------------------------------------------------------------
Costs incurred $ 63 $ 33 $ (18) $ 41 $ 94 $ 31
====================================================================================================================
(e) Health care sensitivity
A one percentage change in the health care trend rates assumptions,
as shown in 11(c), would have the following effect on post-retirement
health care obligations and expense:
-----------------------------------------------------------------------------------------------------
Increase Increase Increase
(Decrease) (Decrease) in (Decrease) in
in Service and Obligation Annual Expense
Interest Cost
-----------------------------------------------------------------------------------------------------
Impact of 1% increase in health care trend rate $ 3 $ 33 $ 4
Impact of 1% decrease in health care trend rate (2) (28) (4)
-----------------------------------------------------------------------------------------------------
(f) Investment of plan assets
The assets of the company's defined benefit pension plans are managed
by pension fund managers under the oversight of the Teck Cominco
Pension Fund Co-ordinating Society.
The company's pension plan asset composition at December 31 is as
follows:
---------------------------------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------------------------------
Equity securities 60% 62%
Debt securities 37% 33%
Other 3% 5%
---------------------------------------------------------------------------------------------------
Total 100% 100%
===================================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
12. DEBENTURES EXCHANGEABLE FOR INCO COMMON SHARES
---------------------------------------------------------------------
($ in millions) 2004 2003
---------------------------------------------------------------------
Exchangeable debentures due 2021 at quoted market value $240 $285
Deferred gain (loss) 8 (37)
---------------------------------------------------------------------
$248 $248
=====================================================================
In September 1996, the company issued $248 million of 3% exchangeable
debentures due September 30, 2021. Each $1,000 principal amount of
the exchangeable debentures is exchangeable at the option of the
holder for 20.7254 common shares of Inco Limited (subject to
adjustment if certain events occur), without payment of accrued
interest. The company may satisfy the exchange obligation by a cash
payment determined with reference to the market value of the common
shares at the time of the exchange.
The exchangeable debentures are redeemable at the option of the
company on or after September 12, 2006. Redemption may be satisfied
by delivery of the Inco common shares owned by the company, or
payment of a cash amount equal to the market value of the Inco common
shares at the time of redemption.
The Inco common shares (note 5) held by the company have been pledged
as security for the exchangeable debentures and the company has
designated the exchangeable debentures as a hedge against these Inco
common shares. The Inco exchangeable debenture is accounted for as a
cash flow hedge of the anticipated disposition of the Inco shares
held by the company. The deferred gain or loss on the exchangeable
debenture will be recognized against the corresponding gain or loss
on disposition of the Inco common shares.
13. SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------
($ in millions) 2004 2003
---------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
(in 000's) (in 000's)
---------------------------------------------------------------------------------------------------------
As restated
(Note 3)
Capital stock
Class A common shares 4,674 $ 7 4,682 $ 7
Class B Subordinate Voting Shares (b) 196,682 2,117 181,810 1,804
---------------------------------------------------------------------------------------------------------
2,124 1,811
Exchangeable debentures due 2024 (c) 107 107
Contributed surplus (i) 58 57
Cumulative translation adjustment (h) (117) (43)
Retained earnings 1,049 495
---------------------------------------------------------------------------------------------------------
$ 3,221 $ 2,427
=========================================================================================================
(a) Authorized share capital
The company's authorized share capital consists of an unlimited
number of Class A common shares (Class A shares) without par value,
an unlimited number of Class B Subordinate Voting Shares without par
value and an unlimited number of preferred shares without par value
issuable in series.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY, continued
The Class A shares carry the right to 100 votes per share and the
Class B Subordinate Voting Shares carry the right to one vote per
share. Each Class A share is convertible, at the option of the
holder, into one Class B Subordinate Voting Share. In all other
respects the Class A and Class B Subordinate Voting Shares rank
equally. Subject to certain exceptions, if a take-over bid is made in
respect of the Class A shares and is not made concurrently with an
offer to purchase Class B Subordinate Voting Shares on identical
terms, each outstanding Class B Subordinate Voting Share will be
convertible into a Class A share, if the take-over bid is accepted by
holders of a majority of the Class A shares.
(b) Class B Subordinate Voting Shares
----------------------------------------------------------------------------------------------------------
Shares Issued Amount
($ in millions) (in 000's)
----------------------------------------------------------------------------------------------------------
At December 31, 2001 179,796 $1,779
Options exercised 59 --
----------------------------------------------------------------------------------------------------------
At December 31, 2002 179,855 1,779
Options exercised (e) 1,943 24
Transferred from contributed surplus on exercise of options (i) -- 1
Issued to holders of shares of predecessor
companies merged with the company 12 --
----------------------------------------------------------------------------------------------------------
At December 31, 2003 181,810 1,804
Options exercised (e) 2,609 36
Transferred from contributed surplus on exercise of options (i) -- 2
Issued for convertible subordinated debentures (Note 8(b)) 7,275 185
Exercise of warrants (g) 4,980 90
Conversion of Class A shares to
Class B Subordinate Voting Shares 8 --
----------------------------------------------------------------------------------------------------------
At December 31, 2004 196,682 $2,117
==========================================================================================================
At December 31, 2004 there were 378,022 Class B Subordinate Voting
Shares (2003 - 378,878 shares) reserved for issuance to the former
shareholders of predecessor companies that merged with the company in
prior years.
(c) Exchangeable debentures due 2024
In April 1999 the company issued $150 million of 25-year debentures
with each $1,000 debenture exchangeable, at a reference price of
$23.50 per share, into 42.5532 shares of Cominco Ltd. At the time of
the merger with Cominco Ltd. in 2001, holders of these debentures
were paid $6 in respect of each underlying Cominco share as a partial
repayment. The face value of each $1,000 debenture was reduced to
$745 and each debenture became convertible into 76.596 Class B
Subordinate Voting Shares for a total, if exchanged, of 11,489,000
Class B Subordinate Voting Shares. Interest is at 2% above the
company's dividend yield using a share price of $9.72. In 2004 and
2003, the effective interest rate so determined was 4.40% and 4.06%
respectively.
The debentures are exchangeable by the holder or redeemable by the
company at any time. If redeemed by the company, the company will pay
a premium over the market value of the underlying Class B Subordinate
Voting Share which was $37 per $1,000 principal amount at December
31, 2004, $19 from May 1, 2005 and declining to nil after April 30,
2006.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY, continued
By virtue of the company's option to deliver a fixed number of Class
B Subordinate Voting Shares to satisfy the principal payments, the
debentures net of issue costs and taxes are classified as a component
of shareholders' equity. The interest, net of taxes, is charged
directly to retained earnings.
(d) Preference shares
In November 2003, the Articles of the company were amended and the
company issued 790,000 Series 1 and 550,000 Series 2 preference
shares to replace certain preference shares of its wholly-owned
subsidiary, TCML (formerly Cominco Ltd.). These shares entitle the
holders to receive dividends and redemptions based upon a rate of
return index governed by world prices for lead and silver. The rate
of return index to date has been insufficient to trigger any dividend
or redemption. Based on foreseeable metal prices these shares are
expected to expire in March 2006 without any dividends or
redemptions. Accordingly, the company has assigned no value to these
shares.
(e) Share options
In the year ended December 31, 2004, the company granted 836,000
Class B Subordinate Voting Share options at market price to employees
and an executive director. These share options have an exercise price
of $25.09, a vesting period of three years and expire in 2010.
The company recorded a stock-based compensation expense of $4 million
(2003 - $3 million, 2002 - $5 million) relating to share options.
The weighted average fair value of Class B Subordinate Voting Share
options was estimated as $9.74 per share option (2003 - $2.52) at the
grant date based on the Black-Scholes option-pricing model using the
following assumptions:
Valuation assumptions:
---------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------
Dividend yield 0.80% 1.77% 1.50%
Risk free interest rate 3.50% 4.50% 4.42%
Expected life 4.5 years 3.5 years 3.7 years
Expected volatility 36% 25% 25%
Outstanding share options:
=====================================================================
2004 2003
-----------------------------------------------------------
Shares Weighted Shares Weighted
(in 000's) Average (in 000's) Average
Exercise Price Exercise Price
------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 6,228 $13.22 8,258 $14.51
Granted under plan 836 25.09 1,301 11.70
Exercised (2,609) 13.76 (1,943) 12.26
SARs exercised (6) 13.83 (215) 13.83
Expired (23) 22.36 (1,172) 22.08
Forfeited -- -- (1) 15.46
------------------------------------------------------------------------------------------------------
Outstanding at end of year 4,426 $15.09 6,228 $13.22
======================================================================================================
Vested and exercisable at end of year 3,822 $13.51 6,228 $13.22
======================================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY, continued
Information relating to share options outstanding at December 31,
2004:
---------------------------------------------------------------------------------------------------------
Outstanding Vested Price Range Weighted Average Weighted Average
Share Options Share Options Exercise Price on Remaining Life on
(in 000's) (in 000's) Outstanding Options Outstanding Options
(months)
---------------------------------------------------------------------------------------------------------
52 52 $ 6.39 - $10.16 $ 7.27 53
1,074 1,074 $10.17 - $11.76 $10.76 54
843 843 $12.00 - $12.85 $12.09 40
1,464 1,464 $13.04 - $16.59 $14.32 35
993 389 $17.84 - $25.09 $23.85 58
---------------------------------------------------------------------------------------------------------
4,426 3,822 $ 6.39 - $25.09 $15.09 46
=========================================================================================================
(f) Deferred Share Units and Restricted Share Units
In April 2004, the company approved a new stock-based compensation
plan for directors and the six most senior officers of the company.
Under the plan, directors and senior officers may receive either
Deferred Share Units (DSU's) or Restricted Share Units (RSU's), each
of which entitle the holder to a cash payment equal to the market
value of a Class B Subordinate Voting Share of the company at the
time they are redeemed. In the case of directors, these units vest
immediately. The units granted to officers vest after three years,
except in circumstances related to termination without cause or
retirement. DSU's may only be redeemed at the time a holder ceases to
be an officer or director while RSU's must be redeemed prior to the
end of a three-year period measured from the end of the year
immediately preceding the grant.
Accounting standards for stock-based compensation require the company
to record, over the vesting period, an expense equal to the fair
value of the units at the date of the grant. In addition, as these
units represent a cash liability to the company, the expense is
adjusted throughout the life of the unit to reflect the changing
value of the liability resulting from market fluctuations in the
value of the underlying Class B Subordinate Voting Shares.
In April 2004, the company issued 39,000 DSU's and 22,500 RSU's to
directors and 55,500 DSU's to officers. As a result, the company
recorded an expense of $3 million in the year in respect of the
initial grant and subsequent appreciation of the units.
(g) Warrants
In May 2004, the company received $90 million for the exercise of the
4,980,000 remaining warrants to purchase Class B Subordinate Voting
Shares at a price of $18 per share. The warrants were issued in 1999.
(h) Cumulative Translation Adjustment
The cumulative translation adjustment represents the net unrealized
foreign exchange gains or losses on translation of the accounts of
self-sustaining foreign subsidiaries, net of foreign exchange losses
on the portion of US dollar denominated debt designated as hedges
against these investments.
