EXHIBIT 99.3
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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 26, 2007, 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, 2006. In this
discussion, unless the context otherwise dictates, a reference to Teck Cominco,
the Company, or us, we or our, refers to Teck Cominco Limited and its
subsidiaries including Teck Cominco Metals Ltd., and a reference to TCML 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 report contains certain statements which constitute forward-looking
information. These forward-looking statements are not descriptive of historical
matters and may refer to management's expectations or plans. These statements
include but are not limited to statements concerning our business objectives
and plans; future trends in our industry; future production costs and volumes;
mineral grades, reserve and resource estimates and ore types; sales volumes and
realized prices; capital spending plans; exploration plans; expansion plans;
expected metallurgical coal market fundamentals and prices; availability of
equipment and supplies; expected plant availability; success of process
changes; our processing technologies; global economic growth and industrial
demand; production of coal, base metal concentrates and refined metal by our
operations; future metal prices and treatment charges; future royalties
payable; changes in global metal and concentrate inventories; currency exchange
rates; costs of energy, materials and supplies; the outcome of disputes and
legal proceedings in which we are involved; future effective tax rates; and
future benefits costs.
Inherent in forward-looking statements are risks and uncertainties beyond our
ability to predict or control including risks that may affect our operating or
capital plans, including generally encountered in the development and operation
of mineral properties and processing facilities such as unusual or unexpected
geological formations, unanticipated metallurgical difficulties, ground control
problems, process upsets and equipment malfunctions; risks associated with
labour disturbances and unavailability of skilled labour; fluctuations in the
market prices of our principal products, which are cyclical and subject to
substantial price fluctuations; risks created through competition for mining
properties; risks associated with lack of access to markets; risks associated
with mineral and oil and gas reserve and resource estimates, including the risk
of errors in assumptions or methodologies; risks posed by fluctuations in
exchange rates and interest rates, as well as general economic conditions;
risks associated with environmental compliance and permitting, including those
created by changes in environmental legislation and regulation; risks
associated with our dependence on third parties in the provision of
transportation and other critical services; risks associated with aboriginal
title claims and other title risks; social and political risks associated with
operations in foreign countries; and risks associated with legal proceedings.
Actual results and developments are likely to differ, and may differ
materially, from those expressed or implied by the forward-looking statements
contained in this annual report. Such statements are based on a number of
assumptions which may prove to be incorrect, including, but not limited to, the
following assumptions: that there is no material deterioration in general
business and economic conditions; that there is no unanticipated fluctuation of
interest rates and foreign exchange rates; that the supply and demand for,
deliveries of and the level and volatility of prices of zinc, copper, coal and
gold and our other primary metals and minerals as well as oil, natural gas and
petroleum products develop as expected; that we receive regulatory and
governmental approvals for our development projects and other operations on a
timely basis; that we are able to obtain financing for our development projects
on reasonable terms; that there is no unforeseen deterioration in our costs of
production or our production and productivity levels; that we are able to
continue to secure adequate transportation for our products; that we are able
to procure mining equipment and operating supplies (including tires) in
sufficient quantities and on a timely basis; that engineering and construction
timetables and capital costs for our development and expansion projects are not
incorrectly estimated or affected by unforeseen circumstances; that costs of
closure of various operations are accurately estimated; that there are no
unanticipated changes to market competition; that our reserve estimates are
within reasonable bounds of accuracy (including with respect to size, grade and
recoverability) and that the geological, operational and price assumptions on
which these are based are reasonable; that we realize expected premiums over
London Metal Exchange cash and other benchmark prices; that our coal price
negotiations with customers will be resolved on acceptable terms as to price
and volume; that environmental and other proceedings or disputes are
satisfactorily resolved; and that we maintain our ongoing relations with our
employees and with our business partners and joint venturers.
We caution you that the foregoing list of important factors and assumptions is
not exhaustive. Events or circumstances could cause our actual results to
differ materially from those estimated or projected and expressed in, or
implied by, these forward-looking statements. You should also carefully
consider the matters discussed under "Risk Factors" in our Annual Information
Form. We undertake no obligation to update publicly or otherwise revise any
forward-looking statements or the foregoing list of factors, whether as a
result of new information or future events or otherwise, except as may be
required under applicable laws.
2 Management's Discussion and Analysis Teck Cominco Limited
OPERATIONS
Base metal mining represents a major portion of our operations, consisting of
interests in three zinc mines and two copper mines. We own and operate the Red
Dog zinc mine under an agreement with NANA Regional Corporation Inc., an
Alaskan native corporation. The Company also owns the Pend Oreille zinc mine in
Washington State, which provides concentrates to the Trail metallurgical
operations. In addition, we have a 50% joint venture interest in the Lennard
Shelf zinc mine in Western Australia, which is restarting operations in the
first quarter of 2007. We have a 97.5% partnership interest in the Highland
Valley Copper mine in British Columbia, Canada, and a 22.5% interest in the
Antamina copper, zinc mine in Peru.
In coal mining, we are a 40% owner and managing partner of the Elk Valley Coal
Partnership, formed in 2003. Elk Valley Coal operates six metallurgical coal
mines in Western Canada, which produced 22 million tonnes of coal in 2006.
Our gold mining operations include three mines: our 40% interest in the Pogo
mine in Alaska in a joint venture with Sumitomo Metal Mining Co. Ltd. and
Sumitomo Corporation, and our 50% interest in two mines in the Hemlo camp in
Ontario.
In smelting and refining, we own and operate the Trail metallurgical complex in
British Columbia, which produces refined zinc, lead and other metals including
indium and germanium.
The table below shows our share of production for the last five years and
planned production for 2007.
FIVE YEAR PRODUCTION RECORD AND 2007 PLAN (COMPANY'S SHARE)
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UNITS 2007
(000's) 2002 2003 2004 2005 2006 PLAN
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SMELTING AND REFINING (Note 1)
Zinc tonnes 362 412 413 223 296 295
Lead tonnes 81 88 85 69 90 85
MINE OPERATIONS (Note 2)
Zinc tonnes 714 665 619 657 627 700
Lead tonnes 126 125 119 110 129 130
Copper tonnes 202 176 248 263 254 215
Molybdenum pounds 3,836 4,934 11,631 9,482 7,929 7,300
Gold ounces 285 281 261 245 263 350
Metallurgical coal (Note 3) tonnes 6,889 7,558 9,277 9,948 8,657 9,000
====================================================================================================================================
Notes:
(1) Refined zinc and lead production was affected by a three-month strike at
Trail in 2005. Refined zinc production decreased with the sale of the
Cajamarquilla zinc refinery in December 2004.
(2) Production and sales data for base metals refer to metals contained in
concentrate.
(3) Coal production does not include our 5.25% indirect interest in Elk Valley
Coal Partnership through our investment in Fording Canadian Coal Trust
units. Planned coal production volume in 2007 is a preliminary estimate
and actual production will depend on the outcome of sales negotiations
with customers which are currently in progress.
3 Management's Discussion and Analysis Teck Cominco Limited
ZINC MINING
RED DOG (100%)
The Red Dog mine, located in northwest Alaska, is the world's largest zinc
producer. We operate the mine under an agreement with NANA Regional Corporation
Inc. (NANA), an Alaskan native corporation.
Production in 2006 totalled 557,500 tonnes (1.23 billion pounds) of zinc and
123,500 tonnes (272 million pounds) of lead. Site operating costs increased 18%
over 2005 primarily as a result of escalating prices for fuel, reagents and
grinding media. Capital expenditures in 2006 totalled $36 million including $8
million for process improvements. A follow-up shallow gas program in 2006
encountered technical setbacks, and further drilling will be required in 2007
to explore the economic potential of natural gas as a replacement for diesel
fuel for power generation.
Operating profit increased to $1.1 billion in 2006 from $325 million in 2005,
mainly as a result of significantly higher zinc and lead prices.
Estimated production in 2007 is 557,000 tonnes (1.23 billion pounds) of zinc
and 124,000 tonnes (273 million pounds) of lead. Capital expenditures for 2007
are planned at $38 million, including $14 million on the tailings dam and $6
million for process improvements.
Pursuant to a royalty agreement, we pay NANA an annual advance royalty equal to
the greater of 4.5% of Red Dog mine's net smelter return or US$1 million. In
2006, the advance royalty amounted to US$51 million. After we recover certain
capital expenditures including an interest factor, the Company will pay to NANA
a 25% net proceeds of production royalty from the Red Dog mine, increasing in
5% increments every fifth year to a maximum of 50%. Net proceeds of production
are calculated based on net cash flow from product sales after deduction of
distribution and operating costs, less capital expenditures, an interest
allowance, a selling and management fee and a charge for estimated reclamation
and closure costs. Advance royalties previously paid will be recoverable
against the 25% royalty on net proceeds of production. As at December 31, 2006,
capital expenditures including an interest factor have been fully recovered and
the unrecovered cumulative amount of advance royalty payments was US$104
million. We estimate that the payment of the 25% royalty to NANA will commence
in the fourth quarter of 2007 after we have recovered all advance royalty
payments, but the actual timing is highly dependent on metal prices, sales
volumes and other items affecting the calculation of net proceeds.
RED DOG MINE, ALASKA, USA
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100% 2006 2005 2004
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Tonnes milled (000's) 3,238 3,087 2,948
Zinc grade (%) 20.6 21.7 22.0
Lead grade (%) 6.1 5.6 6.0
Zinc recovery (%) 83.5 84.9 85.6
Lead recovery (%) 62.8 59.0 65.9
Zinc production (000's tonnes) 557.5 568.0 554.2
Zinc sales (000's tonnes) 536.0 544.8 661.2
Lead production (000's tonnes) 123.5 102.3 117.0
Lead sales (000's tonnes) 114.8 105.0 126.8
Capital expenditures ($ millions) 36 34 19
Operating profit ($ millions) 1,079 325 207
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4 Management's Discussion and Analysis Teck Cominco Limited
PEND OREILLE (100%)
The Pend Oreille mine, located in northeastern Washington State, provides zinc
and lead concentrates to the Trail smelter 80 kilometres north of the mine in
British Columbia. Mine production in 2006 was 34,000 tonnes of zinc and 5,000
tonnes of lead. Zinc production in 2006 was 11,000 tonnes lower than 2005,
primarily as a result of the implementation of a revised ground control plan.
