EXHIBIT 99.2
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| PricewaterhouseCoopers LLP
| Chartered Accountants
| PricewaterhouseCoopers Place
| 250 Howe Street, Suite 700
| Vancouver, British Columbia
| Canada V6C 3S7
| Telephone +1 604 806 7000
| Facsimile +1 604 806 7806
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Teck Cominco Limited
We have completed integrated audits of the consolidated financial statements
and internal control over financial reporting of Teck Cominco Limited. as at
December 31, 2007 and 2006 and an audit of the Company's December 2005
consolidated financial statements. Our opinions, based on our audits, are
presented below.
CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of Teck Cominco
Limited as at December 31, 2007 and December 31, 2006, and the related
consolidated statements of earnings, comprehensive income, retained earnings
and cash flows for each of the years in the three year period ended December
31, 2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits of the Company's financial statements as at December
31, 2007 and for each of the years in the two year period then ended in
accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States). We
conducted our audit of the Company's financial statements for the year ended
December 31, 2005 in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. A financial statement audit also includes assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
December 31, 2007 and December 31, 2006 and the results of its operations and
its cash flows for each of the years in the three year period ended December
31, 2007 in accordance with Canadian generally accepted accounting principles.
INTERNAL CONTROL OVER FINANCIAL REPORTING
We have also audited Teck Cominco Limited's internal control over financial
reporting as at December 31, 2007, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on the effectiveness of
the Company's internal control over financial reporting based on our audit.
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers
LLP and the other member firms of PricewaterhouseCoopers International Limited,
each of which is a separate and independent legal entity.
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We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing
such other procedures as we consider necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
As described in Management's Report on Internal Control over Financial
Reporting, management has excluded the operations of the former Aur Resources
Inc. (the "Aur Operations") from its assessment of internal control over
financial reporting as of December 31, 2007 because Aur Resources Inc. was
acquired by the Company in a purchase business combination during 2007. We have
also excluded the Aur Operations from our audit of internal control over
financial reporting. The Aur Operations represent $5,510 million of total
assets and $296 million of total revenues respectively of the consolidated
financial statement amounts of Teck Cominco Limited as of and for the year
ended December 31, 2007.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as at December 31, 2007 based on
criteria established in Internal Control -- Integrated Framework issued by the
COSO.
(signed) PricewaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
Vancouver, British Columbia
February 27, 2008
(2)
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COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) where there is a
change in accounting principles that has a material effect on the comparability
of the company's financial statements, such as the change described in Note
2(b) to the financial statements. Our report to the shareholders dated February
27, 2008 is expressed in accordance with Canadian reporting requirements which
do not require a reference to such a change in accounting principles in the
auditor's report when the change is properly accounted for and adequately
disclosed in the financial statements.
(signed) PricewaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
Vancouver, British Columbia
February 27, 2008
(3)
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[TECH COMINCO LOGO]
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Teck Cominco Limited
Consolidated Financial Statements
For the Years Ended December 31, 2007, 2006 and 2005
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Teck Cominco Limited
Consolidated Statements of Earnings
Years ended December 31
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(Cdn$ in millions, except per share data) 2007 2006 2005
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Revenues $ 6,371 $ 6,539 $ 4,415
Operating expenses (3,300) (2,714) (2,181)
Depreciation and amortization (333) (264) (272)
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Operating profit 2,738 3,561 1,962
Other expenses
General and administration (109) (96) (74)
Interest on long-term debt (Note 10(i)) (85) (97) (69)
Exploration (105) (72) (70)
Research and development (32) (17) (13)
Asset impairment charges (Note 4) (69) -- --
Other income (expense) (Note 17) 170 316 94
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Earnings before the undernoted items 2,508 3,595 1,830
Provision for income and resource
taxes (Note 18) (795) (1,213) (524)
Minority interests (47) (19) (11)
Equity earnings (loss) (Note 6(e)) (5) 32 50
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Net earnings from continuing operations 1,661 2,395 1,345
Net earnings (loss) from discontinued
operations (Note 22(b)) (46) 36 --
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Net earnings $ 1,615 $ 36 $ --
======================================================================================================
Earnings per share (Note 16(i))
Basic $ 3.74 $ 5.77 $ 3.31
Basic from continuing operations $ 3.85 $ 5.68 $ 3.31
Diluted $ 3.72 $ 5.60 $ 3.11
Diluted from continuing operations $ 3.83 $ 5.52 $ 3.11
Weighted average shares outstanding (millions) 431.5 421.2 404.9
Shares outstanding at end of year (millions) 441.9 431.6 406.8
The accompanying notes are an integral part of these financial statements.
1
Teck Cominco Limited
Consolidated Statements of Cash Flows
Years ended December 31
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(Cdn$ in millions) 2007 2006 2005
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Operating activities
Net earnings from continuing operations $ 1,661 $ 2,395 $ 1,345
Items not affecting cash
Depreciation and amortization 333 264 272
Future income and resource taxes (97) 59 122
Equity (earnings) loss 30 5 (15)
Minority interest 5 14 (2)
Asset impairment charges 69 -- --
Gain on sale of investments and assets (55) (201) (77)
Other 55 70 2
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2,001 2,737 1,722
Net change in non-cash working capital items
(Note 20(b)) (282) 299 (21)
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1,719 70 2
Financing activities
Issuance of long-term debt 14 123 1,167
Repayment of long-term debt -- (333) (95)
Issuance of Class B subordinate voting shares 13 16 28
Purchase and cancellation of Class B
subordinate voting shares (577) -- --
Dividends paid (426) (296) (81)
Interest on exchangeable debentures (Note 16(d)) -- (5) (6)
Redemption of exchangeable debentures (105) (340) --
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(1,081) (124) 1,102
Investing activities
Decrease (increase) in temporary investments 194 759 (954)
Decrease (increase) in cash held in trust 105 (105) --
Property, plant and equipment (571) (391) (326)
Investments and other assets (724) (272) (220)
Fording Canadian Coal Trust investment (Note 6(b)) (599) -- --
Acquisition of Aur Resources Inc. (Note 3) (2,588) -- --
Proceeds from sale of investments and assets 194 885 118
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(3,989) (133) (398)
Effect of exchange rate changes on cash and
cash equivalents held in U.S. dollars (335) 10 (34)
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Increase (decrease) in cash and cash equivalents
from continuing operations (3,686) (5) (6)
Cash received from discontinued operations
(Note 22(b)) 40 -- --
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Increase in cash and cash equivalents (3,646) (5) (6)
Cash and cash equivalents at beginning of year 5,054 2,098 875
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Cash and cash equivalents at end of year $ 1,408 $ 2,093 $ 869
======================================================================================================
The accompanying notes are an integral part of these financial statements.
2
Teck Cominco Limited
Consolidated Balance Sheets
As at December 31
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(Cdn$ in millions) 2007 2006
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ASSETS
Current assets
Cash and cash equivalents $ 1,408 $ 5,054
Temporary investments -- 227
Cash held in trust (Note 11) -- 105
Accounts and settlements receivable 593 723
Inventories (Note 5) 1,004 786
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3,005 1,841
Investments (Note 6) 1,506 365
Property, plant and equipment (Note 7) 7,807 3,724
Other assets (Note 8) 592 463
Goodwill 663 --
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$ 13,573 $ 11,447
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued
liabilities (Note 9) $ 1,017 $ 763
Dividends payable (Note 16(j)) 221 216
Current portion of long-term debt (Note 10) 31 -
Current income and resource taxes payable - 443
Current portion of future income and
resource taxes (Note 18(c)) 81 161
Exchangeable debentures (Note 11) - 105
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1,350 925
Long-term debt (Note 10) 1,492 1,509
Other liabilities (Note 12) 994 778
Future income and resource taxes (Note 18(c)) 1,926 880
Minority interests (Note 13) 92 43
Shareholders' equity (Note 16) 7,719 6,549
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$ 13,573 $ 11,447
================================================================================
Commitments and contingencies (Note 21)
(signed) HUGH J. BOLTON (signed) KEITH E. STEEVE
Chairman of the Audit Committee Director
The accompanying notes are an integral part of these financial statements.
3
Teck Cominco Limited
Consolidated Statements of Retained Earnings
Years ended December 31
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(Cdn$ in millions) 2007 2006 2005
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Retained earnings at beginning of year
as previously reported $ 4,225 $ 2,228 $ 1,049
Adoption of financial instruments
standards (Note 2(b)) 112 -- --
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4,337 2,228 1,049
Net earnings 1,615 2,431 1,345
Dividends declared (431) (431) (162)
Class B subordinate voting shares
repurchased (Note 16(k)) (483) -- --
Interest on exchangeable debentures,
net of taxes (Note 16(d)) -- (3) (4)
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Retained earnings at end of year $ 5,038 $ 4,225 $ 2,228
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Consolidated Statements of Comprehensive Income
For the years ended December 31
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(Cdn$ in millions) 2007 2006 2005
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Net earnings $ 1,615 $ 2,431 $ 1,345
Other comprehensive income (loss)
in the year
Currency translation adjustment
Unrealized gains (losses) (665) 20 (53)
Exchange differences on debt
designated as a hedge of
self-sustaining foreign
subsidiaries 56 1 --
Losses reclassified to net
earnings on realization 59 1 2
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(550) 22 (51)
Available-for-sale instruments
Unrealized losses (net of
tax of $9 for 2007) (47) -- --
Losses reclassified to net
earnings on realization
(net of tax of $2 for 2007) 11 -- --
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(36) -- --
Derivatives previously designated as
cash flow hedges
Losses reclassified to net earnings
on realization (net of tax of
$7 for 2007) 10 --
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10 -- --
Total other comprehensive income (loss)
(Note 16(h)) (576) 22 (51)
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Comprehensive income $ 1,039 $ 2,453 $ 1,294
===============================================================================
The accompanying notes are an integral part of these financial statements.