------------------------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
------------------------------------------------------------------------------------------------
Cumulative translation adjustment - beginning of year $ (43) $ 105 $ 115
Exchange differences on investments in foreign subsidiaries (134) (338) (16)
Exchange differences on debt designated as a hedge of
self-sustaining foreign subsidiaries 34 190 6
Exchange loss realized on disposition of Cajamarquilla (Note 4(b)) 26 -- --
------------------------------------------------------------------------------------------------
Cumulative translation adjustment - end of year $ (117) $ (43) $ 105
================================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY, continued
(i) Contributed surplus
----------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
----------------------------------------------------------------------------------
As restated As restated
(Note 3) (Note 3)
Beginning of year $ 57 $ 55 $ 50
Stock-based compensation expense (e) 4 3 5
Transfer to Class B Subordinate Voting Shares
on exercise of share options (b) (2) (1) --
Redemption of convertible debt (Note 8(b)) (1) -- --
----------------------------------------------------------------------------------
End of year $ 58 $ 57 $ 55
==================================================================================
(j) Earnings per share
The following table reconciles the basic and diluted earnings per
share of the company:
--------------------------------------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
--------------------------------------------------------------------------------------------------------------
Basic earnings
Earnings from continuing operations $ 594 $ 125 $ 10
Less interest on exchangeable debentures (3) (3) (3)
--------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 591 122 7
Earnings from discontinued operation 23 9 3
--------------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders 614 131 10
Diluted earnings
Earnings from continuing operations 594 125 10
Earnings from discontinued operation 23 9 3
--------------------------------------------------------------------------------------------------------------
Net diluted earnings available to common shareholders $ 617 $ 134 $ 13
Weighted average number of common shares outstanding (000's)
192,993 184,823 184,526
Effect of dilutive securities:
Incremental shares from stock options 1,830 468 454
Shares issuable on conversion of exchangeable debentures 11,489 11,489 --
--------------------------------------------------------------------------------------------------------------
Weighted average number of diluted common shares outstanding (000's) 206,312 196,780 184,980
--------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 3.18 $ 0.71 $ 0.06
Basic earnings per share from continuing operations $ 3.06 $ 0.66 $ 0.04
Diluted earnings per share $ 2.99 $ 0.68 $ 0.06
Diluted earnings per share from continuing operations $ 2.88 $ 0.64 $ 0.04
In 2003 and 2002, convertible debentures and warrants were
outstanding and convertible into Class B Subordinate Voting Shares
but were not dilutive.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
14. OTHER INCOME (EXPENSE)
-------------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
-------------------------------------------------------------------------------------
As restated As restated
(Note 3) (Note 3)
Income from Fording Canadian Coal Trust $ 13 $ 10 $ --
Gain on sale of investments and assets 25 22 16
Interest and investment income 10 5 19
Insurance proceeds 12 20 --
Additional Quebrada Blanca sales proceeds 12 -- --
Asset retirement expense for closed properties (26) (24) (4)
Minority interests (9) -- 1
Reduction in carrying value of investments (6) -- (22)
Miscellaneous expense (7) (32) (7)
-------------------------------------------------------------------------------------
$ 24 $ 1 $ 3
=====================================================================================
15. INCOME AND RESOURCE TAXES
(a) Income and resource tax expense (recovery)
--------------------------------------------------------------------
($ in millions) 2004 2003 2002
--------------------------------------------------------------------
As restated As restated
(Note 3) (Note 3)
Current
Income tax $ 26 $21 $ 14
Resource tax 76 20 14
Large Corporation tax 4 3 3
--------------------------------------------------------------------
106 44 31
Future
Income tax 205 2 (1)
Resource tax (6) 4 (34)
--------------------------------------------------------------------
199 6 (35)
--------------------------------------------------------------------
$ 305 $50 $ (4)
====================================================================
(b) Reconciliation of income and resource taxes calculated at the
statutory rates to the actual tax provision
-----------------------------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
-----------------------------------------------------------------------------------------------------
As restated As restated
(Note 3) (Note 3)
Tax expense at the statutory income tax rate of 35.5%
(2003 - 37.6%; 2002 - 39.6%) $319 $ 62 $ (4)
Tax effect of
Resource taxes, net of resource and depletion allowances 31 12 4
Difference in tax rates in foreign jurisdictions (12) (21) (17)
Benefit of tax losses not previously recognized (31) -- 20
Reduction in statutory rates and changes in tax legislation (3) (5) --
Large Corporation tax 4 3 3
Benefit of capital gains rate difference and other (3) (1) (10)
-----------------------------------------------------------------------------------------------------
$305 $ 50 $ (4)
=====================================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
15. INCOME AND RESOURCE TAXES, continued
(c) Temporary differences giving rise to future income tax assets and
liabilities
==================================================================
($ in millions) 2004 2003
------------------------------------------------------------------
As restated
(Note 3)
Future income tax asset
Research and development tax credits $ 38 $ 47
Net operating loss carry-forwards 246 313
Property, plant and equipment (88) (89)
Other 50 3
Valuation allowance (94) (144)
------------------------------------------------------------------
152 130
Less current portion (15) --
------------------------------------------------------------------
$ 137 $ 130
==================================================================
Future income tax liability
Property, plant and equipment $ 571 $ 507
Net operating loss carry-forwards (6) (29)
Timing of partnership items 273 101
Other 57 66
------------------------------------------------------------------
$ 895 $ 645
==================================================================
For income tax purposes, the company has regular tax net operating
loss carry-forwards of $337 million and alternative minimum tax net
operating loss carry-forwards of $217 million, which expire in the
years 2005 through 2021. The company also has $22 million of capital
loss carry-forwards, which have no expiry. Also available to offset
future taxes are $39 million of investment tax credits, which expire
in various years through 2014.
(d) The company has non-resident subsidiaries that have undistributed
earnings. Provisions have not been recorded for taxes that may arise
on repatriation of these earnings as these undistributed earnings
are not expected to be repatriated in the foreseeable future.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
16. PARTNERSHIPS AND JOINT VENTURES
The principal operations of the company which are accounted for as
partnerships and joint ventures are the Elk Valley Coal Partnership
and the Antamina, Louvicourt and Hemlo mines. Prior to the
acquisition of a further 33.6% interest in February 28, 2004, the
Highland Valley Copper mine was also accounted for as a joint
venture. Antamina was accounted for as a joint venture subsequent to
the third quarter of 2003. The company's share of the assets and
liabilities, revenues and expenses and cash flows of these operations
is as follows:
---------------------------------------------------------------------------------------------
($ in millions) 2004 2003 2002
---------------------------------------------------------------------------------------------
As restated As restated
(Note3) (Note 3)
Assets
Cash $ 137 $ 77 $ (3)
Other current assets 204 198 117
Mineral properties, plant and equipment 952 1,197 297
---------------------------------------------------------------------------------------------
$ 1,293 $ 1,472 $ 411
=============================================================================================
Liabilities and Equity
Current liabilities $ 141 $ 80 $ 53
Long-term liabilities 447 557 120
Equity 705 835 238
---------------------------------------------------------------------------------------------
$ 1,293 $ 1,472 $ 411
=============================================================================================
Earnings
Revenues $ 1,223 $ 1,019 $ 485
Expenses 920 834 442
---------------------------------------------------------------------------------------------
Net earnings $ 303 $ 185 $ 43
=============================================================================================
Cash flow
Operating activities $ 488 $ 325 $ 102
Financing activities (61) (30) (5)
Investing activities (77) (50) (17)
Distributions (266) (204) (88)
Cash recognized on consolidation of Antamina -- 41 --
Effect of exchange rates on cash (6) (2) --
---------------------------------------------------------------------------------------------
Increase (decrease) in cash $ 78 $ 80 $ (8)
=============================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
17. SUPPLEMENTARY CASH FLOW INFORMATION
=================================================================================================
($ in millions) 2004 2003 2002
-------------------------------------------------------------------------------------------------
As restated As restated
(Note 3) (Note 3)
(a) Changes to non-cash working capital items:
Accounts and settlements receivable $ (58) $ (76) $(15)
Production inventories (29) 101 47
Supplies and prepaid expenses 5 1 27
Accounts payable and accrued liabilities 55 1 (34)
-------------------------------------------------------------------------------------------------
$ (27) $ 27 $ 25
=================================================================================================
(b) Other information:
Interest paid $ 50 $ 57 $ 55
Income and resource taxes paid $ 79 $ 14 $ 15
(c) Non-cash investing and financing transaction:
Value ascribed to shares issued on conversion
Of debt (Note 8(b)) $ 185 $ -- $ --
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
18 COMMITMENTS AND CONTINGENCIES
(a) Derivatives and financial instruments
The company's derivative positions accounted for as cash flow hedges, fair
value hedges and non-hedge derivatives at December 31, 2004 were as
follows:
-----------------------------------------------------------------------------------------------------------
2008- Unrealized
2005 2006 2007 2010 Total Gain (Loss)
--------------------------------------------------------------------
Cash flow hedges (Cdn$ millions)
Gold (000's ozs)
Forward sales contracts -- -- 44 87 131
Average price (US$/oz) -- -- 350 350 350 $ (19)
Forward sales contracts 55 32 8 -- 95
Average price (C$/oz) 528 519 520 -- 524 (1)
US dollars (millions) (Note b)
Forward sales contracts 312 158 -- -- 470
Average exchange rate 1.43 1.44 -- -- 1.44 109
US dollars (millions)
Forward collars 18 -- -- -- 18
Average upper limit 1.63 -- -- -- 1.63
Average lower limit 1.59 -- -- -- 1.59 7
Power (MW.h)
Forward sales contracts 183,200 -- -- -- 183,200
Average price (US$/MW.h) 53 -- -- -- 53 --
-----------------------------------------------------------------------------------------------------------
$ 96
===========================================================================================================
Non-hedge derivatives
Copper (million lbs) (Note c)
Forward collars 79 -- -- -- 79
Average upper limit (US$/lb) 1.30 -- -- -- 1.30
Average lower limit (US$/lb) 1.15 -- -- -- 1.15 (9)
-----------------------------------------------------------------------------------------------------------
$ (9)
===========================================================================================================
Fair value hedge
Interest Rate Swap
Principal Amount Rate Swapped Rate Obtained Maturity Date Unrealized Gain
(Cdn$ millions)
-----------------------------------------------------------------------------------------------------------
US$100 7.00% LIBOR plus 2.14% September 2012 $ 3
-----------------------------------------------------------------------------------------------------------
$ 3
===========================================================================================================
Notes:
(a) In addition to the above hedging commitments, the company has
forward purchase commitments on 75 million pounds of zinc averaging
US$0.46 per pound maturing in 2005 to 2006 and 9 million pounds of
lead averaging US$0.33 per pound maturing 2005 to match fixed price
sales commitments to customers. A portion of these forward positions
do not qualify for hedge accounting and accordingly the company has
recognized a $4 million mark to market gain before taxes as a
result.
(b) Included in the US dollar forward sales contract of $470 million is
the company's share of forward sales contracts by the Elk Valley
Coal Partnership of US$171 million.
(c) The company is unable to apply hedge accounting to the copper
forward sales contracts and accordingly has recognized an unrealized
loss of $9 million before taxes.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
18. COMMITMENTS AND CONTINGENCIES, continued
(b) Legal proceedings and contingencies
Lake Roosevelt
On November 11, 2004, the District Court for Eastern Washington
State denied a motion by Teck Cominco Metals Ltd. (TCML) to dismiss,
for want of jurisdiction, a citizen's suit brought by two members of
the Colville Confederated Tribes supported by the State of
Washington. TCML has petitioned for appeal of the decision to the
9th Circuit Court of Appeal.
The Colville suit was brought pursuant to Section 310(a)(i) of the
US Superfund Statute (CERCLA) to enforce a universal administrative
order issued by the US Environmental Protection Agency (EPA)
purporting to require TCML to conduct a remedial investigation and
feasibility study with respect to metal contamination in the
sediments of the Upper Columbia River and Lake Roosevelt. The EPA
issued the order shortly after breaking off negotiations with the
company during which TCML offered to fund human health and
ecological studies, at an estimated cost of US$13 million, to
address the possible impact of historical discharges from the Trail
Metallurgical Operations in British Columbia. Both the Government of
Canada and the company have the view that the EPA does not have
jurisdiction to apply U.S. law in Canada.
The Government of Canada and the Government of the US are continuing
to pursue a bilateral agreement to facilitate the studies and
appropriate remediation to address environmental concerns about the
area. Such an agreement could provide a basis under which TCML's
offer of funding for this work could be implemented.
There can be no assurance that the offer to fund the studies will
resolve the matter, or that TCML or its affiliates will not be faced
with liability in relation to this matter. Until studies of the kind
described above are completed, it is not possible to estimate the
extent and cost, if any, of remediation that may be required.
Competition Investigation
Teck Cominco Metals Ltd., as the marketing agent for Highland Valley
Copper Partnership (HVC), has responded to an Order issued pursuant
to the Competition Act to produce documents relevant to the
marketing of custom copper concentrates. The company understands
that this is part of an ongoing industry-wide investigation
involving major copper concentrate producers commenced in Canada,
the US and Europe to determine whether there is evidence of a cartel
agreement and related illegal practices concerning pricing, customer
allocation and market sharing in the copper concentrate sector.
The company has been advised by the United States Department of
Justice that it intends to close its investigation. There can be no
assurance that the investigation will not result in further
regulatory action against the company or HVC in Canada or elsewhere
or that HVC or the company will not face prosecution or liability
under the Act otherwise in relation to the investigation. The
company can also offer no guidance or assurance as to the course of
the ongoing investigation or when the ongoing investigation will be
completed. The company is cooperating in the continuing
investigation.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
18.COMMITMENTS AND CONTINGENCIES, continued
Tax recovery
The company has appealed the assessment of mining taxes by the
Province of Ontario on gold hedging gains at the Williams mine. In a
similar case, the Supreme Court of Ontario has recently ruled that
gold hedging gains are exempt from Ontario mining taxes. The
Province of Ontario has sought leave to appeal this ruling to the
Supreme Court of Canada. The company is currently assessing the
effect of this court ruling and has not recorded any recovery of the
disputed amounts pending possible appeal and the results of
discussions with the Province of Ontario. The amount of mining taxes
and interest which may be recovered is approximately $16 million.
Pension Lawsuit
In May 2004, the Supreme Court of Canada denied the application of a
pensioner group for leave to appeal a decision of the British
Columbia Court of Appeal affirming a decision of the B.C. Supreme
Court in favour of the former Cominco Ltd. (now TCML). The case
involved the transfer of funds from one of the company's pension
plans to a successor plan when the two plans were merged in the
1980's.
(c) Commitments and guarantees
Red Dog Commitments
Teck Cominco Alaska Inc. (TCAK), a subsidiary company, has a royalty
agreement with NANA Regional Corporation (NANA) on whose land the
Red Dog mine is situated. Under the terms of the agreement, NANA
receives an annual net smelter return royalty equal to the greater
of 4.5% of Red Dog's net smelter return or US$1 million. After TCAK
recovers certain capital expenditures including an interest factor
and all advance royalties, the royalty will be 25% of net proceeds
of production from the Red Dog mine increasing in 5% increments
every fifth year to a maximum of 50%.
TCAK leases road and port facilities from the Alaska Industrial
Development and Export Authority through which it ships all ore
concentrate produced at the Red Dog mine. The lease requires TCAK to
pay a minimum annual user fee of US$18 million, with fee escalation
provisions based on zinc price and annual tonnage.
TCAK has also entered into agreements for the transportation and
handling of concentrates from the millsite. These agreements have
varying terms expiring at various dates through 2010 and include
provisions for extensions. There are minimum tonnage requirements
and the annual fees amount to approximately US$9 million, with
adjustment provisions based on variable cost factors.
Antamina Royalty
On the acquisition of the company's interest in the Antamina mine,
the company granted the vendor a net profits royalty equivalent to
7.4% of the company's share of the project's free cash flow after
recovery of capital costs and an interest factor on approximately
60% of project costs.
Elk Valley Coal Partnership Guarantee
The Elk Valley Coal Partnership has provided an unsecured guarantee,
limited in recourse against the company to the assets of Elk Valley
Coal and the interest of the company therein, with respect to up to
$420 million of borrowings by Fording incurred principally in
connection with the financing of the transaction pursuant to which
the company acquired its interest in Elk Valley Coal.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
18. COMMITMENTS AND CONTINGENCIES, continued
Operating Leases
Amounts payable under operating leases are estimated to be $63
million, with annual payments of $19 million in 2005, $14 million in
2006, $11 million in 2007, $10 million in 2008, $8 million in 2009
and $1 million thereafter. The leases are primarily for office
premises, equipment and rail cars.