Production in 2007 is planned to be 45,000 tonnes of zinc and 8,000 tonnes of
lead. Exploration in the immediate vicinity of the mine returned encouraging
results with intersections similar to current mining areas, and further
drilling will continue in 2007.
We have observed significant negative zinc grade variances between the reserve
model and mill feed and have experienced higher mining costs than anticipated.
A revised mine plan and reserve model have been developed, and Pend Oreille's
ore reserves have been substantially reduced due to changes in mine design,
revised ore grades and higher operating costs assumptions, offset by higher
metal price projections. Reserve and mine life will be highly sensitive to zinc
prices, but we expect the remaining mine life to exceed four years.
LENNARD SHELF (50%)
The Lennard Shelf operations are located in the Kimberley region of Western
Australia, 400 kilometres east of Broome and 2,600 kilometres north of Perth.
They are owned by Teck Cominco Limited (50%) and Xstrata Plc (50%) through
Lennard Shelf Pty Ltd.
The operations have been on care and maintenance since October 2003. A decision
to restart the Pillara mine was made in April 2006, and production began in the
first quarter of 2007. The operation is anticipated to produce approximately
75,000 tonnes of zinc and 15,000 tonnes of lead in concentrates, on an annual
basis, over its anticipated mine life of four years. Concentrate shipments are
expected to start in the second quarter of 2007.
An active exploration program designed to increase reserves at the Pillara mine
and to look for other economic deposits in the region is continuing. Since the
acquisition of this property in late 2003, there has also been extensive
cleanup and rehabilitation of past producing mine sites (Kapok, Goongewa and
Cadjebut) operated by the previous owner.
COPPER
HIGHLAND VALLEY COPPER (97.5%)
The Highland Valley Copper mine, located in south central British Columbia, is
one of the world's largest tonnage copper mining and milling complexes.
Mill throughput declined 10% to 45 million tonnes from 2005 as a result of
processing harder ore from the Valley and Highmont pits. Copper production in
2006 was 171,300 tonnes (378 million pounds), and molybdenum production was 4.1
million pounds. The east Highmont pit was reactivated in October 2005 and
provided six million tonnes of ore during 2006. Capital expenditures of $80
million were primarily for mine equipment and capitalized deferred stripping
costs. A new five-year agreement was concluded with the United Steelworkers of
America, which will expire on September 30, 2011.
Operating profit increased to a record $1.0 billion in 2006 from $613 million
in 2005 due mainly to significantly higher copper prices.
Estimated production in 2007 is 141,700 tonnes (312 million pounds) of copper
and 4.4 million pounds of molybdenum. The decline in copper production is a
result of a combination of reduced mill throughput due to harder ore and
reduced copper grades, as well as higher stripping requirement to develop the
Valley pit east wall. Capital expenditures for 2007 are planned at $170
million, including $60 million for replacement of mine production equipment,
$20 million for the completion of the Valley pit crusher and conveyor
relocation, $30 million for sustaining capital and $60 million for capitalized
development stripping.
Following months of extensive study, we have decided to extend the mine life of
Highland Valley Copper by an additional six years to 2019. The new mine plan
will require a push-back of the west wall of the Valley pit to produce an
5 Management's Discussion and Analysis Teck Cominco Limited
average of 125,000 tonnes of copper per year after 2013. Life of mine copper
and molybdenum grades are expected to decline by approximately 10% as a result
of the inclusion of lower grade ore in the mine plan. Total capital costs of
the project are estimated at $300 million, including $130 million for capital
equipment and the balance in pre-production stripping over the period of 2009
through 2013. Approximately $50 million of mobile mining equipment will be
ordered in 2007 to permit waste stripping to commence in 2009.
Our feasibility study to determine the viability of the construction of a new
CESL hydrometallurgical refinery to process Highland Valley concentrates was
inconclusive. The principle advantages of the CESL process, which include the
efficient, environmentally friendly treatment of lower grade, higher impurity
concentrates are less relevant in the treatment of the readily marketable, high
grade, clean concentrates that are produced at Highland Valley. We will
continue to evaluate the potential for accessing other, better suited feed
sources in the region that could improve the overall economics and justify the
construction of a new refinery.
HIGHLAND VALLEY COPPER MINE, BRITISH COLUMBIA, CANADA
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100% 2006 2005 2004
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Tonnes milled (000's) 45,356 50,666 50,623
Copper grade (%) 0.412 0.398 0.384
Copper recovery (%) 91.5 88.8 87.7
Copper production (000's tonnes) 171.3 179.0 170.3
Copper sales (000's tonnes) 185.2 185.8 156.1
Molybdenum production (million pounds) 4.1 6.3 10.7
Molybdenum sales (million pounds) 3.9 6.9 10.8
Capital expenditures ($ millions) 80 14 4
Operating profit ($ millions) (Note) 1,019 613 431
================================================================================
Note:
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.
ANTAMINA (22.5%)
The Antamina mine, located in the north central Peruvian Andes, is owned
jointly by BHP Billiton (33.75%), Xstrata Plc (33.75%), Teck Cominco Limited
(22.5%) and Mitsubishi Corporation (10%). The mine produced 384,200 tonnes (847
million pounds) of copper, 156,100 tonnes (344 million pounds) of zinc and 17
million pounds of molybdenum, in 2006.
A three-year collective bargaining agreement was concluded with the union that
represents the workers at the Antamina mine, which will expire on July 24,
2009. Our share of the operating profit improved to $598 million in 2006
compared with $355 million in 2005 as a result of higher metal prices.
On the acquisition of our interest in the Antamina mine, we granted the vendor
a net profits royalty equivalent to 7.4% of our share of project cash flow
after recovery of capital costs and an interest factor. The royalty became
payable in the first quarter of 2006, and royalty expense in 2006 was $33
million.
Mill throughput in 2007 is estimated to be 30 million tonnes, producing 349,000
tonnes (769 million pounds) of copper, 351,000 tonnes (774 million pounds) of
zinc and 13 million pounds of molybdenum. Zinc production is expected to rise
in 2007 with an increased proportion of copper-zinc ores while copper and
molybdenum production is expected to decline with decreases in copper-only
ores. Antamina's planned capital expenditures, on a 100% basis, total $114
million, including $34 million for a pebble crusher, $19 million for the
tailings pond and $17 million on resource definition drilling. The addition of
a pebble crusher is expected to improve average annual throughput by 5% after
completion in the first quarter of 2008.
6 Management's Discussion and Analysis Teck Cominco Limited
On September 5, 2006, Antamina, together with other mining companies in Peru,
announced that it would contribute to a fund established for the benefit of
local communities. The agreement requires Antamina to make extraordinary annual
payments of 3.75% of its after-tax earnings to the fund. In December 2006, the
agreement was finalized. The payment will be applicable for 2006 and the
subsequent four years, subject to annual metal prices exceeding certain
reference price levels for any given year. The payments are not deductible for
Peruvian income tax purposes. The Company's share of the 2006 contribution was
$17 million.
ANTAMINA MINE, ANCASH, PERU
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100% 2006 2005 2004
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Tonnes milled (000's)
Copper-only ore 23,665 24,053 21,508
Copper-zinc ore 6,591 6,291 9,746
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30,256 30,344 31,254
Copper grade (%) (Note) 1.38 1.35 1.34
Zinc grade (%) 0.75 0.92 0.97
Copper recovery (%) 91.0 90.3 87.3
Zinc recovery (%) 86.5 82.7 73.8
Copper production (000's tonnes) 384.2 374.6 362.1
Copper sales (000's tonnes) 385.5 384.1 341.3
Zinc production (000's tonnes) 156.1 184.3 190.1
Zinc sales (000's tonnes) 158.3 190.5 181.5
Molybdenum production (million pounds) 17.4 14.8 7.9
Molybdenum sales (million pounds) 17.6 16.1 4.0
Capital expenditures ($ millions) 55 62 39
Company's share (22.5%) of operating
profit ($ millions) 598 355 171
================================================================================
Note:
Copper ore grades and recoveries apply to all of the processed ores. Zinc
grades and recoveries apply to copper-zinc ores only.
GOLD
HEMLO MINES (50%)
Teck Cominco has a 50% interest in the Williams and David Bell gold mines,
located in northwestern Ontario approximately 350 kilometres east of Thunder
Bay. The mines are jointly operated by Teck Cominco Limited and Barrick Gold
Corporation.
Our share of gold production was 205,000 ounces in 2006, or 11% below the
previous year. The underground mine at Williams continues to transition its
mining process to Alimak methods, which allows us to reach otherwise
inaccessible ores.
Our share of operating profit was $7 million in 2006 compared with $9 million
in 2005. The impact of higher U.S. dollar gold prices was more than offset by a
weaker U.S. dollar and higher operating costs. Operating costs increased as a
result of increased reliance on contractors for Alimak mining as well as higher
energy prices and consumable costs.
Gold production in 2007 is expected to be similar to 2006, with lower
production from the Williams underground mine being offset by higher production
from the open pit.
Ore grade at Williams is expected to drop off after 2007, as the higher grade
underground B-Zone is mined out and a higher percentage of ore is sourced from
the lower grade open pit. The underground mine is expected to continue to go
through a significant transition as Alimak mining methods require longer lead
7 Management's Discussion and Analysis Teck Cominco Limited
times for development. Underground access to and extraction of high-grade
stopes at the David Bell mine will also continue to be restricted by ground
problems. A strategic review of the life of mine plan is being undertaken in
the first half of 2007 to optimize production and costs going forward. This
review may result in changes to reserves and resource estimates for the
operations.