4
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
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1. NATURE OF OPERATIONS
Teck Cominco Limited is engaged in mining and related activities including
exploration, development, processing, smelting and refining. Our major
products are zinc, copper and metallurgical coal. We also produce precious
metals, lead, molybdenum, electrical power, fertilizers and various
specialty metals. Metal products are sold as refined metals, concentrates
or both. We also own an interest in certain oil sands leases and have a
partnership interest in an oil sands development project.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation and Accounting Principles
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Our consolidated financial statements are prepared using Generally
Accepted Accounting Principles (GAAP) in Canada. Note 25 reconciles
the consolidated financial statements prepared in accordance with
accounting principles generally accepted in Canada to financial
statements prepared with accounting principles generally accepted in
the United States.
BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of Teck
Cominco Limited and all of its subsidiaries. Our significant operating
subsidiaries include Teck Cominco Metals Ltd. (TCML), Teck Cominco
American Inc. (TCAI), Teck Cominco Alaska Inc. (TCAK), Highland Valley
Copper Partnership (Highland Valley Copper) and Aur Resources Inc.
(Aur).
Many of our mining activities are conducted through interests in
entities where we share joint control including Compania Minera
Antamina (Antamina), Elk Valley Coal Partnership (Elk Valley Coal),
and Pogo Joint Venture (Pogo). These entities are accounted for using
the proportionate consolidation method.
Certain comparative figures have been reclassified to conform with the
presentation adopted for the current period. All dollar amounts are in
Canadian dollars unless otherwise specified.
b) Adoption of new Accounting Standards
FINANCIAL INSTRUMENTS
Effective January 1, 2007, we adopted the new financial instruments
accounting standards and related amendments to other standards on
financial instruments issued by the Canadian Institute of Chartered
Accountants (CICA). In accordance with the transitional provisions,
prior period financial statements have not been restated.
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 methods are used to measure the
recorded amounts. It also specifies how financial instrument gains and
losses are to be presented.
5
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
Effective January 1, 2007, our cash equivalents, temporary investments and
investments in marketable securities have been classified as
available-for-sale and are recorded at fair value on the balance sheet.
Fair values are determined directly by reference to published price
quotations in an active market. Changes in the fair value of these
instruments are reflected in other comprehensive income and included in
shareholders' equity on the balance sheet.
All derivatives are recorded on the balance sheet at fair value. Unrealized
gains and losses on these instruments are included in net earnings, unless
the instruments are designated as part of a cash flow hedge relationship.
In accordance with the standard's transitional provisions, we recognize as
separate assets and liabilities only embedded derivatives acquired or
substantively modified on or after January 1, 2003.
All other financial instruments are recorded at cost or amortized cost,
subject to impairment reviews. The criteria for assessing an other than
temporary impairment remain unchanged. Transaction costs incurred to
acquire financial instruments are included in the underlying balance.
Regular-way purchases and sales of financial assets are accounted for on
the trade date.
HEDGES, SECTION 3865
This standard is applicable when a company chooses to designate a hedging
relationship for accounting purposes. It builds on the previous 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, we discontinued hedge accounting on all
commodity derivative contracts and interest rate swaps. We may enter into
foreign exchange forward contracts in the future to hedge anticipated sales
and may designate these contracts as cash flow hedges as they occur.
COMPREHENSIVE INCOME, SECTION 1530
This 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 (OCI) includes
holding gains and losses on available-for-sale 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.
6
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
As at January 1, 2007 the effect on our balance sheet of adopting these
standards is summarized in the following table. As prescribed by these
standards, prior periods have not been restated.
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(Cdn$ in millions) January 1, 2007
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Adjusted on
adoption of
Financial Restated
Instruments opening balances
As reported standards in 2007
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ASSETS
Current assets $ 6,895 $ - $ 6,895
Investments 365 106(a)(b) 471
Property, plant and equipment 3,724 - 3,724
Other assets 463 128(b)(c) 591
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$ 11,447 $ 234 $ 11,681
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities 1,688 19(b) 1,707
Long-term debt 1,509 (11)(c) 1,498
Other liabilities 778 52 (b) 830
Minority interests 43 - 43
Future income and resource taxes 880 12 (d) 892
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4,898 72 4,970
Shareholders' equity
Share capital 2,405 - 2,405
Retained earnings 4,225 112 (b) 4,337
Contributed surplus 64 - 64
Cumulative translation adjustment (145) 145 (e) -
Accumulated other comprehensive income - (145)(e) (95)
50 (a)(b)
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6,549 162 6,711
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$ 11,447 $ 234 $ 11,681
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Notes:
(a) Investments in marketable securities previously accounted for at cost are
designated as available-for-sale and measured at fair value.
(b) Derivative instruments previously accounted for at cost are held for
trading and measured at fair value.
(c) Debt financing costs previously deferred as other assets are reclassified
to long-term debt.
(d) The tax effect of the above adjustments is recorded to future income and
resource taxes.
(e) The cumulative translation adjustment is reclassified to accumulated other
comprehensive income.
Variable interest entities (VIE), EIC-163
Effective January 1, 2007, we adopted the CICA Emerging Issues Committee
Abstract 163 "Determining the Variability to be Considered in Applying
Accounting Guideline 15" (AcG-15). This abstract provides clarification of
how an entity should determine the variability in assessment of a VIE.
Using a two-step approach, this abstract requires an analysis of the design
of the entity in determining the variability to be considered in applying
AcG-15. The guidance applies to all entities (including newly created
entities) when an enterprise first becomes involved and to all entities
previously required to be analyzed under AcG-15 when a reconsideration
event has occurred. The adoption of the new standard did not result in any
significant changes to the balance sheet, statement of earnings or retained
earnings.
7
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
Financial Instruments - Disclosures, Section 3862
Effective December 31, 2007, we adopted Section 3862, "Financial
Instruments - Disclosures," which requires additional disclosures to enable
users to evaluate the significance of financial instruments to our
financial position and performance. In addition, qualitative and
quantitative disclosures are provided to enable users to evaluate the
nature and extent of risks arising from our financial instruments. We have
chosen to early adopt this standard, which would otherwise have been
effective beginning January 1, 2008.
Capital Disclosures, Section 1535
Effective December 31, 2007, we adopted Section 1535, "Capital
Disclosures," which requires disclosure of qualitative and quantitative
information that enables users to evaluate our objectives, policies and
process for managing capital. We have chosen to early adopt this standard,
which would otherwise have been effective beginning January 1, 2008.
Deferred stripping, EIC-160
Effective January 1, 2006, we adopted CICA Emerging Issues Committee
Abstract 160, "Stripping Costs Incurred in the Production Phase of a Mining
Operation." This abstract 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, in which case stripping costs are capitalized.
Betterment occurs when stripping activity increases future output of the
mine by providing access to additional sources of reserves. Capitalized
stripping costs are amortized on a units-of-production basis over the
proven and probable reserves to which they relate.
We prospectively adopted this standard. As a result, deferred stripping
costs of $52 million incurred in the production phase prior to January 1,
2006 are amortized on a units-of-production basis over the remaining
reserves to which they relate.
c) Significant Accounting Policies
Use of Estimates
The preparation of our financial statements in conformity with GAAP
requires estimates and assumptions that affect the amounts reported in the
consolidated financial statements. Significant areas where judgment is
applied include asset and investment valuations, ore reserve estimation,
finished and in-process inventory quantities, plant and equipment lives,
goodwill, contingent liabilities including matters in litigation, tax
rates, provisions and future tax balances including valuation allowances in
respect of future tax balances, asset retirement obligations, other
environmental liabilities, demobilization costs, pension and other
post-retirement benefits and other accrued liabilities. Actual results
could differ from our estimates.
8
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
Translation of Foreign Currencies
Our functional currency is the Canadian dollar. For our integrated foreign
operations, monetary assets and liabilities are translated at year end
exchange rates and other assets and liabilities are translated at
historical rates. Revenues, expenses and cash flows are translated at
monthly average exchange rates. Gains and losses on translation of monetary
assets and monetary liabilities are charged to earnings.
The accounts of our self-sustaining foreign operations are translated at
year end exchange rates, and revenues and expenses are translated at
monthly average exchange rates. Differences arising from these foreign
currency translations are recorded in other comprehensive income until they
are realized by a reduction in the investment.
Financial Instruments
We recognize financial assets and liabilities on the balance sheet when we
become a party to the contractual provisions of the instrument.
Cash and cash equivalents
Cash and cash equivalents include cash on account, demand deposits and
money market investments with maturities from the date of acquisition of
three months or less, which are readily convertible to known amounts of
cash and are subject to insignificant changes in value.
Temporary investments
Temporary investments are designated as available-for-sale and recorded at
fair value using quoted market prices. These investments include money
market instruments with maturities of greater than three months from the
date of acquisition.
Trade receivables and payables
Trade receivables and payables are non-interest bearing and stated at
carrying values, which approximate fair values due to the short terms to
maturity. Where necessary, trade receivables include allowances for
uncollectable amounts.
Investments in marketable securities
Investments in marketable securities are designated as available-for-sale
and recorded at fair value. Fair values are determined by reference to
quoted market prices at the balance sheet date. Unrealized gains and losses
on available-for-sale investments are recognized in other comprehensive
income. Investment transactions are recognized on the trade date with
transaction costs included in the underlying balance. At each balance sheet
date, we assess for any impairment in value that is considered to be other
than temporary, and record any write-downs to net earnings for the period.