Forward Purchase Commitments
The company has a number of forward purchase commitments for the
purchase of concentrates and power, and for shipping and
distribution of its products which are incurred in the normal course
of business. The majority of these contracts are subject to force
majeure provisions.
Environmental Protection
The company's operations are affected by federal, provincial, state
and local laws and regulations concerning environmental protection.
The company's provisions for future reclamation and site restoration
are based on known requirements. It is not possible to estimate the
impact on operating results, if any, of future legislative or
regulatory developments.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts and settlements receivable,
long-term receivables and deposits, other investments, accounts payable,
long-term debt and other liabilities represent their fair value unless
otherwise disclosed. The carrying amounts and the quoted market values of
the company's investments are disclosed in note 5, and the debentures
exchangeable for Inco common shares are disclosed in note 12. The market
values for derivative and financial instruments are disclosed in note
18(a). The fair value estimates for the 6.875% debenture, the 7% debenture
and the convertible debentures are based on market prices.
The carrying amounts and estimated fair values of the company's other
financial instruments at December 31, are summarized as follows:
-----------------------------------------------------------------------------------------------------------
2004 2003
------------------------ ----------------------------
Carrying Estimated Carrying Estimated
($ in millions) Amount Fair Value Amount Fair Value
-----------------------------------------------------------------------------------------------------------
6.875% debentures due February 2006 $ 181 $ 186 $ 194 $ 207
7% debentures due September 2012 238 265 255 280
Antamina senior debt 245 245 323 323
Convertible debentures -- -- 202 209
Cajamarquilla debt -- -- 78 78
-----------------------------------------------------------------------------------------------------------
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
20. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
The effect of the material measurement differences between generally
accepted accounting principles (GAAP) in Canada and the United States on
the company's net earnings and shareholders' equity is summarized as
follows:
--------------------------------------------------------------------------------------------------------
($ in millions, except per share data) 2004 2003 2002
--------------------------------------------------------------------------------------------------------
Net earnings under Canadian GAAP $ 617 $ 134 $ 13
Add (deduct)
Inventory valuation (a) -- 17 (12)
Exchangeable debentures due 2024 and convertible debentures (b) (6) (3) (3)
Unrealized holding gains (losses) on investments (d) (51) 94 33
Share of earnings (losses) in Antamina and FCCT (c) (3) 12 1
Deferred start-up costs (e) (4) 3 3
Stock-based compensation expense (i) -- -- 8
Derivative instruments (g) 77 46 (1)
Asset retirement obligations (h) (4) (4) 20
Capitalized interest (l) 2 -- --
Tax effect of adjustments (16) (75) (17)
--------------------------------------------------------------------------------------------------------
Net earnings before changes in accounting principle 612 224 45
Asset retirement obligation - cumulative adjustment (h) -- (58) --
Underground development amortization (k) (7) -- --
Tax effect of adjustments 3 21 --
--------------------------------------------------------------------------------------------------------
Net earnings under US GAAP before comprehensive income
adjustments 608 187 45
Unrealized holding gains (losses) on investments (d) (4) 36 (32)
Cumulative translation adjustment (f) (79) (148) (10)
Derivative instruments (g) (33) 31 --
Minimum pension liability (j) 52 47 (60)
Tax effect of adjustments (1) (22) 40
--------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 543 $ 131 $ (17)
========================================================================================================
Earnings per share, before changes in accounting principle
and comprehensive income adjustments
Basic $ 3.17 $ 1.19 $ 0.24
Diluted $ 2.96 $ 1.12 $ 0.22
Shareholders' equity under Canadian GAAP $ 3,221 $ 2,427 $ 2,454
Cumulative adjustments to shareholders' equity
Inventory valuation (a) -- -- (17)
Underground development amortization (k) -- 7 7
Exchangeable debentures due 2024 and convertible debentures (b) (107) (113) (115)
Share of losses in Antamina and FCCT (c) (7) (4) (16)
Unrealized holding gains (losses) on investments (d) (2) 53 (77)
Deferred start-up costs (e) (14) (10) (13)
Derivative instruments (g) 189 145 68
Asset retirement obligations (h) 40 44 106
Minimum pension liability (j) (28) (80) (127)
Capitalized interest (l) 2 -- --
Tax effect of adjustments (51) (37) 38
--------------------------------------------------------------------------------------------------------
Shareholders' equity under US GAAP $ 3,243 $ 2,432 $ 2,308
========================================================================================================
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
20. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(a) Coal Inventory Valuation at Bullmoose Mine
Under Canadian GAAP, production inventories may be recorded at net
realizable value as there were long-term contracts for sale. US GAAP
requires such inventory to be valued at the lower cost and market.
The Bullmoose mine was closed during 2003.
(b) Exchangeable Debentures due 2024 and Convertible Debentures
Under Canadian GAAP a portion of the convertible debentures which
were settled in full during 2004 was classified as equity. The
difference between the carrying amount of the debentures and the
contractual liability was amortized to earnings. Similarly, the
exchangeable debentures due 2024 have been classified as equity with
related interest being charged directly to retained earnings. Under
US GAAP both debentures would be classified as liabilities and
interest would be charged against current period earnings.
(c) Share of Earnings (Losses) in Antamina and Fording Canadian Coal
Trust (FCCT)
Adjustments in respect of the company's share of earnings in
Antamina and FCCT arise due to various differences between US and
Canadian GAAP. Prior to June 30, 2003, the company equity-accounted
its interest in Antamina. The company began to proportionately
consolidate its investment in Antamina on July 1, 2003. As a result,
the company's share of US GAAP reconciling items for Antamina are
separately included in the related adjustments beginning July 1,
2003.
(d) Unrealized Holding Gains (Losses) on Investments
For US GAAP purposes, certain of the company's marketable securities
are considered to be either available-for-sale securities or trading
securities. Available-for-sale securities are carried at market
value with unrealized gains or losses included in comprehensive
income until realized or an other than temporary decline occurs. The
company's trading securities are carried at market value with
unrealized gains or losses included in net earnings.
(e) Deferred Start-Up Costs
Under Canadian GAAP, certain mine start-up costs are deferred until
the mine reaches commercial levels of production and are amortized
over the life of the project. Under US GAAP, these costs are
expensed as incurred.
(f) Comprehensive Income
Under US GAAP, comprehensive income is recognized and measured in
accordance with FASB Statement No. 130 (SFAS 130) "Reporting
Comprehensive Income". Comprehensive income includes all changes in
equity other than those resulting from investments by owners and
distributions to owners. Comprehensive income includes two
components, net income and other comprehensive income (OCI). OCI
includes amounts that are recorded as an element of shareholders'
equity but are excluded from net income as these transactions or
events were attributable to changes from non-owner sources. These
items include minimum pension liability adjustments, holding gains
and losses on certain investments, gains and losses on certain
derivative instruments and foreign currency gains and losses related
to self-sustaining foreign operations. Comprehensive income and OCI
are currently not a component of Canadian GAAP.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
20. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(g) Derivative Instruments
Effective January 1, 2004, the company adopted Accounting
Guideline-13, "Hedging Relationships" for Canadian GAAP and
designated substantially all derivative positions as hedges (Note
18).
For US GAAP purposes, the company adopted the provisions of FASB
Statement No. 133 (SFAS 133), "Accounting for Derivative Instrument
and Hedging Activities", effective January 1, 2001. SFAS 133
requires that all derivatives be recorded on the balance sheet as
either assets or liabilities at their fair value. The accounting for
changes in the fair value of derivatives depends on whether it has
been designated and qualifies as part of a hedging relationship.
For fair value hedges, the effective portion of the changes in fair
value of the derivatives is offset by changes in the fair value of
the hedged item. For cash flow hedges the effective portion of the
changes in fair value are accumulated in OCI and released into
income when the hedged item affects net earnings.
Under US GAAP, the company's Inco exchangeable debenture includes an
embedded derivative which must be separately recorded on the balance
sheet at fair value. Changes in the fair value of the embedded
derivative are included in net earnings.
In 2004 and 2003, certain instruments entered into by the Elk Valley
Coal Partnership were designated as cash flow hedges. For US GAAP
purposes, the company did not designate any other derivatives as
hedges under SFAS 133 in the periods presented.
(h) Asset Retirement Obligations
For US GAAP purposes the company adopted FASB Statement No. 143,
"Accounting for Asset Retirement Obligations", effective January 1,
2003. The company adopted the provisions of CICA 3110, "Asset
Retirement Obligations", for Canadian GAAP purposes effective
January 1, 2004, and retroactively restated the Canadian GAAP
results to account for this policy change.
The Canadian and US standards for Asset Retirement Obligations are
substantially the same; however due to the difference in adoption
dates, different assumptions were used. This resulted in differences
in the asset and liability balances on adoption and will result in
different amortization and accretion charges over time.
(i) Stock-based Compensation
For US GAAP purposes, the company adopted FASB Statement No. 123
(SFAS 123), "Accounting for Stock-based Compensation" and FASB
Statement No. 148 (SFAS 148), "Accounting for Stock-based
Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123", effective January 1, 2004. SFAS 123 requires the
use of the fair value method of accounting for stock-based
compensation. The company utilized the provisions of SFAS 148 for
retroactive statement of net income and earnings per share for all
periods presented. These standards are consistent with the revised
provisions of CICA 3870, adopted for Canadian GAAP effective January
1, 2004 (Note 3). As the company adopted with retroactive
restatement of prior periods, there will no longer be a Canadian to
US GAAP difference.
(j) Additional Minimum Pension Liability
For US GAAP purposes, the company is required to recognize an
additional minimum pension liability in the amount of the excess of
the company's unfunded accrued benefit obligation over the fair
value of the plan assets. An intangible asset is recorded equal to
any unrecognized past service costs. Changes in the additional
minimum pension liability and intangible asset are recorded in OCI.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
20. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(k) Underground Development Amortization
Under Canadian GAAP, the company retroactively adopted the block
method of underground amortization, effective January 1, 2004, which
resulted in a $4 million charge to opening retained earnings. US
GAAP requires that such a change be accounted for as a cumulative
adjustment through the current period income statement. Income under
US GAAP has been reduced by $4 million after-tax during 2004 and no
difference in ending shareholder's equity exists between US and
Canadian GAAP.
(l) Capitalized Interest
For US GAAP purposes, interest costs must be capitalized for all
assets that are under development. For Canadian GAAP, interest is
capitalized only on project specific debt.
(m) Variable Interest Entities
For US GAAP purposes, the company adopted Interpretation No. 46 (FIN
46R) "Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51" effective January 2004. FIN
46R establishes accounting guidance for consolidation of variable
interest entities. Adoption of this statement for US GAAP purposes
has not resulted in any effect to earnings or retained earnings. In
Canada, Accounting Guideline 15 "Consolidation of Variable Interest
Entities" will be adopted effective January 2005.
(n) Recent U.S. Accounting Pronouncements
In November 2004, FASB issued Statement No. 151 (SFAS 151) Inventory
Costs which clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material. This
statement requires that those items be recognized as current-period
charges and the allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the
production facility. This standard is effective for inventory costs
incurred during years beginning on or after June 15, 2005 and is not
expected to have a material impact on the company.
In December 2004, FASB issued Statement 123R (SFAS 123R) "Accounting
for Stock-based Compensation". As the company adopted SFAS 123R
during 2004, there is no material impact on the company.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
21. SEGMENTED INFORMATION
The company has six reportable segments: zinc smelters, zinc mines,
copper, gold, coal, and corporate and other. The corporate segment
includes the company's investment, exploration and development activities.
Sales between segments, initially recorded at arm's length prices, are
eliminated in the Inter-Segment column. Segments include operations based
upon the principal product produced.
---------------------------------------------------------------------------------------------------------------------
2004
-------------------------------------------------------------------------------------
Zinc Zinc Corporate Inter-
($ in millions) Smelters Mines Copper Gold Coal and Other Segment Total
---------------------------------------------------------------------------------------------------------------------
Revenues $ 1,006 $ 643 $ 1,100 $ 142 $ 645 $ 17 $ (125) $ 3,428
Operating profit 135 203 628 32 125 1 -- 1,124
Interest on long-term debt -- -- (15) -- -- (46) -- (61)
Depreciation and amortization (47) (68) (107) (22) (31) -- -- (275)
Property, plant and equipment 1,002 1,040 813 250 368 15 -- 3,488
Total assets 1,297 1,456 1,197 263 513 1,333 -- 6,059
Capital expenditures 24 37 17 82 53 3 -- 216
---------------------------------------------------------------------------------------------------------------------
2003
-------------------------------------------------------------------------------------
Zinc Zinc Corporate Inter-
($ in millions) Smelters Mines Copper Gold Coal and Other Segment Total
---------------------------------------------------------------------------------------------------------------------
Revenues $ 800 $ 430 $ 394 $ 143 $ 547 $ 13 $ (99) $ 2,228
Operating profit 24 42 83 30 91 4 (4) 270
Interest on long-term debt -- -- (9) -- -- (56) -- (65)
Depreciation and amortization (46) (66) (65) (19) (27) -- -- (223)
Equity earnings -- -- 10 -- -- -- -- 10
Property, plant and equipment 1,239 1,137 764 198 367 18 -- 3,723
Total assets 1,561 1,496 944 212 476 686 -- 5,375
Capital expenditures 39 52 22 23 19 3 -- 158
---------------------------------------------------------------------------------------------------------------------
2002
-------------------------------------------------------------------------------------
Zinc Zinc Corporate Inter-
($ in millions) Smelters Mines Copper Gold Coal and Other Segment Total
---------------------------------------------------------------------------------------------------------------------
Revenues $ 769 $ 462 $ 277 $ 133 $ 463 $ 13 $ (75) $ 2,042
Operating profit 19 (34) 32 20 112 4 2 155
Interest on long-term debt -- -- -- -- -- (60) -- (60)
Depreciation and amortization (42) (82) (50) (16) (16) -- -- (206)
Equity earnings -- -- 17 -- -- -- -- 17
Property, plant and equipment 1,299 1,248 583 198 159 14 -- 3,501
Total assets 1,606 1,722 667 213 258 600 -- 5,066
Capital expenditures 65 50 31 18 11 2 -- 177
Note:
(1) Included in Corporate and Other are undeveloped mineral properties and
investments.