During the last quarter of 2006, an agreement was reached with Newmont Mining
Canada granting Hemlo exclusive rights on the nearby Interlake property to
explore, develop and mine ores. The Interlake property is the down-dip
extension of the Williams ore zone to the west of the current boundary. An
extensive exploration program is planned for 2007 to extend the life of the
Williams underground mine.
HEMLO MINES, ONTARIO, CANADA
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100% 2006 2005 2004
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Tonnes milled (000's) 3,355 3,503 3,662
Grade (grams/tonne) 4.0 4.4 4.5
Mill recovery (%) 94.2 93.7 94.0
Production (000's ounces) 410 460 495
Cash operating cost per ounce (US$) 465 336 266
Capital expenditures ($ millions) 16 15 27
Company's share (50%) of operating
profit ($ millions) 7 9 32
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POGO MINE (40%)
The Pogo gold mine is located 145 kilometres southeast of Fairbanks, Alaska. It
is a joint venture with Sumitomo Metal Mining Co. Ltd. (51%) and Sumitomo
Corporation (9%). Teck Cominco Limited has a 40% interest in the mine and is
the operator.
Construction of the Pogo mine was completed in the first quarter of 2006, and
the installation of the underground ore conveying system was completed in the
second quarter with total construction cost of US$350 million. The Pogo mine
commenced operations in January, with the first gold bar poured on February 12,
2006.
Mill throughput did not reach design capacity in 2006 as originally planned as
it was limited by tailings filtration capacity and bottlenecks in the paste
backfill system. When operating, the overall plant was processing ore at 70% of
design capacity during the last half of 2006. The mill grinding and flotation
circuits capability was confirmed as the mill operated at design capacity of
2,500 tonnes per day for short periods of time.
A third filter press was installed in the latter part of 2006 to improve
filtration capacity and was commissioned in January 2007. Modifications to the
filtered tailings handling system to improve paste backfilling will be
completed in the first quarter of 2007. These two projects are estimated to
cost an additional US$21 million.
On October 19, a construction accident severely damaged electrical systems at
the mine site, resulting in a total loss of electrical power. Maintenance
activities and construction projects recommenced on October 22, and underground
mining resumed on October 28. Mill operations resumed when line power was
restored in mid-December. There was a stockpile of 99,000 tonnes of ore on
surface by the end of the year.
Commercial production for accounting purposes is expected to commence in the
second quarter of 2007 following the completion of the filter plant projects.
Full production is anticipated by May 2007, and gold production in 2007 is
scheduled to be 340,000 ounces. Annual gold production is expected to be
350,000 to 450,000 ounces over the ten-year life of the project.
The surface exploration program completed 37,048 feet of drilling over a
three-month period in 2006. The program focused on advancing previously
discovered quartz veins and drill testing early stage targets. Information
collected from the program in 2006 will be used to define the 2007 program.
8 Management's Discussion and Analysis Teck Cominco Limited
COAL
ELK VALLEY COAL PARTNERSHIP (40%)
Elk Valley Coal operates five metallurgical coal mines in southeastern British
Columbia and one in west-central Alberta. Elk Valley Coal is the world's second
largest exporter of seaborne hard coking coal for the global steel industry. We
hold a 40% partnership interest in Elk Valley Coal and a 5.25% indirect
interest through our investment in Fording Canadian Coal Trust.
Coal sales by Elk Valley Coal declined 6% from the previous year to 22.6
million tonnes in 2006. The decrease results from some customers reducing their
requirements for hard coking coal by substituting lower quality and lower
priced semi-soft coking coals. The price differential between different
qualities of coking coals is expected to ultimately determine the extent of
substitution in the future.
The reduction in sales and production volumes, combined with an increase in
cost of sales and transportation, as well as a weaker U.S. dollar, contributed
to a lower operating profit in 2006. Our share of operating profit decreased to
$444 million compared with $512 million in 2005. Higher costs for site
consumables, combined with longer waste haul distances and lower production
levels, led to increased site costs. Higher rail rates in the primary rail
contract and port rates partially linked to coal pricing led to an increase in
transportation costs.
Multi-year collective agreements were signed at three of Elk Valley Coal's
mining operations in 2006. In January, a four-year agreement was reached at the
Line Creek mine, followed by five-year agreements at the Fording River mine in
May and the Elkview mine in June. With the completion of these agreements, all
four of Elk Valley Coal's unionized mines located in southeast British Columbia
are now covered under long-term labour contracts.
Adverse weather conditions in late 2006 and early 2007 affected rail
performance and contributed to lower inventories of Elk Valley Coal's products
at the ports and lower sales in the first quarter. Elk Valley Coal's 2007
production and sales will be affected by any disruption in coal shipments and
the outcome of the sales negotiations in the first quarter in 2007.
COAL MINES, ALBERTA AND BRITISH COLUMBIA, CANADA
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100% 2006 2005 2004
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Coal production (000's tonnes) (Note 1) 21,790 25,679 24,889
Coal sales (000's tonnes) 22,614 24,124 25,004
Average sale price (US$/tonne) 113 99 52
Average sale price (Cdn$/tonne) 131 125 73
Operating expenses (Cdn$/tonne)
Cost of product sold 40 33 26
Transportation 37 35 29
Capital expenditures ($ millions) (Note 2) 40 64 43
Company's share of operating profit
($ millions) (Note 3) 444 512 125
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Notes:
(1) Production, sales volume and capital expenditures reflect 100% of Elk
Valley Coal operations.
(2) Capital expenditures exclude expansion capacity costs.
(3) Results of the Elk Valley Coal Partnership represent our 40% direct
interest in the Partnership commencing April 1, 2006, 39% from April 1,
2005 to March 31, 2006, 38% from April 1, 2004 to March 31, 2005 and 35%
prior to April 1, 2004.
9 Management's Discussion and Analysis Teck Cominco Limited
OIL SANDS
FORT HILLS PROJECT (15%)
In September 2005, we entered into an agreement to subscribe for a 15% interest
in the Fort Hills Energy Limited Partnership, which is developing the Fort
Hills oil sands project in northern Alberta. The subscription price will be
satisfied by contributing $850 million (34%) of the first $2.5 billion of
project expenditures and our 15% share thereafter. Following our earn-in, the
project will be owned by Petro-Canada (55%), UTS Energy Corporation (30%), and
Teck Cominco Limited (15%). Petro-Canada became a partner in the project in
March 2005 and is the project operator as well as having responsibility for
marketing.
The Fort Hills oil sands project, situated on Leases 5, 8 and 52, located about
90 kilometres north of Fort McMurray, encompasses approximately 18,600
contiguous hectares. Leases 437 and 438, totalling 5,200 hectares, were
acquired immediately to the north of the project in 2006 to provide for
additional mine development area. The Fort Hills Partnership has determined a
best estimate of the contingent bitumen resource of the project (on a 100%
basis) to be 4.7 billion barrels of recoverable bitumen, with a low estimate of
3.0 billion barrels and a high estimate of 5.5 billion barrels.
The project will consist of an open pit truck-shovel operation, bitumen
extraction-froth treatment plant and an upgrader. The mine and bitumen
extraction-froth treatment plant has regulatory approval for a 100,000 barrels
per day operation commencing in 2011, increasing to 190,000 barrels per day by
2013. The bitumen upgrader facility will be located in Sturgeon County,
approximately 40 kilometres northeast of Edmonton. An Environmental Impact
Assessment for the upgrader was filed with Alberta Environment and the Alberta
Energy and Utilities Board in December.
Preliminary concept screening and selection work was carried out in 2005 with
pre-feasibility level engineering studies completed in 2006. The design basis
memorandum, defining project phasing and capital cost estimates will be
completed in mid-2007. The appropriate production level for the first phase of
the operation is still under review. Project spending in 2006 was $275 million,
and $670 million is budgeted for 2007 of which our 34% share would be $230
million.
OTHER OIL SANDS LEASES
In January 2007, we announced with UTS Energy Corporation (UTS) that the two
companies have jointly acquired a total of eighteen new leases in the Athabasca
oil sands region of Alberta, on a 50/50 basis. The two companies have jointly
acquired 277 thousand acres at a total cost of $164 million. We also have an
option to acquire a 50% interest in Lease 14 from UTS at fair market value.
SMELTING AND REFINING
TRAIL (100%)
The metallurgical operations at Trail, British Columbia, constitute one of the
world's largest fully integrated zinc and lead smelting and refining complexes.
The facility also produces a variety of other metals, fertilizers and chemical
products.
A strong focus on operating performance and productivity resulted in excellent
production levels in 2006. Refined zinc production was 296,100 tonnes in 2006,
an annual production record, while new production records were also set for
indium, germanium and cadmium. Germanium production was 33,200 kilograms and
indium production was 51,500 kilograms. The new tin removal plant was
successfully commissioned in the second quarter of the year as planned and has
allowed for higher indium inputs.
10 Management's Discussion and Analysis Teck Cominco Limited
Operating profit from metal operations was $370 million, up significantly from
$65 million in the previous year. The higher operating profit was due mainly to
higher zinc prices and production levels, while the 2005 results were
negatively affected by the interruption caused by the 79-day strike.
Capital expenditures were $76 million during 2006 with projects including the
tin removal plant, the Waneta dam generator upgrade and cold stage filter
replacement in zinc leaching.
Trail is expected to produce 295,000 tonnes of refined zinc, 85,000 tonnes of
refined lead, 16.5 million ounces of silver and 60,000 kilograms of indium in
2007. Capital expenditures are planned at $98 million, of which $22 million
will be dedicated to work associated with a five-week maintenance shutdown in
the lead smelter commencing in October.