9
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
Long-term debt
Long-term debt is initially recorded at total proceeds received less direct
issuance costs. Long-term debt is subsequently measured at amortized cost
and calculated using the effective interest rate method.
Derivative Instruments and Hedge Accounting
Derivative instruments, including embedded derivatives, are held for
trading and recorded on the balance sheet at fair value. Unrealized gains
and losses on derivatives are recorded as part of other income (expense) in
net earnings. Fair values for derivative instruments held for trading are
determined using valuation techniques. These valuations use assumptions
based on market conditions existing at the balance sheet date. Derivatives
embedded in non-derivative contracts are recognized separately unless
closely related to the host contract.
We do not apply cash flow or fair value hedge accounting. For hedges of net
investments in self-sustaining foreign operations, we recognize any gains
or losses on the hedging instrument relating to the effective portion of
the hedge in other comprehensive income. Any gain or loss on the hedging
instrument relating to the ineffective portion of the hedge is recognized
immediately in net earnings.
Inventories
Finished products, work in process and raw material inventories are valued
at the lower of cost and net realizable value. Raw materials include
concentrates for use at smelting and refining operations. Work in process
inventory includes inventory in the milling, smelting or refining process
and stockpiled ore at mining operations.
For work in process and finished product inventories, cost includes all
direct costs incurred in production including direct labour and materials,
freight, depreciation and amortization and directly attributable overhead
costs. Waste rock stripping costs related to mine production are
inventoried as incurred.
We use both joint-product and by-product costing for work in process and
finished product inventories. Joint costing is applied to primary products
at the Red Dog, Antamina, Duck Pond and Pend Oreille mines and the Trail
operations, where the profitability of the operation is dependent upon the
production of a number of primary products.
Joint costing allocates total production costs based on the relative values
of the products. Where by-product costing is used, by-products are
allocated the incremental costs of processes that are specific to the
production of that product.
Supplies inventory is valued at the lower of average cost and replacement
value. Cost includes acquisition, freight and other directly attributable
costs.
Investments Subject to Significant Influence
Investments in Fording Canadian Coal Trust (Fording), Fort Hills Energy
Limited Partnership (Fort Hills) and Galore Creek Partnership (Galore
Creek) are accounted for using the equity method as we have significant
influence over these investments.
10
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
Property, Plant and Equipment
Plant and equipment
Plant and equipment are recorded at cost. The cost of buildings, plant and
processing equipment at our mining operations is amortized on a
units-of-production basis over the lesser of the estimated useful life of
the asset and the estimated proven and probable ore reserves. Amortization
of plant and equipment at our smelting operations is calculated on a
straight-line basis over the estimated useful life of the asset. Mobile
equipment is depreciated over the estimated equipment operating hours.
Buildings are amortized on a straight-line basis over their estimated
useful life, not exceeding the estimated life of the mine. When we incur
debt directly related to the construction of a new operation or major
expansion, the interest and financing costs associated with such debt are
capitalized during the construction period.
Mineral properties and mine development costs
The cost of acquiring and developing mineral properties or property rights,
including costs incurred during production to increase future output by
providing access to additional sources of resources, are deferred. Upon
commencement of commercial production, mineral properties and mine
development costs are amortized on a units-of-production basis over the
proven and probable reserves to which they relate.
Underground mine development costs are amortized using the block
amortization method. Development costs associated with each distinct
section of the mine are amortized over the reserves to which they relate.
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 Instrument
43-101, exist and it is expected that the expenditure can be recovered by
future exploitation or sale, in which case they are deferred.
Development costs of oil sands properties
The costs of acquiring, exploring, evaluating and developing oil sands
properties are deferred when it is expected that these costs will be
recovered through future exploitation or sale of the property.
Asset impairment
We perform impairment tests on our property, plant and equipment when
events or changes in circumstances occur that indicate the carrying value
of an asset may not be recoverable. Estimated future cash flows are
calculated using estimated future prices, mineral resources, and operating
and capital costs on an undiscounted basis. When the carrying value of the
development project exceeds estimated future cash flows, the asset is
impaired. Write-downs are recorded to the extent the carrying value exceeds
the discounted value of the estimated future cash flows based on our
average cost of borrowing.
11
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, continued
Repairs and maintenance
Repairs and maintenance costs, including shutdown maintenance costs, are
charged to expense as incurred, except when these repairs significantly
extend the life of an asset or result in an operating improvement. In these
instances the portion of these repairs relating to the betterment is
capitalized as part of plant and equipment.
Goodwill and Impairment Tests
We allocate goodwill arising from business combinations to the reporting
units acquired based on estimates of the fair value of the reporting unit.
Any excess of the fair value of a reporting unit over the fair value of the
sum of its individual assets and liabilities is considered goodwill for
that unit.
We perform annual goodwill impairment tests. This impairment assessment
involves estimating the fair value of each reporting unit that has been
assigned goodwill. We compare the fair value to the total carrying amount
of each reporting unit, including goodwill. If the carrying amount exceeds
fair value, then we estimate the fair values of all identifiable assets and
liabilities in the reporting unit, and compare this net fair value of
assets less liabilities to the estimated fair value of the entire reporting
unit. The difference represents the fair value of goodwill. If the carrying
amount of goodwill exceeds this amount, we reduce goodwill by a charge to
earnings in the amount of the excess.
Circumstances which result in an impairment and write-down of goodwill
could arise through a variety of factors including a reduction in the
reserve or resource base of the mineral property, a reduction in expected
prices of the commodities produced, or general business considerations
including changes in circumstances of the host country tax regime.
Revenue Recognition
Sales are recognized when title transfers and the rights and obligations of
ownership pass to the customer. The majority of our metal concentrates are
sold under pricing arrangements where final prices are determined by quoted
market prices in a period subsequent to the date of sale. In these
circumstances, revenues are recorded at the time of sale based on forward
prices for the expected date of the final settlement. As a result, the
values of our concentrate receivables change as the underlying commodity
market prices vary. This component of the contract is an embedded
derivative, which is recorded at fair value with changes in fair value
recorded in revenue.
Income and Resource Taxes
Current income taxes are recorded based on the estimated income and
resource taxes payable on taxable income for the current year. Future
income tax assets and liabilities are recognized based on the difference
between the tax and accounting values of assets and liabilities and are
calculated using substantively enacted tax rates for the periods in which
the differences are expected to reverse. Tax rate changes are recognized in
earnings in the period of substantive enactment. Future tax assets are
recognized to the extent that they are considered more likely than not to
be realized.
We are subject to assessments by various taxation authorities which may
interpret tax legislation differently. The final amount of taxes to be paid
depends on a number of factors including outcomes of audits, appeals,
disputes, negotiations and litigation. We provide for such differences
based on our best estimate of the probable outcome of these matters.
12
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, continued
Pension and Other Employee Future Benefits
Defined benefit pension plans
Defined benefit pension plan obligations are based on actuarial
determinations. The projected benefit method prorated on services is used
to determine the accrued benefit obligation. Actuarial assumptions used in
the determination of defined benefit pension plan liabilities and
non-pension post-retirement benefits are based upon our best estimates,
including discount rate, expected plan performance, salary escalation,
expected health care costs and retirement dates of employees. The expected
return on plan assets is estimated based on the fair value of plan assets,
asset allocation and expected long-term returns on these components.
Past service costs and transitional assets or liabilities are amortized on
a straight-line basis over the expected average remaining service period of
active employees expected to receive benefits under the plan up to the full
eligibility date.
Differences between the actuarial liabilities and the amounts recorded in
the financial statements will arise from changes in plan assumptions,
changes in benefits, or through experience as results differ from actuarial
assumptions. Cumulative differences which are greater than 10% of either
the fair value of the plan assets or the accrued benefit obligation,
whichever is greater, are amortized over the average remaining service life
of the related employees.
Defined contribution pension plans
The cost of providing benefits through defined contribution plans is
charged to earnings as the obligation to contribute is incurred.
Non-pension post-retirement plans
We provide certain health care benefits for certain employees when they
retire. The cost of these benefits is expensed over the period in which the
employees render services. These non-pension post-retirement benefits are
funded by us as they become due.
Stock-Based Compensation
The fair value method of accounting is used for stock-based awards. Under
this method, the compensation cost of options and other stock-based
compensation arrangements is recorded based on the estimated fair values at
the grant date and charged to earnings over the vesting period. For
employees eligible for normal retirement prior to vesting, the expense is
charged to earnings over the period from the grant date to the date they
are eligible for retirement.
Stock-based compensation expense relating to deferred and restricted share
units is accrued over the vesting period of the units based on the quoted
market value of Class B subordinate voting shares. As these awards will be
settled in cash, the expense and liability are adjusted each reporting
period for changes in the underlying share price.
13
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, continued
Research and Development
Research costs are expensed as incurred. Development costs are only
deferred when the product or process is clearly defined, the technical
feasibility has been established, the future market for the product or
process is clearly defined and we are committed to, and have the resources
to, complete the project.
Asset Retirement Obligations
Future obligations to retire an asset including dismantling, remediation
and ongoing treatment and monitoring of the site are initially recognized
and recorded as a liability at fair value, based on estimated future cash
flows, our current credit adjusted risk-free discount rate and an estimated
inflation factor. The liability is adjusted for changes in the expected
amounts and timing of cash flows required to discharge the liability and
accreted to full value over time through periodic charges to earnings. For
operating properties, the amount of the asset retirement liability
initially recognized and any subsequent adjustments are capitalized as part
of the asset's carrying value and amortized over the asset's estimated
useful life.
For closed properties, any adjustments to the liability are charged to
other income (expense). Asset retirement obligations are only recorded when
the timing or amount of remediation costs can be reasonably estimated.