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended Desember 31,2004, 2003 and 2002
- --------------------------------------------------------------------------------
21. SEGMENTED INFORMATION, continued
The geographic distribution of the company's property, plant and equipment
and external sales revenue is as follows, with revenue attributed to
regions based on the location of the customer:
-----------------------------------------------------------------------------------------------------------
Property, Plant & Equipment Revenues
($ in millions) 2004 2003 2004 2003 2002
-----------------------------------------------------------------------------------------------------------
Canada $ 1,732 $ 1,663 $ 583 $ 408 $ 333
United States 1,213 1,169 680 591 632
Latin America 532 850 156 66 38
Asia 11 41 1,321 795 666
Europe -- -- 688 368 373
-----------------------------------------------------------------------------------------------------------
$ 3,488 $ 3,723 $ 3,428 $ 2,228 $ 2,042
===========================================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS
This discussion and analysis of financial position and results of operations of
Teck Cominco Limited is prepared as at February 16, 2005, and should be read in
conjunction with the audited consolidated financial statements of Teck Cominco
Limited and the notes thereto for the year ended December 31, 2004. In this
discussion, unless the context otherwise dictates, a reference to Teck Cominco
or the company refers to Teck Cominco Limited and its subsidiaries including
Teck Cominco Metals Ltd. and a reference to Teck Cominco Metals or to Cominco
refers to Teck Cominco Metals Ltd. and its subsidiaries. Additional information
relating to the company, including the company's annual information form, is
available on SEDAR at www.sedar.com.
CAUTION ON FORWARD-LOOKING INFORMATION
This annual report contains certain forward-looking statements within the
meaning of the United States Private Securities Litigation Reform Act of 1995.
These forward-looking statements include estimates, forecasts, and statements as
to management's expectations with respect to, among other things, the size and
quality of the company's mineral reserves and mineral resources, future
production, capital and mine production costs, demand and market outlook for
commodities, and the financial results of the company. These forward-looking
statements involve numerous assumptions, risks and uncertainties and actual
results may vary.
Factors that may cause actual results to vary include, but are not limited to,
changes in commodity and power prices, changes in interest and currency exchange
rates, inaccurate geological and metallurgical assumptions (including changes
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, delays
in the receipt of government approvals, industrial disturbances or other job
action, and unanticipated events related to health, safety and environmental
matters), political risk, social unrest, and changes in general economic
conditions or conditions in the financial markets.
The company does not assume the obligation to revise or update these
forward-looking statements after the date of this document, or to revise them to
reflect the occurrence of future unanticipated events, except as may be required
under applicable securities laws.
MD&A Contents
- -------------------
14 Operations
23 Markets
26 Financials
OPERATIONS
Teck Cominco is a 38% owner (increasing to 40% by April 1, 2006) and the
managing partner of the Elk Valley Coal Partnership, formed in 2003, which
operates six metallurgical coal mines in Western Canada with annual coal
production expected to increase to 28 million tonnes in 2005.
In base metal mining, Teck Cominco owns and operates the Red Dog zinc mine under
an agreement with NANA Regional Corporation, an Alaskan native corporation, and
has a 97.5 % partnership interest in the Highland Valley Copper mine in British
Columbia and a 22.5% joint venture interest in the Antamina copper, zinc mine in
Peru. It also completed construction of the Pend Oreille zinc mine in Washington
State, with commercial production commenced in August 2004.
In gold, Teck Cominco holds a 50% joint venture interest in two mines in the
Hemlo camp in Ontario and is developing the Pogo deposit in Alaska in a joint
venture with the Sumitomo Group, with production start-up scheduled for the
first quarter of 2006.
In refining, the company operates the wholly-owned Trail metallurgical complex
in British Columbia, producing refined zinc, lead and a number of by-products.
The table below shows Teck Cominco's share of production of its principal
products for the last five years, and planned production for 2005.
Five-Year Production Record and 2005 Plan (Company's share)
- --------------------------------------------------------------------------------------------------
Units 2005
(000's) 2000 2001 2002 2003 2004 PLAN
- --------------------------------------------------------------------------------------------------
Smelter and Refineries
Zinc (Note 1) tonnes 394 290 362 412 413 295
Lead tonnes 91 55 81 88 84 95
Mine Operations (Note 2)
Metallurgical coal (Note 3) tonnes 4,926 6,671 6,889 8,662 10,644 12,000
Zinc tonnes 763 731 714 665 619 670
Lead tonnes 151 158 126 125 119 110
Copper tonnes 176 150 202 176 248 275
Molybdenum pounds 2,786 2,609 3,836 4,934 11,631 7,200
Gold ounces 503 553 285 281 261 250
Notes:
(1) The reduction in refined zinc production in the 2005 plan reflects the
sale of the Cajamarquilla zinc refinery in Peru at the end of 2004.
(2) Production and sales data for base metals refers to metals contained in
concentrate.
(3) Coal production represents a 43.4% (41% in 2003) effective interest
comprising Teck Cominco's 38% (35% from March 31, 2003 to March 31, 2004)
direct interest in the Elk Valley Coal Partnership plus its 5.4% indirect
interest (6% in 2003) through its investment in the Fording Canadian Coal
Trust.
COAL
Elk Valley Coal Partnership (43.4%)
Elk Valley Coal operates six metallurgical coal mines. Five of the mines are in
southeastern British Columbia, and one is in western Alberta. Elk Valley Coal is
the second largest seaborne exporter of metallurgical coal in the world, with
annual production capacity expected to reach 28 million tonnes in 2005.
The Elk Valley Coal Partnership was formed in March 2003, with Teck Cominco
initially owning 35% and Fording Canadian Coal Trust 65%. Under the terms of the
Partnership Agreement, Teck Cominco could increase its interest by up to 5% if
the Partnership achieved certain specified synergies by March 31, 2007.
Following the issue of the opinion of the independent expert engaged to assess
the synergies of Elk Valley Coal for the coal year ended March 31, 2004, the
company and Fording Canadian Coal Trust, which owns the balance of the
partnership interest, reached agreement in July 2004 on the synergies realized
and the resulting adjustments to partnership interests. Teck Cominco's 35%
interest was increased by 3% effective April 1, 2004, and will be increased by
an additional 1% on April 1, 2005 and on April 1, 2006, bringing Teck Cominco's
total direct interest in Elk Valley Coal to 40%. Including the company's holding
of 4.3 million units, or 8.8% interest in the Fording Canadian Coal Trust, the
company's direct and indirect interest in Elk Valley Coal was 43.4% effective
April 1, 2004.
The expectation of continued strong coal markets led to a decision in March to
proceed with development of the Cheviot Creek pit which is located about 20
kilometres south of the Cardinal River coal plant. The capital cost of the
project is estimated at $120 million. This entails building a 20 kilometre haul
road, developing the Cheviot Creek pit, refurbishing the coal plant, upgrading
and purchasing additional pit equipment. Clean coal production from Cheviot
Creek began in October 2004 and the planned 2.8 million tonnes per year rate is
expected to be achieved in the third quarter of 2005.
A number of environmental organizations have applied to the Federal Court
challenging certain federal authorizations that the project has received and
seeking a further environmental assessment of the project. The Federal Court is
expected to hear the applications in June 2005. In addition, an individual
appealed certain provincial approvals in connection with the project. The
Environmental Appeal Board heard the appeal in mid-January 2005 and the parties
are awaiting a decision.
Plant expansion commenced in the fourth quarter to expand the Fording River
operation from an annual rate of 9.5 to 10.5 million tonnes. This will require
new equipment and some de-bottlenecking in the coal plant. A new large electric
cable shovel, which was purchased earlier in the year to replace smaller
shovels, will ensure that excavator capacity is available for the increased
production rate. The mine is expected to reach the higher production rate during
the third quarter of 2005.
Production at the Elkview mine will be increased from the current 6.0 million
tonne level to 7.0 million tonnes by 2007. The expansion is supported by two of
the world's largest steel producers, Nippon Steel of Japan and POSCO of Korea.
Both steel producers propose to gradually increase their individual coal
purchases from Elk Valley Coal to an aggregate of 6.25 million tonnes per year
under a ten-year sales contract. Further, Nippon and POSCO would each pay US$25
million to acquire a 2.5% equity interest in the Elkview mine. The proceeds will
pay for the additional equipment required for the expansion.
Coal sales by Elk Valley Coal totalled 25 million tonnes in 2004. Teck Cominco's
share of the operating profit totalled $125 million compared with $73 million
from coal operations in 2003. The increase was due mainly to a higher realized
coal price, partially offset by the weaker U.S. dollar and higher transportation
costs, as well as the increased ownership interest in Elk Valley Coal commencing
April 1, 2004.
3
Substantially all of the hard coking coal sales for the 2005 coal year beginning
April 1, 2005 have been contracted at an average price of US$125 per tonne on an
FOB west coast port equivalent basis. The expansions noted above should see Elk
Valley Coal increase its annual production from the 2004 level of 25 million
tonnes to 28 million tonnes in 2005 and ultimately to 30 million tonnes by 2007.
The rail rates being charged by CP Rail for the coal being moved from the five
B.C. mines to west coast ports are the subject of various legal proceedings. The
parties are in discussions aimed at settling the dispute. Regardless of the
outcome rail rates are expected to increase in 2005.
Coal Operations, B.C. and Alberta, Canada
- -------------------------------------------------------------------------------
100% 2002 2003 2004
- -------------------------------------------------------------------------------
Coal production (000's tonnes)
Elk Valley Coal (Note) -- 18,406 24,889
Elkview 5,547 824 --
Bullmoose 2,203 479 --
Coal sales - company's effective share
(000's tonne) 6,617 9,997 10,706
Operating expenses (Cdn$/tonne)
Cost of products sold 27 28 26
Transportation and other 25 25 29
Capital expenditures* ($ millions) 11 15 43
Company's share of operating profit ($ millions) 112 91 125
Note: Coal production from the Elk Valley Coal Partnership includes the
company's 35% direct interest plus its 6% indirect interest through its
investment in the Fording Canadian Coal Trust for 2003. On April 1, 2004,
the direct interest was increased to 38% and the indirect interest
decreased to 5.4% for a total of 43.4%.
*Sustaining capital expenditures excluding production capacity expansion
costs.
4
ZINC MINING
Red Dog (100%)
The Red Dog mine in northwest Alaska is the largest zinc mine in the world and
is operated by Teck Cominco under an agreement with NANA Regional Corporation,
Inc., an Alaskan Native corporation.
The mine produced 554,000 tonnes of zinc and 117,000 tonnes of lead in
concentrates in 2004, slightly less than in 2003 because excessive process pipe
scaling during the first quarter restricted throughput.
The mine continued to focus on improving operational efficiency. Recommendations
from an energy audit were implemented in the year and electricity consumption
was reduced by about 5% at the mine and 30% at the port. Concentrator process
enhancements included the installation of a more advanced air dispersion system
on zinc flotation columns, "expert system" control equipment on the grinding and
flotation circuits and cameras to control flotation reagent additions. The
Environmental Management System was certified compliant with the ISO 14001
standard.
Operating profit increased to $207 million from $42 million in 2003 primarily
due to higher prices for zinc and lead, higher zinc sales volumes, as well as
more favourable smelter base treatment charges.
Production in 2005 is estimated to be 578,000 tonnes of zinc and 105,000 tonnes
of lead in concentrates. Site operating costs are expected to increase slightly
due mainly to higher energy costs partially offset by energy reduction
initiatives.
Capital expenditures planned for 2005 include $6 million for mobile equipment
and $14 million on infrastructure.
Red Dog Mine, Alaska, U.S.A.
- --------------------------------------------------------------------------
100% 2002 2003 2004
- --------------------------------------------------------------------------
Tonnes mined (000's) 7,257 6,450 6,345
Tonnes milled (000's) 3,166 3,154 2,948
Zinc grade (%) 21.1 21.7 22.0
Lead grade (%) 5.4 6.2 6.0
Zinc recovery (%) 85.1 84.6 85.6
Lead recovery (%) 60.2 63.8 65.9
Zinc production (000's tonnes) 578.4 579.3 554.2
Lead production (000's tonnes) 107.9 124.9 117.0
Zinc sales (000's tonnes) 586.3 566.5 661.2
Lead sales (000's tonnes) 113.0 124.4 126.8
Capital expenditures ($ millions) 16 7 19
Operating profit (loss) ($ millions) (36) 42 207
Pend Oreille (100%)
The Pend Oreille mine, located in northeastern Washington State, commenced
production in 2004 and achieved commercial production in the third quarter.
Production in 2005 is estimated to be 50,000 tonnes of zinc in concentrate and
8,000 tonnes of lead in concentrate, with operations at design rates. The
concentrate will be hauled by truck to the Trail smelter, 80 kilometres away.
5
COPPER
Highland Valley Copper (97.5%)
Teck Cominco purchased an additional 33.6% interest in the Highland Valley
Copper mine in the first quarter, increasing its interest from 63.9% to 97.5%.