Trail owns the Waneta hydroelectric dam, built in 1954 and located 10
kilometres south of Trail, close to the border with the United States. We also
own 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 we currently receive approximately 2,700
GW.h of power entitlement per year, regardless of the water flow available for
power generation.
The final phase of a multi-year project to upgrade the four generating units at
the Waneta dam was completed in the first quarter of 2007. This final phase
increased plant capacity by an additional 25 MW to 475 MW, and annual power
entitlement will increase by approximately 50 GW.h. Work commenced in July 2006
on the replacement of the existing 50-year old Waneta dam switching station
with completion of this project scheduled for the fall of 2007.
Power operating profit of $25 million in 2006 was lower than the previous year
as a result of lower power prices and less power available for sale due to the
upgrade project and uninterrupted production in the metallurgical operations.
TRAIL SMELTING AND REFINING, BRITISH COLUMBIA, CANADA
- --------------------------------------------------------------------------------
100% 2006 2005 2004
- --------------------------------------------------------------------------------
Zinc production (tonnes) 296,100 223,200 296,000
Lead production (tonnes) 90,300 68,600 84,700
Zinc sales (tonnes) 290,300 228,300 295,500
Lead sales (tonnes) 88,100 69,300 86,100
Gold production (000's ounces) 87 84 112
Silver production (000's ounces) 19,500 15,100 19,700
Indium production (kilograms) 51,500 32,500 41,800
Capital expenditures ($ millions) 76 34 24
Surplus power sold (gigawatt hrs) 891 1,278 957
Power price (US$/megawatt hr) 44 58 44
Operating profit ($ millions)
Metal operations 370 65 82
Power sales 25 69 37
================================================================================
11 Management's Discussion and Analysis Teck Cominco Limited
MARKETS
COMMODITIES IN GENERAL
Our principal products are zinc, copper and metallurgical coal, accounting for
34%, 29% and 18% of revenues respectively in 2006. Molybdenum is a significant
by-product of the Company's copper operations and accounted for 3% of revenue
in 2006. Other products include gold, silver, lead, indium and germanium. Lead
concentrate sales represented 3% of our revenues in 2006 and are included in
the revenues of the zinc mines.
Demand for all our major products, with the exception of coal, increased in
2006, with strong global economic growth led by China. As the accompanying
charts illustrate, inventories for copper and zinc have declined as prices have
strengthened.
If current trends in global economic conditions continue, we expect that prices
of our principal products will remain strong over the medium term, with periods
of price volatility. Our assessment of market dynamics suggests that economic
growth and production capacity in China will continue to be a major factor
influencing global supply and demand for commodities.
ZINC
Global zinc consumption is estimated to have grown by 5.8% in 2006, well above
the trend growth of 2.6%. Continued strong growth in China and other Asian
countries was supplemented by good growth in Europe and the Americas. Asia's
growth of 10% was led by a 12% growth rate in China, while United States
consumption grew by 3%, Europe grew by 2% and the rest of the world grew by 1%.
In 2006, London Metal Exchange stocks fell by 306,000 tonnes or 78% to 88,000
tonnes. Total refined inventories (LME, Producer, Consumer and Merchant) at the
end of 2006 were 478,000 tonnes or 16 days of global consumption, down from 28
days of global consumption at the end of 2005.
Prices rose throughout the year, starting the year at US$0.87 per pound and
finishing the year at US$1.96 per pound. In 2006, the average price was US$1.49
per pound, up 137% from US$0.63 per pound in 2005.
China has a significant impact on the zinc market. With a continuing tight
global concentrate market in 2006, China's net imports of zinc concentrates
rose 46% from 2005 levels. Announced at the beginning of 2006 but not
implemented until late 2006, China eliminated the rebate of the VAT (value
added tax) which caused China's exporters to increase their exports ahead of
the elimination of the VAT. Consequently, China became a small net exporter of
refined zinc in 2006, exporting 7,000 tonnes in 2006 in comparison to imports
of 269,000 tonnes in 2005.
The zinc market in 2006 again recorded deficits in both concentrates and
refined metal. The tight concentrate market for six consecutive years was a
factor in limiting growth in metal supply. The refined market recorded its
third consecutive deficit as consumption grew at a greater rate than supply.
Although there are concerns over the United States economy, we expect that
United States zinc consumption will grow, albeit at a slower pace than in 2006,
and will be supplemented by good growth in Europe and Asia. Consequently, we
expect a strong refined zinc market in 2007 with low stock levels continuing
throughout the year.
In spite of increasing mine production during 2007, we expect the concentrate
market will remain tight, and the zinc concentrates market is expected to be in
deficit. Negotiated zinc concentrate treatment charges have been falling since
2000, and based on the current outlook we expect a further reduction in
treatment charges in 2007.
12 Management's Discussion and Analysis Teck Cominco Limited
ABSOLUTE GROWTH IN CONSUMPTION
2001 TO 2006 FOR ZINC
[GRAPHIC OMITTED]
ZINC PRICE AND INVENTORY (LME) GLOBAL DEMAND FOR ZINC
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
COPPER
World refined copper consumption rose by 4% in 2006, above the trend growth of
2.8% per year. It is believed that actual consumption in China grew by 5%,
while the United States grew by 3%, Western Europe grew by 3% and Asia
excluding China grew by 4%.
Copper supply was again adversely affected by large, unexpected mine production
losses. In 2005, global mine production losses from plan totalled nearly
900,000 tonnes of contained copper; in 2006, we believe they totalled 700,000
tonnes of contained copper. A number of labour disruptions, combined with lower
grade ores and production difficulties at some of the world's largest copper
mines, quickly put the 2006 copper concentrate market into deficit.
Copper prices started the year at US$2.06 per pound, and prices continued to
rise throughout the early half of 2006 with copper prices reaching an historic
high of US$3.98 per pound in May. Copper price averaged US$3.05 per pound in
2006, up 83% from 2005 levels.
Starting in 2005, a large amount of "fund" money entered the commodities
market. With index funds reallocating their investments to include commodities
in their portfolios, a large pool of new money was brought to the copper
market.
In the last quarter of 2006, terminal copper stocks in LME and Comex warehouses
began to rise. In 2006, LME copper stocks doubled, rising 93,225 tonnes to
finish the year at 183,000 tonnes, and Comex stocks rose 25,000 tonnes, a 400%
increase. The stock increases in 2006 are coming off historic lows in 2005 and
13 Management's Discussion and Analysis Teck Cominco Limited
remain well below what are considered normal working levels. At the end of
2006, total global stocks (producer, consumer, merchant and terminal stocks)
stood at less than 20 days of global consumption while 30-year average levels
are estimated at 38 days of global consumption.
In China, apparent consumption growth appeared to reverse from years of double
digit growth and copper imports of concentrates, blister and cathode all
dropped in 2006. Apparent Chinese copper consumption is estimated to have
fallen 6% in 2006. Chinese imports of copper concentrates fell 12% to 1,076,000
tonnes of contained copper in 2006. Net imports of scrap were up 2.5%, and net
imports of cathode were down 46%. Many analysts believe that the government of
China had been selling refined copper from its strategic reserve to supply the
market, making apparent demand appear lower than actual demand in 2006.
In 2007, significant increases in China's smelting capacity are expected to
push the global copper concentrate market into deficit. This is expected to
result in falling treatment charges and modification of the price participation
term. Although a small surplus of copper metal is expected in the global
marketplace, any unexpected mine production disruption could again push the
metal market into deficit.
ABSOLUTE GROWTH IN CONSUMPTION
2001 TO 2006 FOR COPPER
[GRAPHIC OMITTED]
COPPER PRICE AND INVENTORY (LME) GLOBAL DEMAND FOR COPPER
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
14 Management's Discussion and Analysis Teck Cominco Limited
GOLD
The London PM Gold Fix averaged US$604 per troy ounce in 2006, up 36% from the
2005 average. The price hit a 26-year high in May when it reached US$725 per
troy ounce.
Global mine production fell slightly by 2% in 2006 to 2,467 tonnes, while scrap
supply rose 20% and net official sector sales fell by 50%. Overall supply fell
5% in 2006.
Growth in gold investments and Exchange Traded Funds (ETF's) was a strong
driver of prices in 2006, offsetting a slump in jewellery off-take. Jewellery
demand fell by 16%, most of which was in the first half of 2006. This drop was
largely due to the volatile and higher price for gold.
GOLD AVERAGE PRICE (LONDON PM FIX)
[GRAPHIC OMITTED]
COAL
Teck Cominco is a major producer of metallurgical coal through our interest in
the Elk Valley Coal Partnership. Unlike some of our metal products, which are
priced on a daily basis through metal exchanges, the prices of the majority of
metallurgical coal sales are settled through annual negotiations with buyers in
the steel industry for the coal year running from April 1 to March 31.
The supply/demand imbalance for hard coking coal continued to ease over the
course of 2006, which is expected to result in a decline in prices for the 2007
coal year compared with the average contract price of US$107 per tonne in the
2006 coal year. Prices are, however, expected to remain well above historical
averages.
A trend is emerging in the market whereby the hard coking coal segment is being
further stratified into groups based on coal quality, and prices will vary
between these groups. This stratification could prove to be beneficial for Elk
Valley Coal, which can produce a range of qualities of products including high
quality hard coking coal products.
LEAD
The global market for refined lead was in deficit in 2006. Strong growth in
demand outstripped supply and reduced refined stocks to record low levels in
days of global consumption. While it is believed that growth in demand will be
strong again in 2007, it is expected that refined supply will grow by a greater
amount and the refined market will record a modest surplus. In spite of this
modest surplus, refined stocks will not grow significantly, keeping positive
upward pressure on price and premiums.
MOLYBDENUM
Molybdenum prices started the year at US$23 per pound and have remained
relatively flat for the entire year, trading between US$20 per pound and US$27
per pound. The average price for 2006 was US$25 per pound.