Earnings Per Share
Earnings per share are calculated based on the weighted average number of
shares outstanding during the year. We follow the treasury stock method in
the calculation of diluted earnings per share. Under this method, dilution
is calculated based upon the net number of common shares issued should "in
the money" options and warrants be exercised and the proceeds be used to
repurchase common shares at the average market price in the year. Dilution
from convertible securities is calculated based on the number of shares to
be issued after taking into account the reduction of the related after-tax
interest expense.
d) New Canadian Accounting Pronouncements
Inventories
In June 2007, the CICA issued Section 3031 "Inventories" to replace
existing Section 3030. The new section, which is effective January 1, 2008,
establishes standards for the measurement and disclosure of inventories. We
do not expect the application to have a significant impact on our financial
statements.
Goodwill and Intangible assets
In February 2008, the CICA issued Section 3064, "Goodwill and Intangible
Assets," which replaces Section 3062, "Goodwill and Other Intangible
Assets." This new standard provides guidance on the recognition,
measurement, presentation and disclosure of goodwill and intangible assets
and is effective for us beginning January 1, 2009. Concurrent with the
adoption of this standard, EIC-27, "Revenues and Expenditures in the
Pre-operating Period," will be withdrawn. This will result in a change to
our accounting for the start up of mining operations, as pre-commercial
production costs will no longer be capitalized as an asset.
14
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES, continued
e) Changes in Estimates
Mineral reserves
Estimates of proven and probable mineral reserves at each mineral property
are updated annually at the end of each year. Following the update of these
estimates on December 31, 2006, we prospectively revised calculations of
depreciation and amortization of property, plant and equipment.
Mine life extension at Highland Valley Copper
In February 2007, we announced an extension of the mine life at Highland
Valley Copper to 2019. We prospectively revised amounts of depreciation and
amortization of property, plant and equipment, pension expense and amounts
related to asset retirement obligations to reflect the extended mine life.
3. ACQUISITION OF AUR RESOURCES INC.
In the third quarter of 2007, we acquired 100% of the outstanding common
shares of Aur Resources Inc. Aur owned interests in three operating mines,
the Quebrada Blanca (76.5%) and Andacollo (90%) copper mines located in
Chile and the Duck Pond (100%) copper-zinc mine located in Newfoundland,
Canada.
We accounted for the acquisition of Aur using the purchase method. Aur's
results of operations are included in our consolidated financial statements
from August 22, 2007. The purchase cost of $4,054 million was funded with a
combination of cash and Class B subordinate voting shares as follows:
=====================================================================
(Cdn $ in millions)
---------------------------------------------------------------------
Cash $ 3,089
Issuance of 21,971,906 Class B subordinate voting shares 952
Transaction costs 13
---------------------------------------------------------------------
Total purchase price $ 4,054
=====================================================================
Each Class B subordinate voting share was valued at $43.33, being the
average closing price on the Toronto Stock Exchange for two trading days
before and one day after the announcement of our offer for Aur, less deemed
issuance costs.
15
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
3. ACQUISITION OF AUR RESOURCES INC., continued
Our allocation of the purchase cost to the assets acquired and liabilities
assumed is based upon estimated fair values at the time of acquisition. We
have substantially completed the process of determining fair values for the
assets and liabilities acquired. Matters still under review principally
relate to income and resource taxes and could affect values assigned to
future tax liabilities and goodwill. As a result, the purchase price
allocation is subject to change in 2008 as the valuation process is
completed.
Our current allocation of the purchase price to the estimated fair value of
the assets and liabilities of Aur is as follows:
==========================================================================
(Cdn $ in millions)
--------------------------------------------------------------------------
Cash $ 501
Inventory 267
Property, plant and equipment 4,137
Goodwill 706
Other 330
--------------------------------------------------------------------------
Total assets acquired 5,941
Current liabilities (197)
Derivative instrument liability (96)
Long-term liabilities (302)
Future income tax liability (1,263)
Non-controlling interests (29)
--------------------------------------------------------------------------
Total liabilities assumed (1,887)
--------------------------------------------------------------------------
Net assets acquired $ 4,054
==========================================================================
The net cash cost of the acquisition was as follows:
==========================================================================
(Cdn $ in millions)
--------------------------------------------------------------------------
Cash paid to Aur shareholders $ 3,089
Less Aur's cash balance on acquisition date (501)
--------------------------------------------------------------------------
$ 2,588
==========================================================================
4. ASSET IMPAIRMENT CHARGES
During 2007 we recorded an impairment charge of $26 million on our
investment in Tahera Diamond Corporation ("Tahera"). Tahera announced the
suspension of operations at its primary asset, the Jericho mine, and
subsequently filed for creditor protection indicating an other than
temporary decline in market value.
We also recorded impairment charges of $12 million against our Lennard
Shelf zinc mine and $31 million against our Pend Oreille zinc mine. These
impairment charges were triggered by operating losses, lower than planned
production and increasing costs. As we no longer expect to recover the full
carrying value of the mines over their expected mine lives, we have written
the carrying values down to their estimated fair values based on the
discounted value of our expectations of future cash flows.
16
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
5. INVENTORIES
=======================================================================
(Cdn$ in millions) 2007 2006
-----------------------------------------------------------------------
Finished product $ 312 $ 301
Work in process 350 218
Raw materials 153 91
Supplies 189 176
-----------------------------------------------------------------------
$ 1,004 $ 786
=======================================================================
6. INVESTMENTS
=============================================================================================================
(Cdn$ in millions) 2007 2006
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------------------------------------------------------------------
Available-for-sale investments:
Marketable securities (a) $ 308 $ 308 $ 91 $ 186
Held for trading investments:
Warrants (a) 1 1 12 23
-------------------------------------------------------------------------------------------------------------
309 309 103 209
Investments accounted for under the equity method :
Fording Canadian Coal Trust (19.95% interest) (b) 750 148
Galore Creek Partnership (50% interest) (c) 214 -
Fort Hills Energy Limited Partnership (20% interest)(d) 233 114
------- -----
$ 1,506 $ 354
======= =====
(a) The fair values of marketable securities are determined using
quoted market prices. The fair value for warrants is determined
using a Black-Scholes option valuation model.
(b) Fording Canadian Coal Trust
On September 28, 2007, we acquired 16.65 million units of the
Fording Canadian Coal Trust (Fording) at a price of $599 million.
The acquisition of these units increased our interest in Fording
from 8.7% to 19.95%. If, prior to July 31, 2008, we make an offer
or announce an intention to acquire more than 50% of the
outstanding Fording units and subsequently complete the
transaction or sell the Fording units at a price in excess of $36
per unit, we must pay the seller such excess for the 16.65 million
units acquired.
17
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
6. INVESTMENTS, continued
(c) Galore Creek Partnership
In August 2007, we formed a 50/50 partnership with NovaGold Resources
Inc. ("NovaGold") to develop the Galore Creek copper-gold deposit in
northwest British Columbia. Pursuant to the terms of the partnership
agreement, we were required to fund $528 million in development
costs. Thereafter, each partner was to be responsible for funding its
pro rata share of development costs. NovaGold was also entitled to
receive up to US$50 million of preferential distributions if revenues
in the first year of commercial production were to exceed specific
established targets.
In November 2007, construction activities at the project were
suspended as a result of our review of the first season of
construction and a more extensive engineering study that anticipated
substantially higher capital costs and a longer construction
schedule.
By agreement with NovaGold at the time of the suspension, our funding
obligations in connection with the project were amended. Our funding
obligation for project costs incurred after August 1, 2007 was
reduced from the original $528 million to $403 million. Of this
total, $264 million was spent by us as of the suspension date. Of the
next $100 million of project costs (other than project study costs
described below), we will fund two-thirds and NovaGold will fund
one-third. Thereafter, each partner will fund its pro rata share of
partnership costs. We also agreed to invest $72 million in the
partnership over the next five years to be used principally to
reassess the project and evaluate alternative development strategies.
In addition, the amount of preferential distributions, if revenues in
the first year of commercial production were to exceed specific
established targets, was reduced to $25 million.
Galore Creek Partnership is obligated to complete construction
demobilization and to put the site on care and maintenance, which
will enable a restart of the project at a later date. The estimated
project demobilization costs of $100 million have been accrued and
expensed by the partnership in the period. We have recorded our $50
million or 50% share of these expenses as an equity loss of $33
million after-tax. Our actual demobilization costs could vary by a
material amount from our estimates. Ongoing care and maintenance
costs, which will be expensed as incurred, will be required to
monitor the site and infrastructure until a decision is made to
proceed with or abandon the project. This decision may not occur for
several years. If the project does not proceed, Galore Creek
Partnership will have to reclaim and restore disturbed land.
As the Galore Creek Partnership is a variable interest entity with
NovaGold as the primary beneficiary, we account for our interest
using the equity method. Future events, such as the ongoing funding
arrangements, may result in a change to our accounting for this
investment.
(d) Fort Hills Energy Limited Partnership
In November 2005, we acquired a 15% interest in the Fort Hills Energy
Limited Partnership, which is developing the Fort Hills oil sands
project in Alberta, Canada. As consideration for our initial 15%
interest, we are required to contribute 34% of the first $2.5 billion
of project expenditures. In September 2007, we acquired an additional
5% interest, bringing our interest to 20%. To earn our additional 5%
interest, we are required to contribute 27.5% of project expenditures
after project spending reaches $2.5 billion and before project
spending reaches $7.5 billion. Thereafter, we are responsible for
funding our 20% share of development costs. Our interest in Fort
Hills is recorded as an investment using the equity method of
accounting.