The mine, located southwest of Kamloops, British Columbia, is among the world's
largest-tonnage copper mining and milling operations.
The mill achieved record throughput of 51 million tonnes in 2004 or 138,300
tonnes per day. Copper production totalled 375 million pounds despite a copper
ore grade of 0.38% copper, the lowest ever since commencement of production.
Higher grade molybdenum and modifications to the molybdenum separation circuit,
which improved the recovery rate from 75% to over 90%, resulted in a record 10.7
million pounds of production in the year.
The mine achieved its best-ever annual safety record. The improvement in safety
performance was reflected in a record low disability injury frequency of 0.5 and
a severity of 4.6 for every 200,000 hours worked, compared with a 19 year
average of 1.4 and 27.0 respectively.
A new three-year collective agreement, which expired on September 30, 2003, was
concluded with the United Steel Workers of America in early 2004.
Highland Valley generated a record operating profit of $431 million, far
exceeding the 2003 operating profit of $56 million. This was a result of
significantly higher copper prices, record molybdenum production and
exceptionally high molybdenum prices which averaged US$19 per pound.
Production in 2005 is projected to be 409 million pounds of copper, or 34
million pounds more than in 2004 because of a higher head grade. Molybdenum
production is expected to decrease to 5.0 million pounds due to a lower head
grade.
Capital expenditures for 2005 are planned at $22 million, including the purchase
of five new 240-tonne haulage trucks and mine support and service equipment.
A new mine plan is being developed that would involve expanding the Valley pit
to the east and salvaging ore from the west wall of the Lornex pit. These
extensions are dependent on finding solutions to some challenging pit wall
stability concerns. The price of copper will also be a factor. A final decision
will be made before the end of 2006, and if it is positive, mine life would be
extended by four years to 2013.
Highland Valley Copper Mine, B.C., Canada
- --------------------------------------------------------------------------
100% 2002 2003 2004
- --------------------------------------------------------------------------
Tonnes mined (000's) 75,982 67,494 65,837
Tonnes milled (000's) 49,868 49,030 50,623
Copper grade (%) 0.410 0.393 0.384
Copper recovery (%) 88.7 88.5 87.7
Copper production (000's tonnes) 181.3 170.4 170.3
Copper sales (000's tonnes) 179.7 168.7 156.1
Molybdenum production (million lb) 5.4 7.3 10.7
Capital expenditures ($ millions) 8 7 4
Company's share of operating profit
($ millions) (Note) 35 56 431
Note: Operating profit represents the company's 63.9% share in the mine in 2002
and 2003. Commencing March 1, 2004, the company increased its interest to
97.5% and consolidated 100% of the mine's operating profit with a 2.5%
minority interest.
6
Antamina (22.5%)
Located in the north central Peruvian Andes near Huaraz, the Antamina mine and
the port facilities at Huarmey is a joint venture between Teck Cominco (22.5%),
BHP Billiton (33.75%), Noranda (33.75%) and Mitsubishi (10%).
Increases in productivity were achieved as a result of a comprehensive employee
training program, as the employees gained operating experience at a relatively
new mine. The number of expatriates has declined from 66 to 28 and further
reductions are expected.
Sediment removal from the pit was completed in early May, releasing large
tonnages of copper-only ore with favourable milling characteristics which
resulted in increased throughput and recovery rates. Mill throughput in 2004
averaged a record 85,000 tonnes per day, compared with 72,000 in 2003. The mine
produced a record 798 million pounds of copper in concentrate as well as 419
million pounds of zinc in concentrate in 2004.
The company's share of operating profits of $184 million in 2004 increased
significantly from the previous year due mainly to higher copper production and
higher copper prices, partially offset by lower zinc production. Antamina's
operating results were consolidated commencing July 2003 and equity-accounted
prior to that date.
A program of infill drilling and analysis to facilitate better short and
long-term mine planning and to enhance the accuracy of the current reserve model
is progressing on schedule. The drilling program was completed in September and
preliminary evaluation of the results supports previous resource estimates. The
results of the drilling program will be incorporated into a new reserve model to
be completed by mid 2005.
Production of copper and zinc in 2005 will be similar to 2004 levels while
molybdenum production is expected to increase with higher grades and recoveries.
Sustaining capital expenditures in 2005 are estimated to be $65 million,
including $20 million for the continuing construction of the tailings dam and $5
million for additional haulage trucks.
Antamina Mine, Ancash, Peru
- --------------------------------------------------------------------------
100% 2002 2003 2004
- --------------------------------------------------------------------------
Tonnes milled (000's) 26,748 26,412 31,255
Copper grade (%) 1.37 1.19 1.34
Zinc grade (%) 1.19 1.86 0.97
Copper recovery (%) 88.1 80.9 87.3
Zinc recovery (%) 82.7 78.9 73.8
Copper production (000's tonnes) 330.7 252.4 362.1
Zinc production (000's tonnes) 230.7 362.7 190.1
Molybdenum production (000's pounds) 1,631 1,165 7,905
Copper sales (000's tonnes) 350.0 260.8 341.3
Zinc sales (000's tonnes) 250.6 349.7 181.5
Capital expenditures ($ millions) 78 51 39
Company's share (22.5%) of operating
profit ($ millions) -- 26 184
Equity earnings (22.5%) 17 10 --
7
GOLD
Hemlo Mines (50%)
Teck Cominco and Barrick Gold Corporation jointly own and operate the Williams
and David Bell gold mines located in the Hemlo area of northern Ontario.
The Williams mill, which processes ore from the David Bell and Williams
underground mines and the Williams open pit, achieved record throughput of
3,662,000 tonnes in 2004 or 10,005 tonnes per day. Gold production was lower
than the previous year due to declining ore grades.
Production tonnage from the Williams underground mine increased by 5%, but the
grade was substantially lower due to ground problems restricting access to high
grade areas. The paste backfill system installed in 2003 has provided production
flexibility and made it possible to mine the higher tonnage. A pushback in the
pit, started in the second quarter, enabled ore production at a rate similar to
that achieved in 2003, but at a lower grade.
Underground access to high grade stopes at the David Bell mine was also
restricted due to ground problems. A change to the lower-cost Alimak mining
method in certain areas of the mine and the installation of a paste backfill
plant in late 2004 is expected to help improve productivity.
The unionized workers at the David Bell mine accepted a new three-year contract,
effective October 31, 2004.
Operating profit of $32 million in 2004 was slightly higher than 2003 due to
higher U.S. dollar gold prices, largely offset by the impact of a weaker U.S.
dollar and lower gold production.
Hemlo gold production in 2005 is expected to be slightly below 2004 levels as
high grade areas of the Williams underground mine continue to be depleted.
Operating costs are expected to be similar to 2004, as rising energy and supply
costs will be offset by workforce reductions made over the last year.
Hemlo Mines, Ontario, Canada
- --------------------------------------------------------------------------
100% 2002 2003 2004
- --------------------------------------------------------------------------
Tonnes milled (000's) 3,458 3,576 3,662
Grade (grams/tonne) 5.1 4.9 4.5
Mill recovery (%) 94.7 95.0 94.0
Production (000's ozs) 538 536 495
Cash operating cost per oz (US$) 222 239 266
Capital expenditures ($ millions) 20 28 27
Company's share (50%) of operating
profit ($ millions) 20 30 32
8
SMELTER AND REFINERIES
Trail Smelter and Refineries (100%)
Teck Cominco's metallurgical operations at Trail, B.C. constitute one of the
world's largest lead and zinc smelting and refining complexes. The fully
integrated process at Trail operations also produces a wide variety of specialty
metals and chemicals.
A strong focus on operating performance and productivity resulted in several
production records and generated significant returns in 2004. Refined zinc
production was 296,000 tonnes, which represents the best-ever year of refined
zinc production, exceeding the previous record of 288,000 tonnes set in 1999.
Refined lead production, at 84,300 tonnes, was impacted by a boiler explosion in
the Kivcet furnace in February and a subsequent fire in the lead refinery. The
furnace resumed operation in early March and since then has averaged throughput
of 1,356 tonnes per day with an on-line time of 93.8%, setting record
performance levels.
Other production milestones in 2004 include record production of silver, indium
and germanium, and record treatment of residues from historic stockpiles.
A four-week shutdown for the Kivcet lead smelter is scheduled in March 2005 to
allow for major maintenance and upgrades.
Operating profit from metals operations in 2004 improved by $100 million over
the previous year, due mainly to higher zinc and lead prices and increased
profitability from precious metals production and specialty metals operations.
Trail's four-year labour contracts with two local unions of United Steelworkers
will expire on May 31, 2005.
Trail Smelter and Refineries, B.C., Canada
- --------------------------------------------------------------------------
100% 2002 2003 2004
- --------------------------------------------------------------------------
Zinc production (tonnes) 269,000 283,100 296,000
Lead production (tonnes) 80,700 87,800 84,300
Zinc sales (tonnes) 275,300 288,400 295,500
Lead sales (tonnes) 78,400 83,700 82,100
Silver production (000's ozs) 17,700 18,300 19,700
Indium production (kilograms) 30,600 36,100 41,800
Capital expenditures ($ millions) 65 40 24
Surplus power sold (gigawatt hrs) 683 769 957
Power price (Cdn$/megawatt hr) 37 51 57
Operating profit (loss) ($ millions)
Metal operations 13 (2) 98
Power sales 6 26 37
9
Trail Power (100%)
Teck Cominco owns the Waneta hydroelectric dam which was built in 1954, located
ten kilometres south of Trail close to the border with the United States. The
company also owns a 15-kilometre transmission line from Waneta to the United
States power distribution system. The Waneta dam is one of several hydroelectric
generating plants in the region. The operation of these plants is coordinated
through contractual arrangements under which Teck Cominco receives approximately
2,690 GW.h of power per year, regardless of water flow available for power
generation.
The year saw the continuation of a $41 million project to upgrade the remaining
three of the four generating units at the Waneta dam, which will result in an
increase in capacity from 400 MW to 475 MW. The upgrade for two of the three
units was completed in 2003 and design of the third unit commenced in 2004. The
current capacity of the Waneta dam is 450 MW. A three-year, $40 million
modernization of the company's inter-connection to the provincial transmission
grid was also completed in 2004. This project involved the replacement of two
major switching stations with a single new one and the replacement and reduction
of a number of transmission lines.
Operating profit of $37 million was significantly higher than the previous year
as a result of higher power prices, as well as sales volumes which were 24%
higher than 2003.
DEVELOPMENT PROJECT
Pogo Project (40%)
Teck Cominco holds a 40% interest in and is the manager of the Pogo gold
project. Subsidiaries of Sumitomo Metal Mining (51%) and Sumitomo Corp. (9%)
hold the remaining interests. The property is located in central Alaska, some 85
miles southeast of Fairbanks, and hosts a high grade gold deposit. Construction
of a 2,500-tonne per day underground mine and mill is well advanced.
In mid-March 2004, the U.S. Environmental Protection Agency (EPA) issued the key
remaining permit, the National Pollutant Discharge Elimination System permit,
which regulates the discharge of water from the facility to the Goodpaster
River. An Alaskan environmental group filed an appeal with the EPA and this
necessitated the termination of construction activities. Negotiations with the
environmental group and the EPA were undertaken over the following weeks and the
appeal was subsequently withdrawn. The EPA then issued the permit on May 7, 2004
and construction resumed.
Construction activities were suspended for nine days in late June because of a
major forest fire. A 49 mile all-season access road was completed in September
and by year end the mill building was enclosed. This will allow construction
work to continue indoors during the harsh winter months. The underground mine
contractor started mobilization in December and is scheduled to complete about
12,000 feet of development work and installation of the underground ore conveyor
by the end of August in 2005. First gold production is expected in the first
quarter of 2006, and the mine should be operating at full capacity by the end of
the second quarter 2006, after a ramp-up period.
Construction cost, including escalation, owner's contingency and the effect of
construction delays, was originally estimated to be $298 million. It is now
estimated to be approximately $320 million, due to higher than expected fuel and
steel prices and equipment and field costs.
10
MARKETS
Commodities in General
Improvement in demand and prices of all Teck Cominco products continued in 2004.
Realized prices of US$1.35 a pound for copper, US$19 a pound for molybdenum and
US$406 an ounce for gold were particularly strong, as were those for indium and
germanium from our Trail refinery, at US$625 and US$322 per kilogram
respectively. Zinc improved to US$0.48 a pound, and contracts for coal for the
coming year are at record prices.
As noted in last year's annual report, China has become a major factor in demand
for mineral commodities. Its consumption of copper has tripled and zinc has
quadrupled over the last ten years to 20% and 23% of global demand. Its growing
production of steel resulted in it becoming a significant importer of
metallurgical coal for the first time in 2004.
As the charts for copper and zinc illustrate, there was an increasing rate of
growth in global demand over the last ten years. With the intensity of use, or
consumption per capita, in both China and India still well below that of the
rest of the industrialized world, and with their large populations, there is
reason for optimism that the recent increase in global demand growth will be
sustainable.
GLOBAL DEMAND FOR ZINC
[BAR CHART OMITTED]
Source: International Lead-Zinc Study Group
NEED LEGENDS
GLOBAL DEMAND FOR COPPER
[BAR CHART OMITTED]
Source: International Copper Study Group
NEED LEGENDS
11
Zinc
Global zinc consumption grew by 6% in 2004. China and the United States both
increased by 11% over the previous year, Asia by 7% and Europe by only 1%.
Inventories of zinc on the London Metal Exchange (LME) fell by 111,000 tonnes or
15% during the year, despite deliveries of 263,000 tonnes of
previously-unreported stocks to the Exchange. Total refined inventories (LME,
Producer, Consumer and Merchant) fell to seven weeks of Western world
consumption at year end.
The LME price of zinc averaged US$0.48 a pound in 2004, increasing over the year
to US$0.53 a pound at year end.
