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September 12, 2005
United States Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, NW, Stop 4-5
Washington, DC 20549
USA
ATTENTION: JILL S. DAVIS, BRANCH CHIEF
Dear Sirs and/or Mesdames:
RE: Teck Cominco Limited
Forms 40-F and 40-F/A1 for Fiscal Year Ended December 31, 2004
Filed March 31, 2005 and April 1, 2005
File No. 1-13184
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Thank you for your comment letter dated August 1, 2005 with respect to the above
noted filing. We have carefully considered your comments and have attempted to
address them in detail below. The headings and numbered responses set out below
correspond to the headings and numbered comments in your letter. Our responses
to your comments are as follows:
FORM 40-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
CONSOLIDATED STATEMENTS OF CASH FLOW
1. SEC Comment
"We note in your reconciliation of net earnings to net cash provided by
operating activities that you present two subtotals of net earnings and various
charges and credits above total net cash provided by operating activities. We
note the Illustrative example in CICA 1540, and that the subtotal presented does
not include net income; rather the presentation only includes "items not
affecting cash." Support your disclosure of these subtotals under Canadian GAAP
as there does not appear to be a provision within CICA 1540 for this
presentation."
Response
As you have observed, our reconciliation of net earnings to cash flow from
operating activities provides a subtotal before changes to non-cash working
capital items. We agree that this format differs from the illustrative
example in section 1540 of the CICA handbook, which does not provide such a
subtotal. We note, however, that in the preamble to the example, the CICA
handbook states that "Other formats or levels of detail may be appropriate
in other circumstances." The formats presented in the handbook are not
requirements, but are used for illustration only.
TECK COMINCO LIMITED
600-200 BURRARD STREET, VANCOUVER, B.C. V6C 3L9
TEL: (604) 687-1117 FAX: (604) 687-6100
September 12, 2005 Page 2 of 9
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We believe the format that we have followed is appropriate. This format
provides useful information to the reader by presenting the operating cash
flow figures both before and after changes to non-cash working capital
items such as receivables and inventory.
Our review of other Canadian companies' presentation of cash flow from
operating activities indicates that many companies, particularly those in
the resource sector, have followed this format.
We propose in the future to include a comment in our U.S. GAAP
reconciliation note pointing out that the disclosure of this subtotal
amount is not in conformity with U.S. GAAP, substantially as follows:
"Under U.S. GAAP, cash flow from operations must be presented as the amount
calculated after taking into effect the changes in non-cash working capital
items. The disclosure of a subtotal referring to the amount of cash flow
from operations before changes to working capital items is not permitted."
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
DERIVATIVES AND HEDGING ACTIVITIES
2. SEC Comment
"Please expand on your disclosure to identify the line items in which you report
the fair values and the unrealized gains and losses of your derivative
instruments in the financial statements."
Response
In 2004, the fair values of derivative instruments which did not qualify
for hedge accounting were reported in accounts receivable or accrued
liabilities, as appropriate, and unrealized gains and losses were included
in miscellaneous expense as a component of Other Income (Expense).
The amounts in question were unrealized losses on copper forward sales
contracts of $8.5 million offset by $4.3 million of gains on certain
forward purchase commitments of zinc. In both cases these commitments did
not qualify for hedge accounting. The net amount of $4.2 million was not
presented as a separate line item as it was not material. This amount was
included in miscellaneous expense of $7 million in Note 14.
In the first two quarters of 2005, these mark-to-market gains and losses
have been disclosed as a "non-hedge derivative losses" in a separate line
item under Note 4 (entitled Other Income and Expense) of the interim
financial statements. A copy of the note is attached for your information
as Appendix A to this letter. We intend to continue with this disclosure in
our quarterly and annual reports.
September 12, 2005 Page 3 of 9
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We also propose to expand the disclosure on this item in our notes to the
financial statements at the year-end, under the heading "Significant Accounting
Policies", substantially as follows:
"The fair values of the derivative instruments that do not qualify for
hedge accounting are included in current receivables or current liabilities
and the mark-to-market gains and losses are charged to earnings under the
line item entitled Other Income and Expense."