18
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
6. INVESTMENTS, continued
(e) Equity earnings (loss) is as follows:
===============================================================================================
(Cdn$ in millions) 2007 2006 2005
-----------------------------------------------------------------------------------------------
Fording Canadian Coal Trust (b) $ 28 $ 32 $ 50
Galore Creek Partnership (c) (33) - -
-----------------------------------------------------------------------------------------------
$ (5) $ 32 $ 50
===============================================================================================
7. PROPERTY, PLANT AND EQUIPMENT
====================================================================================================
(Cdn$ in millions) 2007 2006
----------------------------------------------------------------------------------------------------
OPERATING
Mines and mining facilities $ 9,013 $ 4,827
Accumulated depreciation and amortization (2,695) (2,620)
----------------------------------------------------------------------------------------------------
6,318 2,207
Smelter and refineries 1,778 1,722
Accumulated depreciation and amortization (717) (694)
----------------------------------------------------------------------------------------------------
1,061 1,028
OTHER RESOURCE PROPERTIES
Mineral properties 132 413
Oil sands leases 296 76
----------------------------------------------------------------------------------------------------
$ 7,807 $ 3,724
====================================================================================================
During 2007, we capitalized $44 million (2006 - $21 million) of waste rock
stripping costs associated with mine expansion at Highland Valley Copper
and as at December 31, 2007, we have cumulative capitalized waste rock
stripping costs of $68 million, all of which represents the capitalized
expansion costs at Highland Valley Copper. In addition, we have $41
million of remaining unamortized capitalized stripping costs related to
the transitional balance on adoption of EIC-160 in 2006 (Note 2(b)).
8. OTHER ASSETS
===============================================================================================
(Cdn$ in millions) 2007 2006
-----------------------------------------------------------------------------------------------
Restricted cash pledged as security (Note 10(e)) $ 151 $ -
Pension assets (Note 15(a)) 210 194
Future income and resource tax assets (Note 18(c)) 70 103
Cajamarquilla contingent receivable (net of current portion
of $37 million) (Note 22(b)) 42 -
Long-term receivables 51 109
Other 68 57
-----------------------------------------------------------------------------------------------
$ 592 $ 463
===============================================================================================
19
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
=======================================================================================================
(Cdn$ in millions) 2007 2006
-------------------------------------------------------------------------------------------------------
Trade payables $ 506 $ 415
Commercial and government royalties 251 118
Payroll related liabilities 93 101
Capital project accruals 25 44
Current portion of asset retirement obligations (Note 14) 28 22
Accrued interest 22 24
Other 92 39
-------------------------------------------------------------------------------------------------------
$ 1,017 $ 763
=======================================================================================================
10. LONG-TERM DEBT
==============================================================================================================
2007 2006
----------------------------------------------------
Carrying Fair Carrying Fair
(Cdn$ in millions) Value Value Value Value
--------------------------------------------------------------------------------------------------------------
Debt instruments
6.125% debentures due October 2035 (US$700
million) (a) $ 675 $ 637 $ 806 $ 783
5.375% debentures due October 2015 (US$300
million) (a) 293 287 349 339
7.0% debentures due September 2012 (US$200
million) (b) 196 212 231 249
Aur debentures 6.75% due March 2010 (US$94
million) (c) 94 96 - -
Antamina senior revolving credit facility due
August 2012 (d) 92 92 108 108
Aur revolving credit facility (e) 148 148 - -
Other 25 25 15 15
--------------------------------------------------------------------------------------------------------------
1,523 1,497 1,509 1,494
Less current portion (31) (31) - -
--------------------------------------------------------------------------------------------------------------
$ 1,492 $ 1,466 $ 1,509 $ 1,494
==============================================================================================================
The fair values of debt are determined using discounted cash flows based
on our expected cost of borrowing.
(a) In 2005, we issued US$300 million of 5.375% notes due October 2015
and US$700 million of 6.125% notes due October 2035. Net proceeds,
after issue costs of $11 million, were $1.16 billion. We can call
these notes at any time by repaying the greater of the principal
amount with accrued interest and the present value of the principal
and interest amounts discounted at comparable treasury yield plus a
stipulated spread.
(b) In 2002, we issued US$200 million of 7.0% notes due September 2012.
We can call these notes at any time by repaying the greater of the
principal amount with accrued interest and the present value of the
principal and interest amounts discounted at comparable treasury
yield plus a stipulated spread.
(c) On acquisition of Aur in 2007, we assumed $94 million of 6.75%
notes. The notes are repayable in three equal annual principal
payments commencing March 11, 2008. 10.
20
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
10. LONG-TERM DEBT, continued
(d) In September 2006, Antamina refinanced its remaining senior debt
(our 22.5% share is US$93 million) on a non-recourse basis with a
syndicated five-year revolving term bank facility with a bullet
repayment due at maturity. The facility may be renewed and extended
annually with the concurrence of the participating banks. During
2007, the maturity date was extended to August 2012. The
outstanding amount under the facility bears interest at LIBOR plus
a margin.
(e) On acquisition of Aur we assumed a revolving credit facility which
permits borrowings of up to US$150 million. This facility is fully
drawn at December 31, 2007. The terms of the facility require one
of our subsidiaries to provide cash collateral to the lender equal
to any amount outstanding under the facility plus US$3 million. The
outstanding amount under the facility bears interest at LIBOR plus
a margin and is due January 2011.
(f) At December 31, 2007, we had revolving credit facilities
aggregating $1.1 billion, of which $0.9 billion is available until
2012. Net of $143 million of letters of credit and $148 million of
draw-downs, the unused portion of the credit facilities is $819
million as at December 31, 2007. In addition, we have issued stand
alone letters of credit for $140 million in respect of
environmental bonding requirements.
Elk Valley Coal has a $200 million revolving credit facility for working
capital purposes, of which our 40% share is $80 million. At December 31,
2007, Elk Valley Coal had issued letters of credit and guarantees
totalling $79 million.
(g) Our debentures and bank credit facilities require the maintenance
of a defined debt to capitalization ratio. As at December 31, 2007,
we are in compliance with all debt covenants and default
provisions.
(h) Excluding financing fees and discounting, we have scheduled
long-term debt principal repayments of $31 million due in 2008, $31
million in 2009, $31 million in 2010, $148 million in 2011, $312
million in 2012, $296 million in 2015 and $695 million in 2035.
(i) We incurred interest expense on long-term debt as follows:
==========================================================================
(Cdn$ in millions) 2007 2006 2005
--------------------------------------------------------------------------
Interest expense $ 95 $ 102 $ 69
Less amounts capitalized (10) (5) -
--------------------------------------------------------------------------
$ 85 $ 97 $ 69
==========================================================================
11. SALE OF INCO SHARES AND REDEMPTION OF INCO EXCHANGEABLE DEBENTURES
In 1996, we issued $248 million of 3% exchangeable debentures due
September 30, 2021. Each $1,000 principal amount debenture was
exchangeable at the option of the holder for 20.7254 common shares of Inco
Limited (Inco), subject to adjustment in certain circumstances. We held
5,148,000 Inco common shares, which were sufficient to affect this
exchange, and pledged these shares as security for the debentures. We also
had the option to satisfy the exchange obligation in cash based on the
market value of the Inco shares at the time of the exchange.
21
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
11. SALE OF INCO SHARES AND REDEMPTION OF INCO EXCHANGEABLE DEBENTURES,
continued
In 2006, we acquired an additional 3,800,000 shares of Inco and made a
takeover bid to acquire all the outstanding shares of Inco. This bid
expired on August 16, 2006, when insufficient shares were tendered to meet
the minimum tender condition. We later tendered all of our Inco shares to
a competing bid. Before our sale of the Inco shares, some holders of the
Inco exchangeable debentures tendered their debentures to us for exchange
and we exercised our option to pay the equivalent amount of cash. When the
Inco shares were sold, an amount was placed in trust sufficient to repay
the remaining debentures in cash. At December 31, 2006, debentures with a
face value of $59 million and a cash value on exchange of $105 million
remained outstanding. In 2006, the cash in trust to meet this obligation
was excluded from cash and cash equivalents on the balance sheet and
classified as cash held in trust. In 2007, the $105 million cash held in
trust was used to settle the remaining debentures.
========================================================================================
(Cdn$ in millions) 2006
----------------------------------------------------------------------------------------
Gain on sale of Inco shares $ 332
Loss on redemption of debentures (194)
----------------------------------------------------------------------------------------
138
Less transaction costs (18)
----------------------------------------------------------------------------------------
Net gain before tax $ (18)
========================================================================================
12. OTHER LIABILITIES
=======================================================================================
(Cdn$ in millions) 2007 2006
---------------------------------------------------------------------------------------
Asset retirement obligations (Note 14) $ 492 $ 427
Other environmental and post-closure costs 88 70
Pension and other employee future benefits (Note 15(a))
Defined benefit pension plans 35 39
Non-pension post-retirement benefits 209 183
Forward sales contracts (net of current portion of
$37 million) (Note 22(c)) 78 -
Other 92 59
---------------------------------------------------------------------------------------
$ 994 $ 778
=======================================================================================
13. MINORITY INTERESTS
=======================================================================================
(Cdn$ in millions) 2007 2006
---------------------------------------------------------------------------------------
Highland Valley Copper $ 56 $ 38
Carmen de Andacollo 21 -
Quebrada Blanca 10 -
Elkview Mine Partnership 5 5
---------------------------------------------------------------------------------------
$ 92 $ 43
=======================================================================================
22
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
14. ASSET RETIREMENT OBLIGATIONS
We have recorded an asset retirement obligation for each of our operating
and closed mines. The refining and smelting facilities in Trail are
considered to be indefinite life operations and neither the amounts that
may be required to retire these facilities nor the timing of required
expenditures can be estimated at this time. For the Trail operation, our
recorded liability is limited to components of the facility where costs
and expected dates of existing retirement and remediation requirements can
be estimated.