China in 2004 has for the first time become a net importer of zinc as a result
of strong domestic consumption. The outlook for zinc price remains positive,
with world metal demand expected to continue to exceed supply.
Copper
Global copper consumption grew by 5.7% in 2004, with that in the United States
increasing by 7% after three years of decline. Asian consumption increased by
6.8%, China by an estimated 5% and Western Europe fell 1%.
Inventories of copper in the LME, COMEX and Shanghai warehouses fell by 684,000
tonnes in 2004, and stocks are now below what is considered to be a critical
level throughout the world.
The LME price of copper averaged US$1.30 a pound in 2004, increasing over the
year to US$1.45 a pound at year end.
The higher price has allowed the restart of much of the mine production that was
closed or cut back in prior years due to poor economics, and this added close to
one million tonnes to supply in 2004. The bottleneck in supply is now
insufficient smelter capacity which, combined with low inventories, is expected
to support copper prices in the near term.
Coal
Hard coking coal markets remained very tight through 2004 due to the ongoing
increased demand from the global steel industry. Contributing to a constrained
supply situation were Australian production problems and Elk Valley Coal's
weather-related shipping delays in the first quarter.
Over the past few years, China has reversed its position from a net exporter of
hard coking coal to a net importer, while at the same time China's exports of
coke to the steel industry have been subject to fluctuation. The global steel
industry has responded by planning significant additions to future domestic coke
production capacity to replace Chinese coke imports. This should increase global
seaborne demand for hard coking coal from producers such as Elk Valley Coal.
Price negotiations for the 2005 coal year (April 1, 2005 - March 31, 2006),
concluded at the end of 2004, reflected the tight market conditions.
Substantially all of Elk Valley Coal's hard coking coal settlements were
concluded at US$125/tonne FOB Roberts Bank terminal for the 2005 coal year.
After accounting for other lower quality product sales such as thermal and PCI
coal, and as some contracts are based on time periods other than the coal year,
the weighted average coal price for the 2005 coal year is expected to be
approximately US$122/tonne, up about 130% from 2004 coal year prices.
During the year, the trend strengthened towards steel producers signing
long-term contracts and/or purchasing equity interests in coal producers in
order to secure additional supplies to meet their future needs, for example Elk
Valley Coal's proposed sale of a 5% equity interest in the Elkview mine to
Nippon Steel and POSCO for US$50 million and new 10-year contracts.
The higher coal prices are serving to attract new supply to the market, with
major producers announcing plans for capacity increases. However, it is
uncertain when the metallurgical coal markets can be brought back into balance.
12
Gold
London spot gold averaged US$409 an ounce in 2004, up from US$363 in 2003, and
was US$440 an ounce at year end.
The main factors in the increase were the continuing weakening of the U.S.
dollar and producer de-hedging, which is estimated to have risen by 50% in 2004
to over 400 tonnes. Mine production is estimated to have fallen by 4% or 110
tonnes, its largest decline since the 1940's.
Jewellery fabrication rose by 4% in 2004, with the largest increases in India,
Turkey and China, and demand from the electronics industry was up by 8%.
Investment in gold rose by 33% to 245 tonnes, driven in part by the Exchange
Traded Funds (ETF's) in the United States and elsewhere.
OTHER PRODUCTS
Teck Cominco's Trail refinery is the world's largest producer of indium, with
sales of 41 tonnes in 2004. The price of indium, used in flat panel displays,
increased by 270% to an average of US$625 per kilogram during the year.
The Trail refinery is also the world's largest producer of germanium, used in
fibre optics, polethylene terepthalate (PET) catalysts and infrared
applications. The germanium price increased by 21% to an average of US$322 per
kilogram in 2004.
ZINC PRICE AND INVENTORY (LME)
[LINE CHART OMITTED]
COPPER PRICE AND INVENTORY (LME)
[LINE CHART OMITTED]
GOLD AVERAGE PRICE (LONDON P.M. FIX)
[LINE CHART OMITTED]
13
FINANCIAL REVIEW
Net earnings for the year ended December 31, 2004 were $617 million, or $3.18
per share, compared with restated net earnings of $134 million or $0.71 per
share in 2003, and restated net earnings of $13 million or $0.06 per share in
2002.
Net earnings in 2004 included a $52 million after-tax loss from the writedown of
the investment in Sons of Gwalia, while net earnings in 2003 included an
after-tax gain of $41 million on the sale of the Los Filos gold property.
The significantly higher earnings in 2004 were due mainly to high commodity
prices, with prices of copper, zinc, lead, molybdenum, gold and coal all
surpassing the averages of the preceding two years. Partially offsetting the
effect of higher metal prices was a weaker U.S. dollar. The company's realized
Canadian/U.S. dollar exchange rate including hedging gains was 1.32, compared
with 1.45 in 2003 and 1.57 in 2002.
In addition to higher commodity prices in 2004, increased production of coal and
copper also contributed to the record earnings. The formation of the Elk Valley
Coal Partnership in early 2003 raised the company's direct share of coal
production from 6.9 million tonnes in 2002 to 7.6 million tonnes in 2003 and 9.3
million tonnes in 2004. Total copper production also increased as a result of
the company acquiring an additional 34% interest in Highland Valley Copper in
the first quarter, and the increased copper production from the company's 22.5%
interest in Antamina compared with the previous two years.
Cash flow from operations, before changes to non-cash working capital items, was
$1.1 billion compared with $314 million in 2003 and $185 million in 2002. The
increase in cash flow from operations in the last two years was due mainly to
rising commodity prices, partially offset by the effects of a weaker U.S.
dollar. The most significant increases came from copper and zinc operations,
with price increases for copper and zinc as well as by-products.
At December 31, the company had a cash balance of $907 million against debt of
$665 million. At the beginning of the year, the amount of debt net of cash was
$1.01 billion or 29% of net debt plus equity.
- --------------------------------------------------------------------------
FINANCIAL DATA
($ millions, except per share data) 2004 2003 2002
- --------------------------------------------------------------------------
Earnings and Cash Flow
Net earnings $ 617 $ 134 $ 13
Cash flow from operations $ 1,143 $ 314 $ 185
Earnings per share $ 3.18 $ 0.71 $ 0.06
Diluted earnings per share $ 2.99 $ 0.68 $ 0.06
Dividends per share $ 0.30 $ 0.20 $ 0.20
Capital expenditures $ 216 $ 158 $ 177
Investments $ 132 $ 297 $ 18
Balance Sheet
Total assets $ 6,059 $ 5,375 $5,066
Long-term debt $ 627 $ 1,045 $ 933
Shareholders' equity $ 3,221 $ 2,427 $2,454
Net debt to net debt plus equity N/A 29% 26%
Shares outstanding (millions) 201.4 186.5 184.5
14
REVENUES
Revenues are affected by sales volumes, commodity prices and currency exchange
rates. Comparative data for each operation on production and sales as well as
revenues and operating profits are presented in the tables on pages 28 and 29.
Realized commodity prices and Canadian/U.S. dollar exchange rates are presented
in the table on this page.
Revenues from operations were $3.4 billion compared with $2.2 billion in 2003
and $2.0 billion in 2002. Major revenue increases in 2004 over 2003 included
approximately $700 million from copper and molybdenum sales, $400 million from
zinc mining and refinery operations, and $100 million from coal operations. The
significant increase in revenues in 2004 was due mainly to higher commodity
prices. Other reasons for the increase were higher coal sales volumes, the
purchase of an additional 34% interest in Highland Valley Copper in the first
quarter of 2004 and the change-over from equity accounting to consolidation of
Antamina results on July 1, 2003.
The revenue increase of $186 million in 2003 over 2002 was due mainly to
increased revenues from copper and coal operations resulting from higher copper
prices and coal sales volumes.
- --------------------------------------------------------------------------
REALIZED METAL PRICES AND EXCHANGE RATE
(after the effect of hedging) 2004 2003 2002
- --------------------------------------------------------------------------
Zinc (US$/pound) 0.48 0.38 0.35
Copper (US$/pound) 1.35 0.85 0.71
Lead (US$/pound) 0.40 0.26 0.20
Molybdenum (US$/pound) 19 5 4
Gold (US$/ounce) 406 359 314
Coal (US$/tonne) 52 45 44
Canadian/U.S. exchange rate
(US$1 = Cdn$) 1.32 1.45 1.57
- --------------------------------------------------------------------------
15
PRODUCTION AND SALES STATISTICS
Production Sales
Years ended December 31 2004 2003 2002 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
REFINED METALS
Zinc Trail 296 283 269 296 288 275
(thousand tonnes) Cajamarquilla (Note 5) 117 129 93 117 131 98
- ----------------------------------------------------------------------------------------------------------------------------
413 412 362 413 419 373
Lead Trail 84 88 81 82 84 78
(thousand tonnes)
Surplus Power (GW.h) Trail -- -- -- 957 769 683
MINE OPERATIONS
Zinc Red Dog 554 579 578 661 567 586
(thousand tonnes) Antamina 43 82 52 41 79 56
Pend Oreille 17 -- -- 17 -- --
Other 5 4 84 5 36 111
- ----------------------------------------------------------------------------------------------------------------------------
619 665 714 724 682 753
Copper Highland Valley (Note 3) 158 109 116 140 108 115
(thousand tonnes) Antamina 82 57 75 77 59 79
Louvicourt 8 10 11 8 10 11
- ----------------------------------------------------------------------------------------------------------------------------
248 176 202 225 177 205
Lead Red Dog 117 125 108 127 124 113
(thousand tonnes) Pend Oreille 2 -- -- 3 -- --
Polaris -- -- 18 -- 7 28
- ----------------------------------------------------------------------------------------------------------------------------
119 125 126 130 131 141
Molybdenum Highland Valley 9,853 4,672 3,469 10,130 4,481 3,316
(thousand pounds) Antamina 1,778 262 367 903 361 296
- ----------------------------------------------------------------------------------------------------------------------------
11,631 4,934 3,836 11,033 4,842 3,612
Gold Hemlo 247 268 269 246 268 269
(thousand ounces) Other 14 13 16 13 13 16
- ----------------------------------------------------------------------------------------------------------------------------
261 281 285 259 281 285
Coal Elk Valley Coal 9,277 6,442 -- 9,333 7,254 --
(thousand tonnes) Elkview and Bullmoose -- 1,116 6,889 -- 1,500 6,617
- ----------------------------------------------------------------------------------------------------------------------------
9,277 7,558 6,889 9,333 8,754 6,617
Notes:
(1) The above production and sales volumes refer to the company's share.
(2) Results of the Elk Valley Coal Partnership represent the company's 35%
direct interest in the Partnership commencing March 1, 2003 and 38%
commencing April 1, 2004. Elkview's results in 2003 represent two months
of operation ended February 28, 2003. The Bullmoose mine was shut down at
the end of March 2003.
(3) The company owns 97.5% of Highland Valley Copper since March 1, 2004 and
63.9% prior to that date.
(4) Production and sales volumes of base metal mines refer to metals contained
in concentrate.
(5) Cajamarquilla zinc refinery was sold in December 2004.
16
REVENUE AND OPERATING PROFIT AFTER DEPRECIATION
Depreciation
Operating Profit Revenue and Amortization
($ in millions) 2004 2003 2002 2004 2003 2002 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Zinc
Trail (including power sales) $ 135 $ 24 $ 19 $ 1,006 $ 800 $ 769 $ 47 $ 46 $ 42
Red Dog 207 42 (36) 626 408 382 63 65 71
Pend Oreille (4) -- -- 17 -- -- 5 -- --
Polaris -- -- 2 -- 22 80 -- 1 11
Inter-segment sales and other 1 -- 6 (108) (86) (62) -- -- --
- ------------------------------------------------------------------------------------------------------------------------
339 66 (9) 1,541 1,144 1,169 115 112 124
Copper
Highland Valley Copper 431 56 35 748 270 251 57 35 37
Antamina 184 26 -- 318 100 -- 41 20 --
Louvicourt 13 1 (3) 34 24 26 9 10 13
- ------------------------------------------------------------------------------------------------------------------------
628 83 32 1,100 394 277 107 65 50
Gold
Hemlo 32 30 20 142 143 133 22 19 16
Coal
Elk Valley Coal 125 73 -- 645 450 -- 31 25 --
Elkview -- 14 88 -- 65 387 -- 2 16
Bullmoose -- 4 24 -- 32 76 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
125 91 112 645 547 463 31 27 16
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,124 $ 270 $ 155 $ 3,428 $ 2,228 $2,042 $275 $223 $206
- ------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Operating profit and revenue are segregated by operations. Results of
operations at Red Dog include by-product sales of lead. Similarly, results
of operations at Antamina include by-products of zinc and molybdenum, and
those at Highland Valley Copper include by-product molybdenum. Results of
operations at Trail include by-products indium, germanium, gold, silver,
fertilizers and surplus power sales.
(2) Antamina results were proportionately consolidated commencing July 1, 2003
and equity accounted prior to that date..
(3) Results of the Elk Valley Coal Partnership represent the company's 35%
direct interest in the Partnership commencing March 1, 2003 and 38%
commencing April 1, 2004. Elkview's results represent two months of
operation ended February 28, 2003. The Bullmoose mine was shut down at the
end of March 2003.
(4) Highland Valley Copper results were consolidated commencing March 1, 2004,
with minority interests of 2.5% interest. Prior to March 1, 2004, the
company had proportionately consolidated 63.9% of Highland Valley Copper.
(5) Depreciation and amortization are deducted in calculating operating
profit.
(6) Prior year numbers have been restated due to the adoption of new
accounting standards.
17
COSTS AND EXPENSES
General, administration and marketing expense was $68 million in 2004 compared
with $55 million in 2003 and $56 million in 2002. Major increases over 2003 were
stock-based compensation expense, recognized under the newly-adopted accounting
standard, and bonus expenses.