The molybdenum market continued to experience strong fundamental growth across
many demand sectors including: oil and gas tubular products, pipeline projects,
advanced high strength and ultra high strength steel applications, and
industrial stainless steel applications.
15 Management's Discussion and Analysis Teck Cominco Limited
In 2005, a number of primary molybdenum mines in the northern region of China
were closed for environmental and safety reasons; these mines remain closed,
and China's molybdenum mine production remains below historic levels.
As molybdenum prices are significantly above historic averages, many Western
primary molybdenum mines are expected to start production, but these mines are
not coming on stream until late 2008 and early 2009. With the continued
curtailment of production from China and the projected lower ore grades of the
mines in South America, it is possible that molybdenum mine supply will be
insufficient to meet growing demand through 2007.
INDIUM
Indium prices started the year at US$825 per kilogram rose to US$980 per
kilogram by March and ended the year at US$690 per kilogram. In 2006, the
average price was US$798 per kilogram.
The outlook for indium remains positive as demand growth is expected to stay
strong due to increased consumption of coated glass for display devices, such
as flat screen televisions and computer monitors. The recent announcement by
China to impose a tax on exports of indium should put upward pressure on the
price.
FINANCIAL REVIEW
Net earnings for the year ended December 31, 2006, were $2.4 billion or $11.53
per share compared with net earnings of $1.3 billion or $6.62 per share in
2005, and net earnings of $617 million or $3.18 per share in 2004.
Net earnings in 2006 included after-tax gains of $170 million on the sale of
investments including $103 million on the sale of our investment in Inco. Net
earnings in 2005 included gains on the sale of investments and assets totalling
$65 million and $94 million in favourable tax adjustments. In 2004, we recorded
a write-down of investments of $52 million and had non-recurring tax benefits
of $31 million.
Net earnings in 2006 increased substantially over 2005 due mainly to
significantly higher copper and zinc prices, with the average LME prices
increasing by 83% and 137% respectively over the previous year. The average
coal price in 2006 of US$113 per tonne was 14% higher than the US$99 per tonne
realized in 2005. Partially offsetting these higher commodity prices was a
weaker U.S. dollar, with an average Canadian/U.S. dollar exchange rate of 1.13
in 2006 compared with 1.21 in 2005.
Sales volumes of copper, zinc, lead and gold from mine operations in 2006 were
similar to 2005, except coal sales volumes which were 4% lower. Sales of
refined zinc in 2006 increased by 27% over 2005 as a three-month strike at
Trail reduced production and sales in 2005. Molybdenum sales in 2006 were 25%
lower than 2005 as a result of lower production due to lower ore grades.
Net earnings in 2005 increased significantly from 2004 due to the higher metals
and coal prices, as well as higher copper sales volumes.
Cash flow from operations in 2006, before changes in non-cash working capital
items, was $2.6 billion compared with $1.6 billion in 2005 and $1.1 billion in
2004. The significant increase in cash flow from operations in the last two
years was due to rising commodity prices, partially offset by the effect of a
weaker U.S. dollar. Copper and zinc operations accounted for all of the
increase in operating profits in 2006 over 2005, as coal operating profits
decreased by 13% compared with the previous year due to a weaker U.S. dollar,
lower sales volumes and higher costs. The increase in cash flow in 2005 over
2004 was due mainly to copper and coal operations, which together accounted for
87% of the increase in operating profits, as copper, molybdenum and coal prices
in 2005 increased substantially over 2004.
Cash flow from operations, after changes in non-cash working capital items,
less scheduled debt repayments, dividends and sustaining capital expenditures,
was $2.1 billion in 2006 compared with $1.3 billion in 2005.
At December 31, 2006, total cash and temporary investments were $5.3 billion.
Long-term debt was $1.5 billion and the total debt to debt plus equity ratio
was 19% compared with 28% at December 31, 2005.
16 Management's Discussion and Analysis Teck Cominco Limited
FINANCIAL DATA
- --------------------------------------------------------------------------------
($ in millions, except per share data) 2006 2005 2004
- --------------------------------------------------------------------------------
Earnings and Cash Flow
Net earnings $ 2,431 $ 1,345 $ 617
Cash flow from operations* $ 2,606 $ 1,647 $ 1,109
Earnings per share $ 11.53 $ 6.62 $ 3.18
Diluted earnings per share $ 11.20 $ 6.22 $ 2.99
Dividends declared per share $ 2.00 $ 0.80 $ 0.30
Capital expenditures $ 488 $ 343 $ 216
Investments $ 175 $ 203 $ 132
Balance Sheet
Total assets $ 11,447 $ 8,809 $ 6,059
Long-term debt $ 1,509 $ 1,508 $ 627
================================================================================
* Before changes in non-cash working capital items.
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 19 and 20.
Revenues from operations were $6.5 billion in 2006 compared with $4.4 billion
in 2005 and $3.4 billion in 2004. The increase in revenues in 2006 from 2005
was due to substantial price increases for copper and zinc, as well as higher
refined metal sales from Trail, which was affected by a strike in 2005.
The $1.0 billion increase in revenue in 2005 over 2004 included $466 million
from copper and molybdenum sales and $528 million from coal operations.
AVERAGE METAL PRICES AND EXCHANGE RATE
- --------------------------------------------------------------------------------
2006 2005 2004
- --------------------------------------------------------------------------------
Zinc (LME Cash -- US$/pound) 1.49 0.63 0.48
Lead (LME Cash -- US$/pound) 0.59 0.44 0.40
Copper (LME Cash -- US$/pound) 3.05 1.67 1.30
Molybdenum (published price* -- US$/pound) 25 32 19
Gold (LME PM Fix -- US$/ounce) 604 445 409
Coal (realized -- US$/tonne) 113 99 52
Canadian/US$ exchange rate (Bank of Canada) 1.13 1.21 1.30
================================================================================
* Published major supplier selling price in Platts Metals Week
COSTS AND EXPENSES
Operating costs of $2.7 billion in 2006 were higher than the $2.2 billion in
2005, due mainly to higher costs of zinc and lead concentrates purchased by
Trail as a result of higher metal prices and higher throughput in 2006. Site
operating costs of mining operations increased by an average of 9% because of
higher costs for fuel, consumables and labour, including one-time payments
related to labour settlements.
17 Management's Discussion and Analysis Teck Cominco Limited
General and administration expense was $96 million in 2006 compared with $74
million in 2005 and $52 million in 2004. The increase in 2006 was due to an
increase in stock-based compensation expense resulting from an increase in our
stock price, and an increased level of corporate activities. The increase in
2005 administration expense over 2004 was also due mainly to stock-based
compensation expense.
Interest expense of $97 million in 2006 was $28 million higher than the
previous year due to our US$1.0 billion bond issue in September of 2005.
Partially offsetting this increase were the repayment of our US$150 million
debenture in February 2006 and the repayment of the Inco exchangeable debenture
late in the year. Interest expense of $69 million in 2005 was higher than $61
million in 2004 due to the US$1.0 billion bond issue in September 2005.
Exploration expense was $72 million in 2006 compared with $70 million in 2005
and $42 million in 2004. The higher exploration expenses in 2006 and 2005
reflect increased activities in exploration and advanced projects. Exploration
expense in 2006 included $55 million or 76% of total expenditures on gold and
copper projects, $13 million on nickel and poly-metallic projects and $4
million on diamond projects. Of the total expenditures, approximately 11% was
spent in Canada, 13% in the United States and 21% in Australia. The remaining
expenditures were incurred mostly in Brazil, Chile, Mexico and Peru.
Other income totalled $331 million in 2006 compared with $155 million in 2005
and a net expense of $40 million in 2004. Major items in 2006 were $186 million
of interest income and $201 million of gains on disposition of our investments
in Inco and other companies, compared with interest income of $56 million and
gain on sale of investments of $58 million in 2005. Income from our holding of
Fording Canadian Coal Trust units was $48 million in 2006, compared with $76
million in 2005 and $13 million in 2004.
Income and resource taxes of $1.2 billion in 2006 was 33.7% of pre-tax earnings
and slightly lower than the Canadian statutory rate of 34%. Included in the
provision for income and resource taxes are provincial mineral taxes on mining
income earned in Canada, which is taxed at rates between 9% and 13%. The effect
of these additional taxes was offset by depletion and resource allowances in
Canada and the United States. The effect of the lower tax rate for capital
gains and other miscellaneous tax adjustments was not significant.
The provision for income and resource taxes of $546 million in 2005 included
non-recurring favourable adjustments relating to reductions in tax rates,
capital gains and the benefit of tax loss carry-forwards not previously
recognized. The composite tax rate, excluding the effect of these non-recurring
adjustments, was 35%.
18 Management's Discussion and Analysis Teck Cominco Limited
PRODUCTION AND SALES STATISTICS (Note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCTION SALES
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31 2006 2005 2004 2006 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
TRAIL OPERATIONS
REFINED ZINC (thousand tonnes) 296 223 296 290 228 296
REFINED LEAD (thousand tonnes) 90 69 85 88 69 86
SURPLUS POWER (GW.h) - - - 891 1,278 957
BASE METALS (Note 2)
ZINC (thousand tonnes) Red Dog 558 568 554 536 545 651
Antamina 35 41 43 36 43 41
Pend Oreille 34 45 17 35 44 17
Louvicourt - 3 5 - 3 5
- ------------------------------------------------------------------------------------------------------------------------------------
627 657 619 607 635 714
LEAD (thousand tonnes) Red Dog 124 102 117 115 105 127
Pend Oreille 5 8 2 5 8 3
- ------------------------------------------------------------------------------------------------------------------------------------
129 110 119 120 113 130
COPPER (thousand tonnes) Highland Valley Copper
(Note 3) 167 175 158 180 181 140
Antamina 87 84 82 87 87 77
Louvicourt - 4 8 - 4 8
- ------------------------------------------------------------------------------------------------------------------------------------
254 263 248 267 272 225
MOLYBDENUM (thousand pounds) Highland Valley Copper 4,023 6,149 9,853 3,764 6,682 10,130
Antamina 3,906 3,333 1,778 3,948 3,628 903
- ------------------------------------------------------------------------------------------------------------------------------------
7,929 9,482 11,631 7,712 10,310 11,033
GOLD (thousand ounces) Hemlo 205 230 247 207 230 246
Pogo 45 - - 39 - -
Other 13 15 14 11 12 13
- ------------------------------------------------------------------------------------------------------------------------------------
263 245 261 257 242 259
COAL (thousand tonnes) Elk Valley Coal (Note 4) 8,657 9,948 9,277 8,994 9,352 9,333
====================================================================================================================================
Notes:
(1) The above production and sales volumes refer to the Company's share.