The following table summarizes the movements in the asset retirement
obligation for the years ended December 31, 2007 and 2006:
==========================================================================
(Cdn$ in millions) 2007 2006
--------------------------------------------------------------------------
At January 1 $ 449 $ 378
Changes in cash flow estimates
Operating mines 42 68
Closed properties 22 11
Expenditures and settlements (20) (31)
Accretion expense 26 21
Obligations assumed on acquisition 36 1
Foreign currency translation adjustments (35) 1
--------------------------------------------------------------------------
At December 31 520 79
Less current portion (28) (22)
--------------------------------------------------------------------------
$ 492 $ -
==========================================================================
Asset retirement obligations are initially recorded as a liability at fair
value, assuming credit adjusted risk-free discount rates between 5.75% and
6.35%, and inflation factors between 2.00% and 2.75%. The liability for
retirement and remediation on an undiscounted basis before inflation is
estimated to be approximately $374 million. In addition, for ongoing
treatment and monitoring of the sites, the estimated undiscounted payments
before inflation adjustment are $3.9 million per annum for 2008 to 2032
and $10.5 million per annum for 2033 to 2107.
The change in cash flow estimates relating to asset retirement obligations
at closed properties are recognized in other income (expense) (Note 17).
23
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS
Defined Contribution Plans
We have defined contribution pension plans for certain groups of
employees. Our share of contributions to these plans is expensed in the
year it is earned by the employee.
DEFINED BENEFIT PLANS AND NON-PENSION POST-RETIREMENT BENEFITS
We have various defined benefit pension plans that provide benefits based
principally on employees' years of service. These plans are only available
to certain qualifying employees. The plans are "flat-benefit" or
"final-pay" plans which are not indexed. Annual contributions to these
plans are actuarially determined and made at or in excess of minimum
requirements prescribed by legislation.
All of our defined benefit pension plans are actuarially evaluated for
funding purposes on a three-year cycle. The most significant plan, which
accounts for 57% of our accrued benefit obligation at December 31, 2007,
was last actuarially evaluated on December 31, 2006. The measurement date
used to determine all of the accrued benefit obligation and plan assets
for accounting information was December 31, 2007.
We also have several post-retirement plans, which provide post-retirement
medical and life insurance benefits to certain qualifying employees.
24
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
a) Actuarial valuation of plans
=================================================================================================================
(Cdn$ in millions) 2007 2006
-----------------------------------------------------------------------------------------------------------------
Defined Non-pension Defined Non-pension
benefit post- benefit post-
pension retirement pension retirement
plans benefit plans plans benefit plans
-----------------------------------------------------------------------------------------------------------------
Accrued benefit obligation
Balance at beginning of year $ 1,270 $ 316 $ 1,198 273
Current service cost 25 6 25 5
Benefits paid (77) (8) (72) (10)
Interest cost 63 16 62 15
Actuarial revaluation (2) (46) 11 8
Past service costs arising from plan improvements 7 - 43 24
Foreign currency exchange rate changes (13) (7) - -
Changes in methodology and assumptions 4 3 - -
Transfers from other plans 14 - 3 -
Impact of new discount rate at year end (36) (9) - -
Other 5 1 - 1
-----------------------------------------------------------------------------------------------------------------
Balance at end of year 1,260 272 1,270 315
Plan assets
Fair value at beginning of year 1,275 - 1,126 -
Actual return on plan assets 21 - 143 -
Benefits paid (77) (8) (72) (10)
Foreign currency exchange rate changes (10) - - -
Contributions 32 8 76 10
Transfer from other plans 17 - 2 -
Other (1) - - -
-----------------------------------------------------------------------------------------------------------------
Fair value at end of year 1,257 - 1,273 -
-----------------------------------------------------------------------------------------------------------------
Funding surplus (deficit) (3) (272) 5 (316)
Unamortized actuarial costs 110 33 75 91
Unamortized past service costs 68 30 75 42
-----------------------------------------------------------------------------------------------------------------
Net accrued benefit asset (liability) $ 175 $ (209) $ 1,278 $ (316)
=================================================================================================================
Represented by
Pension assets (Note 8) $ 210 $ - $ 194 -
Accrued benefit liability (Note 12) (35) (209) (39) (183)
-----------------------------------------------------------------------------------------------------------------
Net accrued benefit asset (liability) 175 (209) - -
=================================================================================================================
25
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
(b) Funded status
The funded status of our defined benefit pension plans is as follows:
==================================================================================================================
(Cdn$ in millions) 2007 2006
------------------------------------------------------------------------------------------------------------------
Plans where Plans where Plans where Plans where
ssets exceed benefit ssets exceed benefit
benefit obligations benefit obligations
a obligations exceed assets Total a obligations exceed assets Total
------------------------------------------------------------------------------------------------------------------
Plan assets $ 1,007 $ 250 $ 1,257 $ 1,083 $ 192 $ 1,275
Benefit obligations (928) (332) (1,260) (988) (282) (1,270)
------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan
assets over benefit
obligations $ 79 $ (82) $ (3) $ 95 $ (90) $ 5
==================================================================================================================
Our total cash payments for pension and other employee future
benefits for 2007, including cash contributed to defined benefit and
defined contribution pension plans and cash payments made directly to
beneficiaries, were $52 million. We expect to contribute $43 million
to our defined contribution and defined benefit pension plans in 2008
based on minimum funding requirements.
The estimated future benefit payments to pensioners for the next five
years and five years thereafter are as follows:
==================================================================================================================
(Cdn$ in millions) 2008 2009 2010 2011 2012 2013-2017
------------------------------------------------------------------------------------------------------------------
$ 81 $ 84 $ 87 $ 91 $ 95 $ 558
==================================================================================================================
(c) Significant assumptions
The assumptions used to calculate annual expenses are those used to
calculate the accrued benefit obligation at the end of the previous
year. Weighted average assumptions used to calculate the accrued
benefit obligation at the end of each year are as follows:
=================================================================================================================
2007 2006 2005
-----------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
Benefit retirement Benefit retirement Benefit retirement
Pension benefit Pension benefit Pension benefit
plans plans plans plans plans plans
-----------------------------------------------------------------------------------------------------------------
Discount rate 5.27% 5.36% 5.02% 5.13% 5.03% 5.09%
Assumed long-term rate of return on assets 7% - 7% - 7% -
Rate of increase in future compensation 4% 4% 4% 4% 4% 4%
Initial medical trend rate - 9% - 10% - 10%
Ultimate medical trend rate - 5% - 5% - 5%
Years to reach ultimate medical trend rate - 4 - 5 - 6
Dental trend rates - 5% - 5% - 4%
=================================================================================================================
26
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
The expected long-term rate of return on plan assets is developed
based on the historical and projected returns for each asset class,
as well as the target asset allocation for the pension portfolio.
Projected rates of return for fixed income securities and equities
are developed using a model that factors in long-term government debt
rates, real bond yield trend, inflation and equity premiums, based on
a combination of historical experience and future long-term
expectations.
The discount rate used to determine the accrued benefit obligation is
determined by reference to the market interest rates of high quality
debt instruments at the measurement date.
(d) Employee future benefits expense
=================================================================================================================
2007 2006 2005
-----------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
Benefit retirement Benefit retirement Benefit retirement
Pension benefit Pension benefit Pension benefit
plans plans plans plans plans plans
-----------------------------------------------------------------------------------------------------------------
Current service cost $ 25 $ 6 $ 25 $ 5 $ 19 $ 4
Interest cost 63 16 62 15 62 14
Expected gain on assets (86) - (77) - (69) -
Actuarial loss recognized 3 7 10 7 5 5
Past service cost recognized 14 6 9 1 6 -
Other 7 - 3 - 10 (1)
-----------------------------------------------------------------------------------------------------------------
Expense recognized for the year $ 26 $ 35 $ 32 $ 28 $ 33 $ 22
=================================================================================================================
The defined contribution expense for 2007 is $11 million (2006 - $8
million; 2005 - $7 million).
Certain employee future benefit costs incurred in the year and the
actual return on plan assets in excess of or short of the actuarially
assumed return are not taken into income in the year but are
amortized over the expected average remaining service life of
employees. Employee future benefit expenses recognized in the year
are reconciled to employee future benefit costs incurred as follows:
=================================================================================================================
(Cdn$ in millions) 2007 2006 2005
-----------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
Benefit retirement Benefit retirement Benefit retirement
Pension benefit Pension benefit Pension benefit
plans plans plans plans plans plans
-----------------------------------------------------------------------------------------------------------------
Expense recognized $ 26 $ 35 $ 32 $ 28 $ 33 $ 22
Difference between expected and actual
return on plan assets 66 - (66) - (60) -
Difference between actuarial losses
(gains) amortized and actuarial
losses (gains) arising (36) (59) 1 1 120 32
Difference between past service costs
amortized and past service costs
arising (7) (6) 34 21 15 -
Other (4) (3) - (9) 1
-----------------------------------------------------------------------------------------------------------------
Costs incurred (recovered) $ 45 $ (30) $ (2) $ 50 $ 99 $ 55
=================================================================================================================
27
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
15. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
(e) Health care sensitivity
A one percent change in the initial and ultimate medical trend rates
assumptions would have the following effect on our post-retirement
health care obligations and expense:
============================================================================================
Increase (Decrease)
in service and Increase (Decrease)
(Cdn$ in millions) interest cost in obligation
--------------------------------------------------------------------------------------------
Impact of 1% increase in medical trend rate $ 4 $ 33
Impact of 1% decrease in medical trend rate (3) (27)
============================================================================================
(f) Investment of plan assets
The assets of our defined benefit pension plans are managed by
pension asset fund managers under the oversight of the Teck Cominco
Limited Executive Pension committee.