PROPERTY, PLANT AND EQUIPMENT
(II) MINERAL PROPERTIES AND DEFERRED COSTS
3. SEC Comment
"We understand that you defer certain costs when they relate to specific
properties for which economically recoverable reserves as shown by an economic
study are believed to exist. Please tell us the nature of these costs, how you
determine the amount to defer, and the amount deferred as of each balance sheet
date. Please refer to the disclosure guidance included in the Appendix attached
to the minutes of the November 25, 2002 AICPA SEC Regulations Committee's
International Practices Task Force located at the AICPA website:
HTTP://WWW.AICPA.ORG/DOWNLOAD/BELT/2002_11_25.PDF and EITF 04-06 for US GAAP."
Response
We have reviewed the accounting and disclosure guidance included in the
Appendix attached to the Minutes of the November 25, 2002 AICPA SEC
Regulations Committee's International Practices Task Force, and noted the
guidance with respect to reserves, acquisition costs and deferred costs. We
have also reviewed EITF 04-06 for US GAAP.
The deferred costs included in Mineral Properties in Note 6 to the 2004
financial statements consist of the following items:
1) costs of land purchases (overlying surface rights);
2) acquisition costs for mineral properties;
3) fixed assets associated with dormant properties and certain
non-operating assets;
4) construction in progress costs; and
5) miscellaneous deferred costs.
September 12, 2005 Page 4 of 9
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A breakdown of these costs in tabular form is as follows:
DECEMBER 31
2004 2003
---- ----
($ million)
Acquisition costs of mineral properties 44 64
Land purchases (overlying surface rights) 12 12
Fixed assets
Offices and research facilities 9 9
Equipment salvage values 11 25
-- ---
20 34
Miscellaneous deferred costs 3 8
Construction in Progress
Pend Oreille Mine - 116
-- ---
79 234
-- ---
The development costs of the Pend Oreille mine, which were included in
Mineral Properties in 2003, were transferred to Mines and Processing
Facilities in 2004 when the property went into production.
The amounts deferred in respect of acquisition costs are based on the
actual costs of the relevant properties, provided that these amounts are
judged to be recoverable either on a sale of the relevant property or
through its future development. The company regularly assesses all fixed
assets, including mineral properties, for impairment conditions which might
indicate that their carrying value is not recoverable.
Where exploration is conducted on a property where economically recoverable
reserves as shown by an economic study are believed to exist, we defer
those expenditures incurred to advance the relevant property and prove up
additional reserves. Amounts to be deferred in respect of exploration
expenditures are determined by reference to the relevant economic study,
although there are no such costs currently deferred. In 2004, $42 million
of exploration expenditures on properties where economically recoverable
reserves are not believed to exist were expensed.
The Mineral Properties line item does not include deferred stripping costs.
Included in the Mines and Processing Facilities balances of $6,118 million
and $6,110 million for 2004 and 2003 respectively were deferred stripping
costs relating to coal mines of $17 million and $11 million respectively.
These costs have not been separately identified on the grounds of
immateriality.
September 12, 2005 Page 5 of 9
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NOTE 15. INCOME AND RESOURCE TAXES
(C) TEMPORARY DIFFERENCES GIVING RISE TO FUTURE INCOME TAX ASSETS AND
LIABILITIES
4. SEC Comment
"Please describe to us, in detail, the nature of the "timing of partnership
items" line item included in the tabular presentation of your future tax
liability."
Response
Under Canadian tax laws income earned in a partnership is taxable in the
hands of each partner in the taxation year of that partner in which the
fiscal year-end of the partnership falls. This situation can give rise to a
timing difference and a provision for future income taxes.
The company consolidates the earnings of Highland Valley Copper Partnership
("HVC"), which has a January 3 year-end, and Elk Valley Coal Partnership
("EVCP"), which has a January 31 year-end. The company's portion of
earnings from these two partnerships in 2004 will be included in the
company's taxable income in 2005. The amount of deferred taxes shown in the
note relates to these two partnerships, with $228 million in respect of HVC
and $45 million in respect of EVCP.
NOTE 18. COMMITMENTS AND CONTINGENCIES
(A) DERIVATIVES AND FINANCIAL INSTRUMENTS
FOOTNOTE (A)
5. SEC Comment
"Please expand your disclosure to include the fair value of your zinc and lead
forward purchase commitments and explain to us why the related amounts have been
excluded from your tabular presentation."