Interest expense of $61 million in 2004 was $4 million lower than the previous
year due mainly to decreasing debt balances in the year and the translation of
U.S.dollar interest expense at more favourable U.S. dollar exchange rates. The
interest expense of $65 million in 2003 was higher than $60 million in 2002 due
mainly to debt increases in the year, with the consolidation of $360 million of
the Antamina project debt on July 1, 2003 and the $250 million debt increase
upon the formation of Elk Valley Coal in the first quarter. The increased
interest expense from higher debt balances was largely offset by the effect of
lower interest rates, a more favourable U.S. dollar exchange rate, and gains
from interest rate swaps.
Exploration expense was $42 million in 2004, compared with $30 million in 2003
and $34 million in 2002. The higher exploration expense is a reflection of the
company's increased commitment to exploration. Some of the exploration successes
have resulted in major gains on disposition of mineral properties, such as the
gain on sale of the Los Filos gold property in 2003. Exploration expenditures in
2004 included $26 million or 62% of total expenditures on gold and copper
projects, $3 million on zinc, $8 million on nickel and poly-metallic projects
and $5 million on diamond projects. Of the total expenditures of $42 million,
approximately 24% was spent in Canada and 16% in Mexico, with the remaining
expenditures incurred mostly in Peru, Chile, Australia and the United States.
Other income of $24 million included income from the Fording Canadian Coal Trust
of $13 million, gain on sale of investments of $25 million and a number of
miscellaneous income items, offset by $26 million of asset retirement
obligations on closed properties and miscellaneous expenses.
Income taxes of $305 million represents a 34% composite tax rate for the
company's income from various jurisdictions. This composite tax rate is
significantly lower than the Canadian statutory tax rate of 42% due to the lower
tax rates applied on income earned in foreign jurisdictions. The composite tax
rate increased from 30% in 2003 to 34% in 2004 because a significantly larger
proportion of the company's income in 2004 was earned in Canada.
18
OPERATION PROFIT BEFORE DEPRECIATION
[BAR CHART OMITTED]
376 594 361 493 1,399
2000 2001 2002 2003 2004
OPERATION PROFIT AFTER DEPRECIATION
[BAR CHART OMITTED]
234 364 155 270 1,124
2000 2001 2002 2003 2004
LONG TERM DEBT & TOTAL CAPITALIZATION
[BAR CHART OMITTED]
LONG-TERM DEBT
875 1,005 933 1,045 627
2000 2001 2002 2003 2004
TOTAL CAPITALIZATION
4,526 4,558 4,498 4,735 5,351
2000 2001 2002 2003 2004
19
FINANCIAL POSITION AND LIQUIDITY
Operating Cash Flow
Cash flow from operations before changes to non-cash working capital items was
$1.1 billion for 2004 compared with $314 million a year ago, mainly as a result
of higher prices for the company's main products. Other reasons for the
significantly higher operating cash flow were the acquisition of an additional
interest in Highland Valley Copper, higher coal sales volumes and the
consolidation of Antamina's results for a full year in 2004 compared with the
last six months in 2003. The operating cash flow of $314 million in 2003 was
higher than the $185 million in 2002 due mainly to rising copper and zinc prices
in the fourth quarter of 2003, and the consolidation of the Antamina results
commencing in the last six months of 2003.
Investing Activities
Capital expenditures in 2004 amounted to $216 million, with $124 million of
sustaining capital expenditures and $92 million of development expenditures. The
company's share of development expenditures was $67 million on the Pogo gold
project and $25 million on the Cheviot Creek coal project. Total capital
expenditures in 2003 were $158 million including $45 million on the Pend Oreille
zinc project.
The major investment in 2004 was the acquisition of an additional interest in
Highland Valley Copper for $80 million, and in 2003 was the investment in Elk
Valley Coal Partnership for $275 million.
Major dispositions were the sale of the Cajamarquilla zinc refinery in 2004 for
net proceeds of $156 million, after repayment of debt of $56 million, and the
sale of the Los Filos gold project in 2003 for net proceeds of $49 million.
Financing Activities
The company did not draw on any debt facilities in 2004. In 2003, the company
drew $250 million on its revolving credit facilities in February to pay for the
Elk Valley Coal Partnership transaction.
In 2004, repayment of long-term debt amounted to $124 million, including minimum
and accelerated repayments of $60 million on the Antamina project debt. The 2003
long-term debt repayments of $259 million included reductions in the company's
revolving bank debt and the Antamina and Cajamarquilla project debts.
In 2004, the company issued 7.6 million Class B Subordinate Voting Shares for
$126 million, including $90 million on the exercise of 5.0 million share
purchase warrants and $36 million on the exercise of employees and directors
stock options.
Following a notice of redemption in September 2004, the company issued 7.3
million Class B Subordinate Voting Shares on the conversion of a stated amount
at maturity of US$156 million of the convertible debentures due 2006. The
redemption and share issue, a non-cash transaction, was not included on the cash
flow statement.
Dividends of $60 million paid in 2004 increased from $37 million in 2003 mainly
as a result of the company increasing the semi-annual dividend from $0.10 per
share to $0.20 per share commencing with the December 2004 payment.
20
Cash Resources and Liquidity
At December 31, 2004, the company had a cash balance of $907 million against
debt of $665 million. This was a significant improvement over the net debt
position of $1.01 billion at December 31, 2003.
At December 31, 2004, the company had bank credit facilities aggregating $768
million, 89% of which mature in 2007 and beyond. Unused credit lines under these
facilities amounted to $655 million, after issuing letters of credit for $113
million.
QUARTERLY EARNINGS AND CASH FLOW
($ in millions, except per share information)
- -----------------------------------------------------------------
2004
- -----------------------------------------------------------------
Q4 Q3 Q2 Q1
Revenues $1,051 $ 925 $ 777 $ 675
Operating profit 392 332 221 179
Net earnings 285 120 116 96
Earnings per share 1.42 0.62 0.60 0.51
Cash flow from
continuing operations 400 326 235 182
- -----------------------------------------------------------------
2003
- -----------------------------------------------------------------
Q4 Q3 Q2 Q1
Revenues $ 716 $ 545 $ 460 $ 507
Operating profit 132 62 33 43
Net earnings 104 16 9 5
Earnings per share 0.56 0.08 0.04 0.03
Cash flow from
- -----------------------------------------------------------------
continuing operations 139 79 52 44
In the fourth quarter of 2004, revenues from operations were $1.05 billion
compared with $716 million in the same period a year ago. Major increases over
2003 were due to higher copper, zinc, coal and molybdenum prices. The additional
34% interest in Highland Valley Copper contributed revenues of $75 million in
the fourth quarter.
Net earnings in the fourth quarter of 2004 were $285 million or $1.42 per share
compared with net earnings of $104 million or $0.56 per share (as restated) in
the fourth quarter of 2003.
The higher earnings in the fourth quarter of 2004 were principally the result of
higher prices for the company's products. The average LME prices for copper,
zinc and lead were US$1.40, US$0.51, and US$0.43 per pound respectively in the
quarter, up 50%, 19%, and 59% from the same period a year earlier. A weaker U.S.
dollar partially offset the effect of the higher commodity prices. The company's
realized Canadian/U.S. dollar exchange rate including hedging gains was 1.25 in
the fourth quarter, compared with 1.39 in the fourth quarter of 2003.
Fourth quarter earnings of 2004 included gains on disposition of assets of $36
million. Net earnings in the fourth quarter of 2003 included an after-tax gain
of $41 million on the sale of the Los Filos gold property.
21
Cash flow from operations, before changes to non-cash working capital items, was
$400 million in the fourth quarter of 2004 compared with $139 million in the
fourth quarter of 2003, due mainly to increased operating profits resulting from
higher prices for the company's products. In addition to stronger commodity
prices, other factors contributing to the higher cash flow included the
acquisition of an additional 34% interest in Highland Valley Copper in the first
quarter of 2004, increased molybdenum production and the consolidation of
Antamina for a full year in 2004 compared with equity-accounting for the first
six months' results of Antamina in 2003.
OUTLOOK
Earnings and Cash Flow
The company's share of estimated 2005 production volumes for its major products
and some information on production outlook have been disclosed in the Operations
section.
Refined zinc production, with the sale of Cajamarquilla in December 2004, will
decrease to approximately 295,000 tonnes compared with 413,000 tonnes in 2004.
Coal production in 2005 is expected to increase by 17% over 2004 as a result of
the development of the Cheviot Creek pit and the capacity expansion at the
Fording River mine. Zinc production is expected to increase at the Pend Oreille
mine as the mine has made significant progress to reach design production
capacity. Copper production is expected to increase by 10% in 2005, with planned
production increases at both the Highland Valley Copper and Antamina mines due
to higher copper ore grades. Molybdenum production is expected to decrease at
the Highland Valley Copper mine to approximately 5 million pounds in 2005 due to
lower molybdenum ore grades. Gold production is expected to be similar to 2004
at around 250,000 ounces.
Metal prices, the main reason for the record earnings of the company in 2004,
have remained strong but volatile after the year end due to a number of factors,
including strong demand, uncertainty over the U.S. dollar and concern over the
world economy. Fluctuations in metal prices will affect the company's earnings,
and may result in significant settlement adjustments on outstanding settlements
receivable.
Substantially all of Elk Valley Coal Partnership's hard coking coal sales for
the 2005 coal year beginning April 1, 2005 have been contracted at an average
price of US$125 per tonne. Some of the 2005 calendar year sales will include
coal priced at the 2004 coal year prices. As a result of this and other factors,
the weighted average price of 2005 calendar year sales are expected to be
approximately US$100 per tonne, nearly double the weighted average price of
US$52 per tonne in calendar 2004.
Market conditions for the company's main products are discussed in the Markets
section.
The Canadian dollar's recent strength against the U.S. dollar will have a
negative impact on the company's earnings because the prices of the company's
products are denominated in U.S. dollars and a significant portion of the
company's operating costs are Canadian dollar based. Metal prices, however, have
increased to reflect a weaker U.S. dollar as well as responding to tight market
conditions.
To mitigate the impact of fluctuations in metal prices and the Canadian/U.S.
dollar exchange rate, the company has made certain forward sales commitments.
The outstanding hedge positions are presented in the notes to the financial
statements.
While the company benefits from rising commodity prices, the company's
operations are facing the impact of rising costs. The prices of fuel, steel,
equipment, materials and supplies have been increasing in the last two years.
The company will continue to focus on managing its operating costs and to
achieve operating efficiencies to mitigate the impact of rising prices on
operating costs.
22
Treatment charges for zinc concentrates are expected to continue to decline in
2005 due to an extremely tight market. While this will negatively impact Trail's
operating income, it will result in overall benefit to the company as the
company is a net miner of zinc with significant production from Red Dog and
Antamina. On the other hand, higher copper prices have resulted in rising mine
production with treatment charges increasing to historical levels.
The company's capital expenditures in 2005 are estimated to be $280 million,
with $170 million of sustaining capital expenditures and $110 million of
development expenditures. The majority of the development expenditures is for
the company's share of the Pogo gold project.
- -------------------------------------------------------------------------------
EARNINGS SENSITIVITY
(Based on planned 2005 production and after the effect of hedging)
- -------------------------------------------------------------------------------
Estimated Impact on
Change After-tax Earnings
- -------------------------------------------------------------------------------
(Cdn$ millions)
ZINC US$0.01/lb $ 11
LEAD US$0.01/lb $ 3
COPPER US$0.01/lb $ 5
GOLD US$10/oz $ 2
COAL US$1/tonne $ 6
POWER US$10/MW.h $ 7
CDN$/US$ CDN$0.01 $ 12
- -------------------------------------------------------------------------------
CONTINGENCIES
Legal Proceedings
On November 11, 2004, the District Court for Eastern Washington State denied a
motion by Teck Cominco Metals Ltd. (TCML) to dismiss, for want of jurisdiction,
a citizen's suit brought by two members of the Colville Confederated Tribes
supported by the State of Washington. TCML has petitioned for appeal of the
decision to the 9th Circuit Court of Appeal.
The Colville suit was brought pursuant to Section 310(a)(i) of the U.S.
Superfund Statute (CERCLA) to enforce a unilateral administrative order issued
by the U.S. Environmental Protection Agency (EPA) purporting to require TCML to
conduct a remedial investigation and feasibility study with respect to metal
contamination in the sediments of the Upper Columbia River and Lake Roosevelt.
The EPA issued the order shortly after breaking off negotiations with the
company during which TCML offered to fund human health and ecological studies,
at an estimated cost of US$13 million, to address the possible impact of
historical discharges from the Trail Metallurgical Operations in British
Columbia. Both the Canadian government and the company have the view that the
EPA does not have jurisdiction to apply U.S. law in Canada.
The Government of Canada and the Government of U.S.A. are continuing to pursue a
bilateral agreement to facilitate the studies and appropriate remediation to
address environmental concerns about the area. Such an agreement could provide a
basis under which TCML's offer of funding for this work could be implemented.
There can be no assurance that the offer to fund the studies will resolve the
matter, or that TCML or its affiliates will not be faced with liability in
relation to this matter. Until studies of the kind described above are
completed, it is not possible to estimate the extent and cost, if any, of
remediation that may be required.
23
Competition Investigation
Teck Cominco Metals Ltd., as the marketing agent for Highland Valley Copper
Partnership (HVC), has responded to an Order issued by the Federal Court of
Canada pursuant to the Competition Act to produce documents relevant to the
marketing of custom copper concentrates. The company understands that this is
part of an ongoing industry-wide investigation involving major copper
concentrate producers commenced in Canada, the United States and Europe to
determine whether there is evidence of a cartel agreement and related illegal
practices concerning pricing, customer allocation and market sharing in the
copper concentrate sector. The company has been advised by the United States
Department of Justice that it intends to close its investigation. There can be
no assurance that the investigation will not result in further regulatory action
against the company or HVC in Canada or elsewhere or that HVC or the company
will not face prosecution or liability under the Act otherwise in relation to
the investigation. The company can also offer no guidance or assurance as to the
course of the ongoing investigation or when the ongoing investigation will be
completed. The company is co-operating in the continuing investigation.