(2) Production and sales volumes of base metal mines refer to metals contained
in concentrate.
(3) The Company owns 97.5% of Highland Valley Copper since March 1, 2004, and
owned 63.9% prior to that date.
(4) Results of the Elk Valley Coal Partnership represent the Company's 40%
direct interest in the Partnership commencing April 1, 2006, 39% from
April 1, 2005 to March 31, 2006, 38% from April 1, 2004 to March 31, 2005
and 35% prior to April 1, 2004.
19 Management's Discussion and Analysis Teck Cominco Limited
REVENUES, DEPRECIATION AND OPERATING PROFIT
====================================================================================================================================
DEPRECIATION
REVENUES AND AMORTIZATION OPERATING PROFIT
- ------------------------------------------------------------------------------------------------------------------------------------
($ in millions) 2006 2005 2004 2006 2005 2004 2006 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
SMELTING AND REFINING
Trail (including power sales) $ 1,802 $ 937 $ 1,006 $ 47 $ 39 $ 47 $ 395 $ 134 $ 119
BASE METALS
Red Dog 1,539 677 626 59 56 68 1,079 325 207
Pend Oreille 88 54 17 14 18 5 38 2 (4)
Highland Valley Copper (Note 1) 1,413 1,021 748 46 62 52 1,019 613 431
Antamina 807 524 318 34 38 41 598 355 171
Inter-segment sales and other (430) (98) (74) 1 4 9 (19) 12 14
- ------------------------------------------------------------------------------------------------------------------------------------
3,417 2,178 1,635 154 178 175 2,715 1,307 819
Gold
Hemlo 143 127 142 24 21 22 7 9 32
Coal
Elk Valley Coal (Note 2) 1,177 1,173 645 39 34 31 444 512 125
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 6,539 $ 4,415 $ 3,428 $ 264 $ 272 $ 275 $ 3,561 $1,9621 $ 1,095
====================================================================================================================================
Notes:
(1) Highland Valley Copper results were consolidated commencing March 1, 2004,
with minority interests of 2.5%. Prior to March 1, 2004, the Company had
proportionately consolidated 63.9% of Highland Valley Copper.
(2) Results of the Elk Valley Coal Partnership represent the Company's 40%
direct interest in the Partnership commencing April 1, 2006, 39% from
April 1, 2005 to March 31, 2006, 38% from April 1, 2004 to March 31, 2005
and 35% prior to April 1, 2004.
(3) Depreciation and amortization are deducted in calculating operating
profit.
20 Management's Discussion and Analysis Teck Cominco Limited
FINANCIAL POSITION AND LIQUIDITY
OPERATING PROFIT DEBT AND DEBT PLUS EQUITY
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
OPERATING CASH FLOW
Cash flow from operations, before changes in non-cash working capital items,
was $2.6 billion for 2006 compared with $1.6 billion a year ago mainly as a
result of the significantly higher copper and zinc prices. Operating cash flow
in 2005 was higher than the $1.1 billion in 2004 due mainly to rising prices
for our main products.
Cash flow from operations, after changes in non-cash working capital items,
less scheduled debt repayments, dividends and sustaining capital expenditures,
was $2.1 billion in 2006 compared with $1.3 billion in 2005.
INVESTING ACTIVITIES
Capital expenditures in 2006, excluding investments in oil sands projects,
amounted to $318 million with $171 million on sustaining capital expenditures
and $147 million on project development expenditures. Capital expenditures in
2005 were $323 million, including $88 million on the Pogo gold mine and $51
million on capacity expansion projects at Elk Valley Coal. In 2006, we also
invested $97 million on the Fort Hills oil sands project and $73 million on
other oil sands leases. Total investments in oil sands projects in 2005 were
$20 million.
In the fourth quarter of 2006, we tendered our Inco shares to a competing offer
for cash proceeds of $770 million. A portion of the Inco shares were pledged
against the Inco exchangeable debenture and the related proceeds were used to
repay the debenture. Proceeds from dispositions in 2006 totalled $885 million,
including $770 million received from the tendering of our Inco shares and the
balance from the sale of other marketable securities. Dispositions of
marketable securities totalled $118 million in 2005, and the sale of the
Cajamarquilla zinc refinery in 2004 provided net proceeds of $156 million.
Major investments in 2006 included $71 million in Tahera Diamond Corporation,
Nautilus Minerals Inc. and ZincOx Resources plc in 2006. Investments of $203
million in 2005 were in marketable securities, primarily Inco shares.
FINANCING ACTIVITIES
In February 2006, we repaid the US$150 million 6.875% debenture issued in 1996.
In the fourth quarter, the majority of the holders of the Inco exchangeable
debentures tendered their debentures for exchange and we repaid these
debentures with the equivalent cash. Cash of $105 million was placed in trust
to satisfy the redemption requirements of the debentures that remained
outstanding at the end of the year.
In June 2006, we completed a series of transactions culminating in the
redemption of $112 million principal amount of exchangeable debentures due
2024. In the course of these transactions, all outstanding exchangeable
debentures were tendered for exchange and we issued 11.5 million Class B
subordinate voting shares. The exchange did not affect our cash flow or
earnings because shares were issued and the debentures were included in
shareholders' equity on the balance sheet.
21 Management's Discussion and Analysis Teck Cominco Limited
In September 2006, the remaining Antamina project debt was refinanced on a
non-recourse basis with a syndicated five-year revolving term bank facility
with a bullet payment at maturity. The facility is extendable annually with the
concurrence of the participating banks.
In September 2005, we issued 10 and 30-year notes totalling US$300 million and
US$700 million respectively. Net proceeds of the issue totalled $1.2 billion.
The 10-year notes have a coupon rate of 5.375%, and the 30-year notes have a
coupon rate of 6.125% with interest paid semi-annually. Repayment of long-term
debt in 2005 consisted of our share of the minimum and accelerated repayments
of $95 million on the Antamina project debt.
In 2006, we recorded $16 million as proceeds on the exercise of employee and
director stock options, compared with $28 million in 2005. In 2004, we issued
7.6 million Class B subordinate voting shares for $126 million, comprising $90
million on the exercise of 5.0 million share purchase warrants and $36 million
on the exercise of employee and director stock options. Also in 2004, we 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 were non-cash transactions and were not included
on the cash flow statement.
We increased our semi-annual dividend to $1.00 per share in July 2006. This
followed an increase to $0.40 per share in June 2005 from $0.20 per share in
December 2004. The semi-annual dividends declared in December of 2006 and 2005
were paid to shareholders in January of the following year.
CASH RESOURCES AND LIQUIDITY
At December 31, 2006, we held cash and temporary investments of $5.3 billion
against total debt of $1.5 billion. Long-term debt to debt plus equity ratio
was 19% compared with 28% at the end of 2005. We have no mandatory corporate
debt payments due in the next five years and over half of the outstanding $1.5
billion of debt is not due until 2035.
At December 31, 2006, we had bank credit facilities aggregating $1.0 billion,
97% of which mature in 2011 and beyond. Unused credit lines under these
facilities after issuing letters of credit amounted to $918 million.
QUARTERLY EARNINGS AND CASH FLOW
($ in millions, except per share
information)
2006
--------------------------------------
Q4 Q3 Q2 Q1
- --------------------------------------------------------------------------------
Revenues $ 2,088 $1,632 $1,546 $1,273
Operating profit 1,167 876 894 624
Net earnings 866 504 613 448
Earnings per share 4.02 2.34 2.95 2.19
Cash flow from continuing operations* 829 647 669 461
================================================================================
2005
--------------------------------------
Q4 Q3 Q2 Q1
- --------------------------------------------------------------------------------
Revenues $ 1,343 $1,150 $ 994 $ 928
Operating profit 686 550 407 319
Net earnings 510 405 225 205
Earnings per share 2.50 2.00 1.11 1.01
Cash flow from continuing operations* 555 474 332 286
================================================================================
* Before changes in non-cash working capital items.
22 Management's Discussion and Analysis Teck Cominco Limited
In the fourth quarter of 2006, revenues from operations were $2.1 billion
compared with $1.3 billion in the same period a year ago due to higher copper
and zinc prices as well as higher sales volumes at the Red Dog mine.
Net earnings in the fourth quarter of 2006 were $866 million or $4.02 per share
compared with net earnings of $510 million or $2.50 per share in the fourth
quarter of 2005.
The higher earnings in the fourth quarter of 2006 were principally a result of
higher copper and zinc prices and higher zinc sales volumes at Red Dog. The
average LME prices for copper and zinc were US$3.21 and US$1.91 per pound
respectively in the quarter, up 65% and 158% from the same period a year
earlier. A weaker U.S. dollar of $1.14 in the fourth quarter compared with
$1.17 in the fourth quarter of 2005 partially offset the effect of the higher
commodity prices.
Included in fourth quarter earnings was an after-tax net gain of $115 million
on the disposition of our position in Inco. In the fourth quarter of 2005, net
earnings included a favourable tax adjustment of $52 million for the reduction
of a future income tax liability and an after-tax gain on the sale of
investments of $17 million.