Response
The fair value of the zinc and lead forward purchase commitments at
December 31, 2004 was $9 million; of which $4 million of mark-to-market
gains were taken into earnings for contracts that did not qualify for hedge
accounting.
These amounts were excluded from the tabular presentation because the
commercial purpose of these contracts was different from that of the
derivative hedge instruments presented in the table. These contracts were
entered into to match fixed price future sales contracts for refined metals
produced by the company's refinery operations. Any gains and losses on the
forward purchase derivative instruments will be offset by corresponding
gains and losses on fixed price forward sales commitments to customers. In
contrast, derivative instruments presented in the table represent the
company's hedging activities with respect to future mine production and
power sales. Gains and losses on these instruments are intended to reduce
the company's exposure to changes in future spot prices for the relevant
commodities.
September 12, 2005 Page 6 of 9
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In future, we propose to present the quantities and amounts of these
forward purchase derivative instruments together with the other derivative
hedge instruments in the table, and expand our disclosure on these fixed
forward purchase commitments by presenting the mark-to-market value and a
footnote substantially as follows:
"From time to time, certain customers request to purchase refined zinc and
lead at fixed forward prices from the company's smelter and refinery
operations. The forward purchase commitments for zinc and lead are matched
to the fixed price sales commitments to customers. Any gains or losses from
these forward purchase commitments will be offset by similar gains or
losses on the fixed price sales commitments."
FOOTNOTE (C)
6. SEC Comment
"Please expand on your disclosure to clearly explain why you are unable to apply
hedge accounting to the copper forward sales contracts."
Response
The company sells copper concentrates to its customers at prices based on
the monthly averages of quoted prices for the contained metals. From time
to time, in order to reduce its exposure to copper price fluctuations, the
company enters into fixed-price forward sales contracts. Copper
concentrates also contain other metals such as silver and gold. In periods
when copper prices remain relatively unchanged, a change in value in the
precious metals content can form a large proportion of the change in the
value of the concentrate. While the copper forward sales contracts
constitute an effective economic hedge for the copper content, when matched
against the potential change in value of the concentrates, the arrangements
are not sufficiently effective to meet the criteria for hedge accounting.
We propose to expand our disclosure in the footnote to explain why copper
forward sales do not qualify for hedge accounting, substantially as
follows:
"Copper forward sales contracts do not qualify for hedge accounting because
when matched against the potential change in value of the concentrates,
hedging only the copper content in the copper concentrates may not result
in a sufficiently effective hedge against the value of the concentrates
sold to customers."
NOTE 20. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE
UNITED STATES
(G) DERIVATIVE INSTRUMENTS
7. SEC Comment
"We understand from your disclosure that there are various components that
attribute to the reconciling difference for derivative instruments between
Canadian GAAP and US GAAP. Please expand on your disclosure to explain the
nature of and quantify these components."
September 12, 2005 Page 7 of 9
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Response
You are correct that various components contribute to the reconciling
difference for derivative instruments for U.S. GAAP and Canadian GAAP. The
derivative instruments referred to in the U.S. GAAP reconciliation note are
the embedded derivative in the exchangeable debentures due in 2021, and the
forward sales derivative instruments for copper, gold, power and U.S.
dollars.
The company's exchangeable debentures due 2021 include an option to settle
the debt with Inco shares. Under U.S. GAAP, this option constitutes an
embedded derivative which must be accounted for as a separate instrument.
The Canadian GAAP rules applicable to embedded derivatives were not
effective as at December 31, 2004.
Under Canadian GAAP, derivative instruments to which hedge accounting is
applied are shown off-balance sheet. Realized gains and losses are recorded
in income. Non-hedge derivative instruments must be recorded on the balance
sheet with mark-to-market gains or losses recorded in other income.
For Canadian GAAP purposes, the company applies hedge accounting to all
forward sales derivative instruments except for forward copper sales
contracts. Consequently, only mark-to-market gains or losses on copper
forward sales contracts are recorded in income under Canadian GAAP.
Under U.S. GAAP, all derivative instruments are recorded on the balance
sheet with mark-to-market gains or losses either recorded in income or
comprehensive income depending on the type of hedging relationship. Gains
or losses on non-hedge derivatives are recorded in other income. As at
December 31, 2004, the concept of comprehensive income did not exist under
Canadian GAAP.