Our pension plan investment strategies support the objectives of each
defined benefit plan and are related to the plan demographics and
timing of expected benefit payments to plan members. The objective
for the plan asset portfolios is to achieve an annual portfolio
return over a four-year period equal to at least the annual
percentage change in the Consumer Price Index plus 4%. To achieve
this objective, a strategic asset allocation policy has been
developed for each defined benefit plan. The asset allocation is
monitored quarterly and rebalanced if the funds in an asset class
exceed their allowable allocation ranges. We review the investment
guidelines for each plan at least annually and the portfolio and
investment managers' performance is monitored quarterly.
The composition of the defined benefit pension plan assets at
December 31, 2007 and 2006, and the target composition for 2008 are
as follows:
=====================================================================
2008 2007 2006
TARGET ACTUAL ACTUAL
---------------------------------------------------------------------
Equity securities 50% 55% 58%
Debt securities 40% 36% 37%
Real estate and other 10% 9% 5%
---------------------------------------------------------------------
Total 100% 100% 100%
=====================================================================
28
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
16. SHAREHOLDERS' EQUITY
============================================================================================================
2007 2006
------------------------------------------------------------------------------------------------------------
Shares Cdn$ in Shares Cdn$ in
(in 000's) millions (in 000's) millions
------------------------------------------------------------------------------------------------------------
Share capital (a)
Class A common shares 9,353 $ 7 9,348 $ 7
Class B subordinate voting shares (b) 432,555 3,274 422,306 2,398
Retained earnings 5,038 4,225
Contributed surplus (g) 71 64
Accumulated other comprehensive income (h) (671) (145)
------------------------------------------------------------------------------------------------------------
$ 7,719 $ 6,549
============================================================================================================
(a) Authorized share capital
Our authorized share capital consists of an unlimited number of Class
A common shares without par value, an unlimited number of Class B
subordinate voting shares without par value and an unlimited number
of preferred shares without par value issuable in series.
Class A common shares carry the right to 100 votes per share. Class B
subordinate voting shares carry the right to one vote per share. Each
Class A common share is convertible, at the option of the holder,
into one Class B subordinate voting share. In all other respects, the
Class A common shares and Class B subordinate voting shares rank
equally.
The attributes of the Class B subordinate voting shares contain so
called "coattail provisions," which provide that, in the event that
an offer (an "Exclusionary Offer") to purchase Class A common shares,
which is required to be made to all or substantially all holders
thereof, is not made concurrently with an offer to purchase Class B
subordinate voting shares on identical terms, then each Class B
subordinate voting share will be convertible into one Class A common
share. The Class B subordinate voting shares will not be convertible
in the event that an Exclusionary Offer is not accepted by holders of
a majority of the Class A common shares (excluding those shares held
by the person making the Exclusionary Offer). If an offer to purchase
Class A common shares does not, under applicable securities
legislation or the requirements of any stock exchange having
jurisdiction, constitute a "take-over bid," or is otherwise exempt
from any requirement that such offer be made to all or substantively
all holders of Class A common shares, the coattail provisions do not
apply.
29
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
16. SHAREHOLDERS' EQUITY, continued
(b) Class B subordinate voting shares
===============================================================================================
Shares
(in 000's) Cdn$ in millions
-----------------------------------------------------------------------------------------------
At December 31, 2004 196,682 $ 2,117
Options exercised (e) 2,067 31
Other (l) 3 -
-----------------------------------------------------------------------------------------------
At December 31, 2005 11,494 230
Options exercised (e) 907 20
Issued in settlement of exchangeable debentures due 2024 (d) 11,489 230
Other (l) 5 -
-----------------------------------------------------------------------------------------------
At December 31, 2006 211,153 876
Share split (c) 211,153 -
Issued on acquisition of Aur (Note 3) 21,972 952
Options exercised (e) 1,373 16
Share repurchase program (k) (13,100) (92)
Other (l) 4 -
-----------------------------------------------------------------------------------------------
At December 31, 2007 432,555 $ 3,274
===============================================================================================
(c) Share split
On April 25, 2007, shareholders approved a two-for-one share split of
our Class A common shares and Class B subordinate voting shares
effective as of the close of business on May 7, 2007. All share, per
share, share option and DSU and RSU information included in the
consolidated financial statements and accompanying notes has been
adjusted to reflect this share split for all periods presented.
(d) Exchangeable debentures due 2024
In April 1999, we issued $150 million of 25-year debentures with each
$1,000 debenture exchangeable, at a reference price of $23.50 per
share, into 42.5532 shares of Cominco Ltd. At the time of the merger
with Cominco Ltd. in 2001, holders of these debentures were paid $6
in respect of each underlying Cominco share as a partial repayment.
The face value of each $1,000 debenture was reduced to $745 and each
debenture became convertible into 76.596 Class B subordinate voting
shares for a total, if exchanged, of 11.5 million Class B subordinate
voting shares. The debentures were exchangeable by the holder or
redeemable by us at any time.
On June 1, 2006, we completed a series of transactions culminating in
the redemption of these debentures. In the course of these
transactions, all outstanding debentures were exchanged and we issued
11.5 million Class B subordinate voting shares.
30
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
16. SHAREHOLDERS' EQUITY, continued
By virtue of our option to deliver a fixed number of Class B
subordinate voting shares to satisfy the principal payments, the
debentures net of issue costs and taxes were classified as a
component of shareholders' equity and the interest, net of taxes, was
charged directly to retained earnings. This interest, net of taxes,
totalled $3 million in 2006 and $4 million in 2005.
The exchange was a non-monetary transaction and did not affect our
cash flow or earnings. In 2006, current tax benefits of $124 million
on these transactions were recorded directly to shareholders' equity.
(e) Share options
Under our share option plan, 9 million Class B subordinate voting
shares have been set aside for the grant of share options to
full-time employees and directors. The exercise price for each option
is the closing price for our Class B subordinate voting shares on the
last trading day before the date of grant. We issue new shares upon
exercise of share options.
During the year ended December 31, 2007, we granted 839,400 Class B
subordinate voting share options at market price to employees. These
share options have an exercise price of $43.74, a vesting period of
three years and expire in 2015.
The weighted average fair value of Class B subordinate voting share
options granted in the year was estimated as $16 per share option
(2006 - $12; 2005 - $9) at the grant date based on the Black-Scholes
option-pricing model using the following assumptions:
=========================================================================================================
2007 2006 2005
---------------------------------------------------------------------------------------------------------
Dividend yield 0.95% 1.04% 0.88%
Risk free interest rate 5.15% 4.11% 3.75%
Expected life 4.2 years 5.0 years 4.7 years
Expected volatility 35% 35% 36%
=========================================================================================================
Outstanding share options
=========================================================================================================
2007 2006
---------------------------------------------------------------------------------------------------------
Weighted Weighted
Shares average Shares average
(in 000's) exercise price (in 000's) exercise price
---------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 4,274 $ 14.40 5,382 $ 10.02
Granted 839 43.74 710 33.20
Exercised (1,373) 9.44 (1,814) 8.73
Forfeited (70) 19.52 (4) 30.87
---------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,670 $ 22.86 4,274 $ 14.40
---------------------------------------------------------------------------------------------------------
Vested and exercisable at end of year 2,141 $ 12.58 2,556 $ 8.04
=========================================================================================================
31
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
16. SHAREHOLDERS' EQUITY, continued
Information relating to share options outstanding at December 31,
2007:
===============================================================================================================
Weighted
Weighted average
average remaining life
Weighted average exercise of
Outstanding Vested exercise price on price on outstanding
share options share options outstanding vested options
(in 000's) (in 000's) Price range share options share options (months)
---------------------------------------------------------------------------------------------------------------
54 54 $ 3.20 - $ 4.79 $3.67 $3.67 17
1,001 1,001 $ 4.80 - $ 7.20 $5.69 $5.69 18
562 562 $ 7.21 - $10.82 $12.55 $12.55 26
560 321 $10.83 - $16.25 $22.64 $22.64 38
665 203 $16.26 - $24.38 $33.20 $33.20 74
828 - $24.39 - $43.74 $43.74 - 86
---------------------------------------------------------------------------------------------------------------
3,670 2,141 $22.86 $12.58 48
===============================================================================================================
The intrinsic value of a share option is the difference between the
current market price for our Class B subordinate voting share and the
exercise price of the option. At December 31, 2007, the aggregate
intrinsic value, based on the December 31, 2007 closing price of
$35.43 for the Class B subordinate voting share, was $53 million for
all outstanding options and $49 million for vested options.
Further information about our share options
==============================================================================================================
(Cdn$ in millions) 2007 2006 2005
--------------------------------------------------------------------------------------------------------------
Total compensation cost recognized $ 11 $ 7 $ 6
Total fair value of share options vested 8 5 3
Total intrinsic value of share options exercised 46 54 70
==============================================================================================================
The unrecognized compensation cost for non-vested share options at
December 31, 2007 was $7 million. The weighted average period over
which it is expected to be recognized is 1.47 years.
(f) Deferred Share Units and Restricted Share Units
Under our Deferred Share Unit (DSU) or Restricted Share Unit (RSU)
plan, directors and employees may receive either DSUs or RSUs, each
of which entitle the holder to a cash payment equal to the market
value of one Class B subordinate voting share at the time they are
redeemed. In the case of directors, these units vest immediately. The
units granted to employees vest after three years. Upon normal
retirement the units vest immediately and when early retirement
occurs, units vest on a pro-rata basis. Should employees be
terminated without cause, units vest on a pro-rata basis. Should
employees be terminated with cause, units are forfeited. DSUs may
only be redeemed within twelve months from the date a holder ceases
to be an employee or director while RSUs must be redeemed at the end
of a three-year period measured from the end of the year immediately
preceding the grant.