Cash flow from operations, before changes to non-cash working capital items,
was $829 million in the fourth quarter of 2006 compared with $555 million in
the fourth quarter of 2005 with the increase due mainly to significantly higher
operating profits from zinc and copper operations.
OUTLOOK
Trail's refined zinc and lead sales are expected to be 10%-15% lower than
production in the first quarter due to seasonality and softness in the U.S.
markets. We expect the shortfall will be recovered in the typically stronger
second and third quarters of the year.
Sales and profits of the Red Dog mine follow a seasonal pattern, with higher
sales volumes of zinc and most of the lead sales occurring in the last five
months of the year following the commencement of the shipping season in July.
Copper production at Highland Valley Copper in 2007 is expected to decrease by
approximately 30,000 tonnes from the 2006 production level, as the mine begins
a three-year transitional mining period in 2007 to develop the Valley pit east
wall and mill throughput decreases as a result of higher stripping levels.
At Antamina, our share of copper production in 2007 is expected to decrease
from 2006 by 8,000 tonnes, while our share of zinc production is expected to
increase by 40,000 tonnes due to the changes in ore mix and ore grades.
The Lennard Shelf mine, expected to commence operation in the first quarter of
2007, will result in approximately 30,000 tonnes of additional zinc production
for the Company in 2007.
Gold production is expected to increase by approximately 85,000 ounces in 2007
compared with 2006 due to higher planned production from the Pogo mine. Our
share of gold production from Pogo is estimated to be 136,000 ounces, while our
share of production from the Hemlo joint venture is expected to be similar to
2006 at approximately 205,000 ounces.
Adverse weather conditions in late 2006 and early 2007 affected rail
performance and contributed to lower inventories of Elk Valley Coal's products
at the ports and lower sales in the first quarter. Elk Valley Coal's 2007
production and sales will be affected by any disruption in coal shipments and
the outcome of the sales negotiations in the first quarter in 2007.
We reported record profits in 2006 due to significantly higher commodity
prices. Prices for copper and zinc declined in January 2007. In January, 40% of
the receivables outstanding at December 31, 2006, were final priced resulting
in negative revenue adjustments of $43 million on a before-tax basis. The total
amount of final pricing revenue adjustments to be recorded in the first quarter
of 2007 will depend on average metal prices in February and March.
23 Management's Discussion and Analysis Teck Cominco Limited
Coal prices in the first quarter of 2007 are expected to be similar to the
fourth quarter average price of US$106 per tonne (Cdn$123 per tonne).
Negotiations are under way for coal prices and volumes for the coal year
commencing April 1, 2007. The hard coking coal market is not as strong as the
past two years as new sources of supply from competitors are coming on stream
and infrastructure constraints in Australia are being mitigated.
In addition to the recording of any negative final pricing adjustments and the
impact of delayed coal shipments due to poor weather, first quarter performance
will also be affected by the seasonality of Red Dog zinc and lead sales, as
well as any unrealized mark-to-market gain or loss on financial instruments as
a result of the adoption of new accounting rules.
Under new accounting rules that are effective January 1, 2007, the Company will
record a receivable of $139 million on January 1, 2007 related to contingent
payments that we may receive from the purchaser of the Cajamarquilla zinc
refinery that was sold in 2004. The payments occur until 2009 in years in which
the average annual zinc price exceeds US$0.454 per pound. The $139 million
receivable is estimated based on the zinc forward curve in effect at the end of
2006. This receivable will be marked to market using the zinc forward curve in
effect at the end of each subsequent quarter with any gain or loss taken into
income during that quarter.
Any strengthening of the Canadian dollar relative to the U.S. dollar has a
negative impact on our earnings as the prices of our products are denominated
in U.S. dollars and a significant portion of our operating costs are Canadian
dollar based.
EARNINGS SENSITIVITY
Sensitivity of annual earnings to changes in metal prices and the U.S. dollar
exchange rate based on the Company's 2007 production plan is as follows:
Estimated Impact on
Change Annual After-Tax Earnings EPS
- --------------------------------------------------------------------------------
(Cdn$ millions)
ZINC US$0.01/pound $10 4.6(cent)
LEAD US$0.01/pound $3 1.4(cent)
COPPER US$0.01/pound $3 1.4(cent)
MOLYBDENUM US$1/pound $5 2.3(cent)
GOLD US$10/ounce $2 1.0(cent)
COAL US$1/tonne $7 3.2(cent)
POWER US$10/MW.h $8 3.7(cent)
US$1 = CDN Cdn$0.01 $22 10.2(cent)
Note:
The effect on the Company's earnings of commodity price and exchange rate
movements will vary from quarter to quarter depending on sales volumes.
Increases in site operating costs are expected to be lower in 2007 compared
with the previous two years, as pressure on commodity prices and oil prices
appears to be easing and no major one-time payments related to labour
settlements are anticipated.
Our capital expenditures are estimated to be $775 million in 2007, including
$210 million of sustaining capital expenditures at our operations and $265
million on development projects. In addition, we expect to spend $300 million
on our share of costs in the Fort Hills oil sands project and various oil sands
properties jointly owned with UTS Energy Corporation.
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 Confederated Tribes of the
Colville Reservation (the "Tribes") supported by the State of Washington. The
24 Management's Discussion and Analysis Teck Cominco Limited
citizen's suit was brought pursuant to Section 310(a)(i) of the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) to enforce a
unilateral administrative order issued by the U.S. Environmental Protection
Agency (EPA) on December 11, 2003 (the "UAO"), 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.
On February 14, 2005, the Federal Court of Appeals for the 9th Circuit granted
TCML's petition for permission to appeal that decision and the District Court
entered a stay of proceedings (the "Stay") pending a final decision on the
appeal. In September 2005, the District Court lifted the Stay to allow the
State of Washington and the Tribes to add the Tribes as an additional plaintiff
and to file amended complaints adding the State's and the Tribes' claims for
natural resource damages and cost recovery under CERCLA. On September 29, 2005,
the individual plaintiffs also served notice of their intention to file suit
under the U.S. Resource Conservation and Recovery Act (RCRA) seeking injunctive
relief and costs. As far as we are aware, no suit has been filed under RCRA.
On July 3, 2006, the 9th Circuit affirmed the District Court's denial of TCML's
motion to dismiss the citizen's suit and on October 30, 2006, denied our
petition for a rehearing. On November 6, 2006, the Court granted our motion for
a stay pending a further application for leave to appeal to the U.S. Supreme
Court. We are preparing the application, which must be filed prior to February
27, 2007.
On June 2, 2006, TCML and its US affiliate, Teck Cominco American Incorporated
(TCAI), entered into a Settlement Agreement (the "Agreement") with the EPA and
the United States under which TCAI is paying for and conducting a remedial
investigation and feasibility study (the "Studies") that, while not carried out
under an administrative or judicial order, is consistent with the U.S. National
Contingency Plan. TCAI is paying EPA's oversight costs and providing US$1.1
million in annual funding to the EPA to facilitate the full participation of
the Tribes, the State and the U.S. Department of Interior, and TCML has
guaranteed TCAI's performance of the Agreement. TCAI has placed US$20 million
in escrow as financial assurance of its obligations under the Agreement.
Contemporaneously with the execution of the Agreement, the EPA withdrew the
UAO. The recent decision of the 9th Circuit will not affect the Agreement.
There can be no assurance that the agreement to conduct and fund the Studies
and the withdrawal of the UAO will be sufficient to resolve the matter or that
TCML or its affiliates will not be faced with further liability in relation to
this matter. Until the studies are completed, it is not possible to estimate
the extent and cost, if any, of remediation that may be required.
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 apply to the
assessment for the impairment of property, plant and equipment and the
valuation of other assets and liabilities such as inventory, plant and
equipment, investments, restoration and post-closure costs, accounting for
income and resource taxes, mineral reserves, contingencies and pension and
other post-retirement benefits.
PROPERTY, PLANT AND EQUIPMENT
The Company capitalizes the development costs of mining projects when resources
as defined under National Instrument 43-101 are present and it is expected that
the expenditure can be recovered by future exploitation or sale. Upon
commencement of commercial production, these costs are amortized over the
proven and probable reserves to which they relate calculated on a units of
production basis. The estimation of the extent of reserves is a complex task in
which a number of estimates and assumptions are made. These involve the use of
25 Management's Discussion and Analysis Teck Cominco Limited
geological sampling and models as well as estimates of future costs. New
knowledge derived from further exploration and development of the ore body may
affect reserve estimates. In addition, the estimation of economic reserves
depends on assumptions regarding long-term commodity prices and in some cases
exchange rates.
Where impairment conditions may exist, the expected undiscounted future cash
flows from an asset are compared with its carrying value. 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 equipment is not required at December
31, 2006. Changes in market conditions, reserve estimates and other assumptions
used in these estimates may result in future write-downs.
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
assessments by various taxation authorities which may interpret tax legislation
differently. These differences may affect the final amount or the timing of the
payment of taxes. The Company provides for such differences where known based
on management's best estimate of the probable outcome of these matters.
PENSION AND OTHER POST-RETIREMENT BENEFITS
The cost of providing benefits through defined benefit pension plans and
post-retirement benefit 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 plan investment performance,
future compensation increases, health care cost trends and retirement dates of
employees. 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
costs and the timing of expenditures 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 when the amounts involved are
material.
ADOPTION OF NEW ACCOUNTING STANDARDS
DEFERRED STRIPPING
Effective January 1, 2006, the Company adopted CICA Emerging Issues Committee
Abstract 160 (EIC-160), "Stripping Costs Incurred in the Production Phase of a
Mining Operation". EIC-160 requires stripping costs to be accounted for as
variable production costs to be included in the costs of inventory produced,
unless the stripping activity can be shown to be a betterment of the mineral
property. Betterment occurs when stripping activity increases future output of
26 Management's Discussion and Analysis Teck Cominco Limited
the mine by providing access to additional sources of reserves. Capitalized
stripping costs are amortized on a unit of production basis over the proven and
probable reserves to which they relate.