Tax Recovery
The company has previously appealed the assessment of mining taxes by the
Province of Ontario on gold hedging gains at the Williams mine. In a similar
case, the Supreme Court of Ontario has recently ruled that hedging gains are
exempt from Ontario mining taxes. The Province of Ontario has sought leave to
appeal this ruling to the Supreme Court of Canada. The company is currently
assessing the effect of this court ruling and has not recorded any recovery of
the disputed amounts pending a possible appeal and the results of discussions
with the Province of Ontario. The amount of mining taxes and interest which may
be recovered is approximately $16 million.
CRITICAL ACCOUNTING ESTIMATES
In preparing financial statements management has to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Based on historical experience, current conditions and expert
advice, management makes assumptions that are believed to be reasonable under
the circumstances. These estimates and assumptions form the basis for judgments
about the carrying value of assets and liabilities and reported amounts for
revenues and expenses. Different assumptions would result in different estimates
and actual results may differ from results based on these estimates. These
estimates and assumptions are also affected by management's application of
accounting policies. Critical accounting estimates are those that affect the
consolidated financial statements materially and involve a significant level of
judgment by management. Management's critical accounting estimates are applied
in the accounting for the impairment of property, plant and equipment and other
assets such as investments, restoration and post-closure costs, accounting for
income and mining taxes, contingencies and accounting for post-retirement
benefits.
Property, Plant and Equipment
The company capitalizes the development costs of mining projects commencing when
economically recoverable reserves as shown by an economic study are believed to
exist. Upon commencement of production these costs are written off over the life
of the mine based on proven and probable reserves. The determination of the
extent of reserves is a complex task in which a number of estimates and
assumptions are made. These involve the use of geological sampling and models as
well as estimates of future costs. New knowledge derived from further
exploration and development of the ore body may also affect reserve estimates.
In addition, the determination of economic reserves depends on assumptions on
long-term commodity prices and in some cases exchange rates.
The company reviews and evaluates property, plant and equipment for impairment
on an ongoing basis. The expected undiscounted future cash flows from an asset
are estimated in a ceiling test. These future cash flows are developed using
assumptions that reflect the long-term operating plans for an asset given
management's best estimate of the most probable set of economic conditions.
Commodity prices used reflect market conditions at the time the model is
developed. These models are updated from time to time and lower prices are used
should market conditions deteriorate. Inherent in these assumptions are
significant risks and uncertainties. In management's view, based on assumptions
which management believes to be reasonable, a reduction in the carrying value of
property, plant and
24
equipment is not required at December 31, 2004. Changes in market conditions,
reserve estimates and other assumptions used in these estimates may result in
future writedowns.
Income and Resource Taxes
The determination of the company's tax expense for the year and its future tax
liabilities and assets involves significant management estimation and judgment
involving a number of assumptions. In determining these amounts management
interprets tax legislation in a variety of jurisdictions and makes estimates of
the expected timing of the reversal of future tax assets and liabilities.
Management also makes estimates of the future earnings which affect the extent
to which potential future tax benefits may be used. The company is subject to
assessment by various taxation authorities which may interpret tax legislation
in a manner different from the company. These differences may affect the final
amount or the timing of the payment of taxes. When such differences arise the
company makes provision for such items based on management's best estimate of
the final outcome of these matters.
Pension and Other Post-Retirement Benefits
The cost of providing benefits through defined benefit pension plans and
post-retirement benefits plans is actuarially determined. Cost and obligation
estimates depend on management's assumptions about future events which are used
by the actuaries in calculating such amounts. These include assumptions with
respect to discount rates, the expected return on plan assets, future
compensation increases and health care cost trends. In addition, actuarial
consultants utilize subjective factors such as withdrawal and mortality rates.
Actual results may differ materially from those estimates based on these
assumptions.
Asset Retirement Obligations
The amounts recorded for asset retirement costs are based on estimates included
in closure and remediation plans. These estimates are based on engineering
studies of the work that is required by environmental laws, or public statements
by management which result in an obligation. These estimates include an
assumption on the rate at which costs may inflate in future periods. Actual
results could differ from these estimates.
Recognition of Contingencies
The company is subject to a number of lawsuits and threatened lawsuits. A
provision is made for amounts claimed through these lawsuits when management
believes that it is more likely than not that the plaintiffs will be awarded
damages or a monetary settlement will be made. Management seeks the advice of
outside counsel in making such judgments where the amounts involved are
material.
CHANGES IN ACCOUNTING POLICIES
Asset Retirement Obligations
Effective January 1, 2004 the company adopted a new accounting standard on asset
retirement obligations. Under this standard, asset retirement obligations are
recognized at discounted value for the costs associated with exit activities and
recorded as a liability at fair value. The liability is accreted over time
through periodic charges to earnings. In addition, the asset retirement cost is
capitalized as part of the asset's carrying value at its initial discounted
value and is amortized over the asset's useful life. This change in accounting
policy has been adopted retroactively and has resulted in an increase in
long-term liability of $210 million, an increase to property, plant and
equipment of $113 million, a reduction of future income tax liabilities of $23
million and a decrease to opening retained earnings of $74 million. The change
also resulted in a reduction of $12 million to previously reported 2003 net
earnings.
25
Stock-Based Compensation
The company has adopted the fair value method of accounting for stock-based
compensation. This method results in the recognition in earnings of the cost of
stock-based compensation based on the estimated fair value of new stock-based
awards granted to directors and employees in the year.
This change in accounting policy was adopted retroactively and resulted in a
restatement and reduction of 2003 net earnings by $3 million pertaining to the
stock options granted in the first quarter of 2003. The stock-based compensation
expense with respect to stock options and deferred and restricted share units
granted in 2004 amounts to $7 million.
Hedge Accounting
On January 1, 2004 the company adopted the recommendations of Accounting
Guideline 13 on documentation and hedge effectiveness testing standards which
must be met to apply hedge accounting to derivative instruments. The company
continues to be eligible for hedge accounting treatment for its U.S. dollar
forward sales, certain of its forward sale and purchase contracts for its
products, foreign exchange gains and losses on U.S. dollar borrowings and the
Inco exchangeable debenture. Contracts which do not qualify for hedge accounting
treatment are marked to market. No adjustment was required to retained earnings
as a result of the adoption of this standard.
Underground Amortization
Effective January 1, 2004 the company adopted the block model method of
underground amortization. Under this method underground development costs
related to the development of particular sections of a mine are amortized over
the reserves of that section. Previously the company did not differentiate
between sections, with costs going into a common pool and amortized over the
reserves of the mine. This resulted in an escalating amortization charge over
the life of the mine. The application of the new method, which is considered to
be the preferred practice, has resulted in a $4 million charge to opening
retained earnings and will decrease future amortization charges at the Hemlo
mines by $1 million per year.
Depreciation in Inventory
A new standard on Generally Accepted Accounting Principles (GAAP) defines what
constitutes Canadian GAAP and establishes a relative hierarchy for sources of
GAAP. The CICA Handbook is confirmed as the primary source of Canadian GAAP
while secondary sources include International Accounting Standards and US GAAP.
Industry practice is no longer considered a valid source of GAAP. As a result,
the company has amended its inventory valuation policy to include depreciation
and amortization charges in the cost of inventory. Previously amortization and
depreciation were charged directly to earnings based on sales volumes. The new
policy does not affect reported earnings in any year but does affect reported
inventory and property, plant and equipment values. As a result, the company has
increased the reported value of inventory by $9 million at January 1, 2004 and
reduced fixed assets by the same amount.
Variable Interest Entities
Effective January 1, 2005, the company will adopt the new Accounting Guideline
15 (AcG-15) "Consolidation of Variable Interest Entities". The new standard
establishes when a company should consolidate a variable interest entity in its
financial statements. AcG-15 provides the definition of a variable interest
entity and requires a variable interest entity to be consolidated if a company
is at risk of absorbing the variable interest entity's expected losses, or is
entitled to receive a majority of the variable interest entity's residual
returns, or both. Adoption of this guideline is not expected to result in any
material impact to earnings or retained earnings.
26
CONTRACTUAL AND OTHER OBLIGATIONS
The company's contractual and other obligations as at December 31, 2004 are
summarized as follows:
- ----------------------------------------------------------------------------------------------------------------
Less than More than
($ in millions) Total 1 Year 2-3 Years 4-5 Years 5 Years
- ----------------------------------------------------------------------------------------------------------------
Long-term debt $ 665 $ 38 $ 257 $ 76 $ 294
Operating leases 63 19 25 18 1
Road and port lease at Red Dog (Note 1) 756 21 42 42 651
Minimum purchase obligations (Note 2)
Concentrate and other supply purchases 155 135 5 5 10
Shipping and distribution 132 16 32 32 52
Pension funding (Note 3) 61 48 - - -
Other non-pension post-retirement benefits (Note 4) 229 8 16 16 189
Asset retirement obligations (Note 5) 348 35 37 27 249
Other long-term liabilities (Note 6) 68 -- -- -- 68
Notes:
(1) The company leases road and port facilities from the Alaska Industrial
Development and Export Authority through which it ships metal concentrates
produced at the Red Dog mine. Minimum lease payments are US$18 million per
annum and are subject to deferral and abatement for force majeure events.
(2) The majority of the company's minimum purchase obligations are subject to
continuing operations and force majeure provisions.
(3) As at December 31, 2004 the company had a net pension funding deficit of
$61 million based on actuarial estimates prepared on a going concern
basis. The amount of minimum funding for 2005 in respect of defined
benefit pension plans is $48 million. The timing and amount of additional
funding after 2005 is dependent upon future returns on plan assets,
discount rates, and other actuarial assumptions.
(4) The company had a discounted, actuarially determined liability of $229
million in respect of other non-pension post-retirement benefits as at
December 31, 2004. Amounts shown are estimated expenditures in the
indicated years.
(5) The company accrues environmental and reclamation obligations over the
life of its mining operations and amounts shown are estimated expenditures
in the indicated years. In addition to the above, the company has ongoing
treatment and monitoring costs of $2 million per annum for 2005-2030 and
$8 million per annum for 2031-2104.
(6) Other long-term liabilities include amounts for workers' compensation and
severance. There are no minimum payment obligations for these amounts over
the next five years.
Outstanding Share Data
As at February 11, 2005, there were 196,809,715 Class B Subordinate Voting
Shares and 4,673,453 Class A Common Shares (Class A shares) outstanding. In
addition, there were outstanding 4,286,219 director and employee stock options
with exercise prices ranging between $6.39 and $25.09 per share. Of this amount
836,000 stock options vest in equal amounts over three years beginning in the
first quarter of 2005. Exchangeable debentures due 2024 are convertible into a
total of 11,489,400 Class B Subordinate Voting Shares (equivalent to $9.72 per
share). More information on these instruments and the terms of their conversion
are set out in note 13 of the company's 2004 year end financial statements.
Change in Trading Symbols of the Company's Equity Securities
The Toronto Stock Exchange has introduced a new stock symbol naming convention
which clearly identifies the voting rights of equity securities. Accordingly on
December 6, 2004, the company's Class A Common Shares, which traded under the
symbol TEK.A, now trade under the symbol TEK.MV.A, the MV suffix denoting the
multiple voting nature of the Class A Common Shares. Similarly the company's
Class B Subordinate Voting Shares, which traded under the symbol TEK.B, now
trade under the symbol TEK.SV.B, the SV suffix denoting the subordinate voting
rights of these securities. Under the company's share structure, the holder of
each Class A Common Share is entitled to 100 votes and the holder of each Class
B Subordinate Voting Share is entitled to a single vote at shareholder meetings.
27
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The financial statements, the Management Discussion and Analysis and the
information contained in the annual report have been prepared by the management
of the company. The financial statements have been prepared in accordance with
accounting principles generally accepted in Canada and, where appropriate,
reflect management's best estimates and judgements based on currently available
information.
The Audit Committee of the Board of Directors, consisting of four members, meets
periodically with management and the independent auditors to review the scope
and result of the annual audit, and to review the financial statements and
related financial reporting matters prior to submitting the financial statements
to the Board for approval.
The company's independent auditors, who are appointed by the shareholders,
conducted an audit in
accordance with Canadian generally accepted auditing standards to allow them to
express an opinion on the financial statements.
A system of internal control is maintained to provide reasonable assurance that
financial information is accurate and reliable. Management and the internal
audit department of the company conduct ongoing reviews and evaluation of these
controls and reports on its findings to management and the Audit Committee.
DAVID A. THOMPSON
Deputy Chairman and
Chief Executive Officer
JOHN G. TAYLOR
Senior Vice President, Finance and
Chief Financial Officer
February 18, 2005
AUDITORS' REPORT TO SHAREHOLDERS
We have audited the consolidated balance sheets of Teck Cominco Limited as at
December 31, 2004 and 2003 and the consolidated statements of earnings, retained
earnings and cash flows for each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 2004
and 2003 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Vancouver, B.C.
February 4, 2005
Comments by Auditors for United States Readers on Canada-United States Reporting
Differences
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there are
changes in accounting principles that have a material effect on the
comparability of the company's financial statements, such as the changes
described in note 3 to the financial statements. Our report to the shareholders
dated February 4, 2005 is expressed in accordance with Canadian reporting
standards which do not require a reference to such a change in accounting
principles in the auditors' report when the change is properly accounted for and
adequately disclosed in the financial statements.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Vancouver, B.C.
February 4, 2005
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