For U.S. GAAP purposes, hedge accounting has been applied only to certain
forward sales derivatives instruments which qualify as cash flow hedges.
This results in the mark-to-market gains and losses on those cash flow
hedges being recorded in comprehensive income until the derivatives are
settled. As discussed above, no such treatment exists under Canadian GAAP.
The disclosed net earnings adjustment of $77 million in 2004 relates to
mark-to-market adjustments of $96 million on the embedded derivative in the
exchangeable debentures offset by a mark-to-market gain calculated at $19
million on the forward sales derivative instruments that did not qualify
for hedge accounting under U.S. GAAP. The net earnings adjustment of $46
million in 2003 comprised a mark-to-market loss on the embedded derivative
of the exchangeable debentures calculated at $99 million offset by a
mark-to-market gain calculated at $145 million on the forward sales
derivative instruments that did not qualify for hedge accounting under U.S.
GAAP. Both of the comprehensive income adjustments for derivative
instruments, $33 million in 2004 and $31 million in 2003, pertain to
forward sales contracts that qualified as cash flow hedges for hedge
accounting under U.S. GAAP. All numbers in this paragraph are before tax.
A review of the U.S. GAAP reconciliation note conducted by the company has
revealed that there were errors in the adjustments reconciling earnings
reported under Canadian GAAP to
September 12, 2005 Page 8 of 9
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earnings reported under U.S. GAAP. The major items relate to the
mark-to-market values of derivative instruments and the tax rates applied
to mark-to-market gains.
The net effect of adjustments for 2004 would result in a decrease in net
earnings (after tax) reported under U.S. GAAP of $4 million to $603
million, and a decrease in comprehensive income of $6 million to $537
million. Similar adjustments in 2003 would result in an increase in net
earnings reported under U.S. GAAP of $11 million to $198 million, and a
decrease in comprehensive income of $14 million to $117 million.
These adjustments have been considered by management and the company's
Audit Committee in consultation with the company's Auditor. The net effect
of the 2004 items was considered to be not significant. While the 2003
items were larger as a proportion of then-current net earnings, these were
also regarded as not significant for a number of reasons. The adjustments
to net earnings and comprehensive income relate primarily to mark-to-market
adjustments which fluctuate on a daily basis, and which a reasonable user
of the financial statements would adjust to current values. These
adjustments relate solely to the U.S. GAAP reconciliation note disclosure
and have no effect on earnings reported under Canadian GAAP. In addition,
the company's financial position and results have changed substantially
since 2003. 2004 net earnings under Canadian GAAP were $617 million in
comparison to $134 million (as restated) in 2003. Net earnings for the
first six months of 2005 were $430 million. Taking into account all the
circumstances, the company considered that the adjustments were not
significant and did not require a restatement of the financial statements.
In future, we propose to expand our disclosure by itemizing line-by-line
any mark-to-market adjustments, clarifying the reasons therefor and
specifying which derivative instruments they pertain to.
CLOSING COMMENTS
We acknowledge that:
- the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
- staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filings; and
- the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the Federal
Securities Laws of the United States.
If there are further questions in connection with the foregoing responses, you
may contact the undersigned at (604) 687-1117.
Yours truly,
John G. Taylor
Senior Vice President, Finance and Chief Financial Officer
September 12, 2005 Page 9 of 9
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APPENDIX A
2Q NEWS RELEASE
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
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4. OTHER INCOME (EXPENSE)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN MILLIONS OF DOLLARS) 2005 2004 2005 2004
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Income from Fording Canadian Coal Trust $ 11 $ 4 $ 18 $ 5
Gain on sale of investments and assets 13 - 33 7
Interest and investment income 10 3 18 4
Insurance proceeds 5 9 21 9
Non-hedge derivative losses (4) - (15) -
Asset retirement obligation expense for closed properties (2) - (4) -
Minority interests (4) (2) (7) (3)
Foreign exchange gain (losses) (4) 2 (2) 3
Miscellaneous income (expense) (6) (4) (12) (10)
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$ 19 $ 12 $ 50 $ 15
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