The prospective application of this standard permits the existing deferred
stripping costs incurred in the production phase to be amortized on a unit of
production basis over the remaining life of the mine. As at January 1, 2006,
the opening balance of capitalized stripping costs was $52 million. Stripping
costs relating to the mine expansion at Highland Valley Copper, which is
considered to be a betterment of the property, are capitalized and amounted to
$25 million as at December 31, 2006 (2005-$3 million).
MINERAL PROPERTIES COSTS
Effective January 1, 2006, the Company amended its accounting policy on the
treatment of costs for the acquisition, exploration and evaluation of mineral
properties.
Under this policy, acquisition, exploration and evaluation costs are charged to
earnings in the year in which they are incurred, except where these costs
relate to specific properties for which resources as defined under National
Policy Statement 43-101 exist and it is expected that the expenditure can be
recovered by future exploitation or sale, in which case they are deferred.
Previously, the Company capitalized acquisition, exploration and evaluation
costs only when economically recoverable reserves as shown by economic studies
were believed to exist. This change has been applied retroactively but did not
have any effect on the Company's reported earnings or retained earnings.
CONDITIONAL ASSET RETIREMENT OBLIGATIONS
During 2006, the Company applied the interpretations of CICA Emerging Issues
Committee Abstract 159 (EIC-159), "Conditional Asset Retirement Obligations".
EIC-159 requires the recognition of a liability if the entity has sufficient
information to reasonably estimate the fair value of the asset retirement
obligation, even if the timing and/or method of settling the legal obligation
are conditional on a future event. If sufficient information is not available
at the time the liability is incurred, a liability should be recognized in the
period in which sufficient information becomes available. The application of
EIC-159 did not have any impact on the Company's consolidated financial
statements.
STOCK-BASED COMPENSATION FOR EMPLOYEES ELIGIBLE TO RETIRE BEFORE THE VESTING
DATE
Effective December 31, 2006, the Company adopted the new CICA Emerging Issues
Committee Abstract 162 (EIC-162), "Stock-Based Compensation for Employees
Eligible to Retire before the Vesting Date". EIC-162 requires that stock-based
compensation costs are to be recorded over the period from the grant date of
the awards to the time employees are eligible to retire as opposed to being
recorded over the stated vesting period of the awards. These new provisions are
applied with retroactive restatement. The adoption of the new standard did not
have any affect on the Company's reported earnings or retained earnings.
FINANCIAL INSTRUMENTS
In 2006, the Company's commodity price and foreign exchange hedging activities
increased the Company's revenues by $43 million. The unrealized mark-to-market
loss on our derivatives and financial instruments totalled $73 million as at
December 31, 2006.
RECENT CANADIAN ACCOUNTING PRONOUNCEMENTS
CANADIAN ACCOUNTING PRONOUNCEMENTS EFFECTIVE FOR 2007
In September 2006, the Emerging Issues Committee issued Abstract 163 (EIC-163),
"Determining the Variability to Be Considered in Applying AcG-15". EIC-163
provides clarification of how an entity should determine the variability in
assessment of a Variable Interest Entity. EIC-163 requires an analysis of the
design of the entity in determining the variability to be considered in
applying AcG-15 using a two-step approach. The guidance will be applied to all
entities (including newly created entities) when an enterprise first becomes
27 Management's Discussion and Analysis Teck Cominco Limited
involved and to all entities previously required to be analyzed under AcG-15
when a reconsideration event has occurred, subsequent to January 1, 2007.
In July 2006, the CICA revised Section 1506, "Accounting Changes", which now
requires that: (a) a voluntary change in accounting principles can be made if,
and only if, the change results in more reliable and relevant information, (b)
changes in accounting policies are accompanied with disclosures of prior period
amounts and justification for the change and (c) for changes in estimates,
nature and amount of the change should be disclosed. The revised section is
effective for the Company's financial year beginning January 1, 2007.
In April 2005, the Accounting Standards Board issued three new accounting
standards dealing with the recognition, measurement and disclosure of financial
instruments, hedges and comprehensive income, together with many consequential
amendments throughout the CICA Handbook. These new standards will affect the
Company's interim and annual financial statements beginning with the first
quarter of 2007.
(i) Financial Instruments - Recognition and Measurement, Section 3855
This standard prescribes when a financial asset, financial liability, or
non-financial derivative is to be recognized on the balance sheet and
whether fair value or cost-based measures are used to measure the
recorded amounts. It also specifies how financial instrument gains and
losses are to be presented.
The Company's cash equivalents, temporary investments and investments in
marketable securities will be classified as available for sale and thus
will be recorded at fair value on the balance sheet. Changes in the fair
value of these instruments will be reflected in other comprehensive
income.
All derivatives will be recorded on the balance sheet at fair value.
Mark-to-market adjustments on these instruments will be included in net
income, unless designated as part of a cash flow hedge relationship.
All other financial instruments will be recorded at cost or amortized
cost, subject to impairment reviews. Transaction costs incurred to
acquire financial instruments will be included in the underlying balance.
(ii) Hedges, Section 3865
This standard is applicable when a company chooses to designate a hedging
relationship for accounting purposes. It builds on the existing AcG-13,
"Hedging Relationships", and Section 1650, "Foreign Currency
Translation", by specifying how hedge accounting is applied and what
disclosures are necessary when it is applied.
Upon adoption of this standard, the Company will discontinue hedging on
all commodity derivative contracts and interest rate swaps. The Company
may enter into foreign exchange forward contracts in the future to hedge
anticipated sales and may account for such as cash flow hedges.
(iii) Comprehensive Income, Section 1530
A new standard requires the presentation of a statement of comprehensive
income and its components. Comprehensive income includes both net
earnings and other comprehensive income. Other comprehensive income
includes holding gains and losses on certain investments, gains and
losses on certain derivative instruments and foreign currency gains and
losses relating to self-sustaining foreign operations, all of which are
not included in the calculation of net earnings until realized.
28 Management's Discussion and Analysis Teck Cominco Limited
OTHER INFORMATION
OUTSTANDING SHARE DATA
As at February 23, 2007, there were 211,231,495 Class B subordinate voting
shares and 4,673,453 Class A common shares (Class A shares) outstanding. In
addition, there were outstanding 2,477,713 director and employee stock options
with exercise prices ranging between $6.39 and $87.48 per share. More
information on these instruments and the terms of their conversion are set out
in Note 17 of the Company's 2006 year end financial statements.
On February 12, 2007, we announced our intention, subject to regulatory
approval, to purchase up to 20 million of our outstanding Class B subordinate
voting shares by way of a normal course issuer bid and, subject to shareholder
approval, to implement a two for one share split of our Class A common shares
and Class B subordinate voting shares.
CONTRACTUAL AND OTHER OBLIGATIONS
The Company's contractual and other obligations as at December 31, 2006 are
summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Less than More than
($ in millions) Total 1 Year 2-3 Years 4-5 Years 5 Years
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $1,509 $ - $ 3 $ 120 $1,386
Operating leases 102 19 25 16 42
Road and port lease at Red Dog (Note 1) 729 21 42 42 624
Minimum purchase obligations (Note 2)
Concentrate, supply and other purchases 62 13 18 13 19
Shipping and distribution 90 16 32 18 24
Pension funding (Note 3) 55 55 - - -
Other non-pension post-retirement benefits (Note 4) 316 10 24 28 254
Asset retirement obligations (Note 5) 449 22 23 13 391
Other long-term liabilities (Note 6) 136 18 34 7 77
Contributions to the Fort Hills oil sands project (Note 7) 736 230 506 - -
====================================================================================================================================
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, 2006, the Company had a net pension over-funding of $5
million based on actuarial estimates prepared on an ongoing concern basis.
The amount of minimum funding for 2007 in respect of defined benefit
pension plans is $55 million. The timing and amount of additional funding
after 2007 is dependent upon future returns on plan assets, discount rates
and other actuarial assumptions.
(4) The Company had a discounted, actuarially determined liability of $316
million in respect of other non-pension post-retirement benefits as at
December 31, 2006. 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 $3.6 million per annum for
2007-2031 and $11.6 million per annum for 2032-2106.
(6) Other long-term liabilities include amounts for post-closure and
environmental costs and other items.
(7) The Company has committed to contribute 34% of the first $2.5 billion of
expenditures on the Fort Hills oil sands project. Total project costs have
not been finalized as project scope and costs are under review.
29 Management's Discussion and Analysis Teck Cominco Limited
DISCLOSURE CONTROLS AND INTERNAL CONTROL OVER FINANCIAL REPORTING
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance
that material information is gathered and reported to senior management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to permit timely decisions regarding public disclosure.
Management, including the Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in the rules of the U.S.
Securities and Exchange Commission and Canadian Securities Administration, as
at December 31, 2006. Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures were effective to ensure that information required to be
disclosed in reports filed or submitted by the Company under United States and
Canadian securities legislation is recorded, processed, summarized and reported
within the time periods specified in those rules.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting. Any system of internal
control over financial reporting, no matter how well designed, has inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management has used the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) framework to evaluate the effectiveness of the Company's
internal control over financial reporting. Based on this assessment, management
has concluded that as at December 31, 2006, the Company's internal control over
financial reporting was effective.
Management's assessment of the effectiveness of internal control over financial
reporting has been audited by PricewaterhouseCoopers, an independent registered
public accounting firm, who have expressed their opinion in their report
included with the Company's annual consolidated financial statements.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over financial
reporting during the year ended December 31, 2006, that have materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting.
30 Management's Discussion and Analysis Teck Cominco Limited