32
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
16. SHAREHOLDERS' EQUITY, continued
Additional units are issued to reflect dividends paid on Class B
subordinate voting shares and other adjustments to Class B
subordinate voting shares.
At December 31, 2007, 1,044,198 DSUs and RSUs were outstanding (2006
- 1,007,818).
Non-vested DSU and RSU activity for the year ended December 31, 2007
=============================================================================================================
2007 2006
Deferred
share unit
Deferred and Weighted
share unit and Weighted restricted average
restricted average share grant date
share unit grant date unit date fair
(in 000's) fair value (in 000's) value
-------------------------------------------------------------------------------------------------------------
Non-vested at beginning of year 718 $29.36 430 $20.23
Granted 359 42.98 488 35.12
Forfeited (19) 26.00 (2) 29.01
Vested (363) 19.62 (198) 23.62
-------------------------------------------------------------------------------------------------------------
Non-vested at end of year 695 $39.08 718 $29.36
=============================================================================================================
Further information about our DSUs and RSUs
==========================================================================================================
(Cdn$ in millions, except weighted average) 2007 2006 2005
----------------------------------------------------------------------------------------------------------
Weighted average grant date fair value of the units granted $ 44.02 $ 35.63 $ 21.84
Total fair value of units vested 13 8 2
Total compensation cost recognized 10 17 12
Tax benefits realized 4 2 -
Cash used to settle DSUs and RSUs 12 6 -
==========================================================================================================
The unrecognized compensation cost for non-vested DSUs and RSUs at
December 31, 2007 was $15 million. The weighted average period over
which it is expected to be recognized is 1.74 years.
(g) Contributed surplus
==========================================================================================================
(Cdn$ in millions) 2007 2006 2005
----------------------------------------------------------------------------------------------------------
Beginning of year $ 64 $ 61 $ 58
Stock-based compensation expense (e) 11 7 6
Transfer to Class B subordinate voting shares
on exercise of share options (2) (4) (3)
Share repurchase program (k) (2) - -
----------------------------------------------------------------------------------------------------------
End of year $ 71 $ 64 $ 61
==========================================================================================================
33
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
16. SHAREHOLDERS' EQUITY, continued
(h) Accumulated other comprehensive income (loss)
========================================================================================================
(Cdn$ in millions) December 31, 2007
--------------------------------------------------------------------------------------------------------
Opening balances at beginning of period $ (145)
Adoption of new accounting standards 50
--------------------------------------------------------------------------------------------------------
(95)
Other comprehensive loss for the period (576)
--------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss at end of period $ (671)
========================================================================================================
The components of accumulated other comprehensive income (loss) are:
=========================================================================================================
On adoption
December 31, January 1, December 31,
(Cdn$ in millions) 2006 2007 2007
---------------------------------------------------------------------------------------------------------
Currency translation adjustment $ (145) $ (145) $ (695)
Unrealized losses on cash flow hedges
(net of tax of $21 and $16) - (28) (18)
Unrealized gains on investments
(net of tax of $16 and $9) - 78 42
---------------------------------------------------------------------------------------------------------
$ (671) $ (95) $ (671)
=========================================================================================================
34
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
16. SHAREHOLDERS' EQUITY, continued
(i) Earnings per share
The following table reconciles our basic and diluted earnings per
share:
=========================================================================================================
(Cdn$ in millions, except per share data) 2007 2006 2005
---------------------------------------------------------------------------------------------------------
Basic earnings
Earnings from continuing operations $ 1,661 $ 2,395 $ 1,345
Less interest on exchangeable debentures, net of taxes - (3) (4)
---------------------------------------------------------------------------------------------------------
Earnings from continuing operations, less interest on
exchangeable debentures, net of taxes 1,661 2,392 1,341
Earnings (loss) from discontinued operations (46) 36 -
---------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders $ 1,615 $ 2,428 $ 1,341
=========================================================================================================
Diluted earnings
Earnings from continuing operations $ 1,661 $ 2,395 $ 1,345
Earnings (loss) from discontinued operations (46) 36 -
---------------------------------------------------------------------------------------------------------
Net diluted earnings available to common shareholders $ 1,615 $ 2,431 $ 1,345
=========================================================================================================
Weighted average shares outstanding (000's) 431,498 421,156 404,944
Effect of dilutive securities
Incremental shares from share options 2,229 3,318 4,242
Shares issuable on conversion of exchangeable debentures - 9,574 22,978
---------------------------------------------------------------------------------------------------------
Weighted average diluted shares outstanding 433,727 434,048 432,164
=========================================================================================================
Basic earnings per share $ 3.74 $ 5.77 $ 3.31
Basic earnings per share from continuing operations $ 3.85 $ 5.68 $ 3.31
Diluted earnings per share $ 3.72 $ 5.60 $ 3.11
Diluted earnings per share from continuing operations $ 3.83 $ 5.52 $ 3.11
(j) Dividends
Dividends declared in 2007, 2006 and 2005 totalled $1.00 per share,
$1.00 per share, and $0.40 per share respectively. Dividends paid on
or after January 1, 2007 are eligible for the enhanced federal and
provincial dividend tax credits.
(k) Share purchase program
During 2007, we purchased 13.1 million Class B subordinate voting
shares at a cost of $577 million pursuant to a normal course issuer
bid that expired on February 21, 2008.
(l) At December 31, 2007, there were 735,312 Class B subordinate voting
shares (2006 - 740,712 shares) reserved for issuance to the former
shareholders of predecessor companies that merged with the company in
prior years.
35
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
17. OTHER INCOME (EXPENSE)
==========================================================================================================
(Cdn$ in millions) 2007 2006 2005
----------------------------------------------------------------------------------------------------------
Interest income $ 177 $ 186 $ 56
Gain on sale of investments and assets 55 201 77
Realization of cumulative translation losses (59) - -
Zinc derivative gains 53 - -
Other derivative losses (31) - (29)
Reclamation expense for closed properties (26) (17) (14)
Miscellaneous 1 (54) 4
----------------------------------------------------------------------------------------------------------
$ 170 $ 316 $ 94
==========================================================================================================
18. INCOME AND RESOURCE TAXES
(a) Income and resource tax expense from continuing operations
=====================================================================================================
(Cdn$ in millions) 2007 2006 2005
-----------------------------------------------------------------------------------------------------
Current
Canadian income tax $ 388 $ 483 $ 201
Foreign income and resource tax 398 499 85
Canadian resource tax 106 172 116
-----------------------------------------------------------------------------------------------------
892 1,154 402
Future
Canadian income tax (101) 34 103
Foreign income and resource tax (12) 19 7
Canadian resource tax 16 6 12
-----------------------------------------------------------------------------------------------------
(97) 25 19
-----------------------------------------------------------------------------------------------------
$ 795 $1,213 $ 524
-----------------------------------------------------------------------------------------------------
(b) Reconciliation of income and resource taxes calculated at the
statutory rates to the actual tax provision
=====================================================================================================
(Cdn$ in millions) 2007 2006 2005
-----------------------------------------------------------------------------------------------------
Tax expense at the statutory income tax rate of 34.1%
(2006 - 34.6%; 2005 - 34.4%) $ 857 $ 1,244 $ 630
Tax effect of
Resource taxes, net of resource and depletion allowances (18) (7) 47
Non-temporary differences
including one-half of capital gains and losses (19) (41) (35)
Benefit of current tax losses not recognized
(recognition of previously unrecognized losses) 21 14 (45)
Benefit of tax rate reduction (81) (21) (21)
Difference in tax rates in foreign jurisdictions (13) 32 (18)
Other 48 (8) (34)
-----------------------------------------------------------------------------------------------------
$ 795 $ 1,213 $ 524
=====================================================================================================
36
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
18. INCOME AND RESOURCE TAXES, continued
(c) Temporary differences giving rise to future income and resource tax
assets and liabilities.
===============================================================================
(Cdn$ in millions) 2007 2006
-------------------------------------------------------------------------------
Future income and resource tax assets
Net operating loss carry forwards $ 111 $ 98
Property, plant and equipment (98) (92)
Alternative minimum and other tax credits 65 104
Asset retirement obligations 57 28
Other 15 31
Valuation allowance (77) (56)
-------------------------------------------------------------------------------
73 113
Less current portion (3) (10)
-------------------------------------------------------------------------------
$ 70 $ (10)
===============================================================================
Future income and resource tax liabilities
Property, plant and equipment $1,895 $ 727
Asset retirement obligations (132) (118)
Amounts relating to partnership year ends 305 484
Other (61) (52)
-------------------------------------------------------------------------------
2,007 1,041
Less current portion (81) (161)
-------------------------------------------------------------------------------
$1,926 $1,041
===============================================================================
(d) Earnings by jurisdiction
Our earnings before income and resource taxes, minority interests and
equity earnings (losses) from continuing operations are earned in the
following tax jurisdictions:
================================================================================
(Cdn$ in millions) 2007 2006 2005
--------------------------------------------------------------------------------
Canada $ 1,181 $ 1,404 $ 1,154
Foreign 1,327 2,191 676
--------------------------------------------------------------------------------
$ 2,508 $ 3,595 $ 1,830
================================================================================
(e) We have non-resident subsidiaries that have undistributed earnings.
For certain non-resident subsidiaries, undistributed earnings are not
expected to be repatriated in the foreseeable future and therefore,
taxes have not been provided.
(f) Loss carry forwards
At December 31, 2007, we had $72 million of Canadian federal net
operating loss carry forwards that were acquired as a result of our
acquisition of Aur. These loss carry forwards expire at various dates
between 2010 and 2027. At December 31, 2007, we had United States
federal net operating loss carry forwards of $103 million (2006 -
$119 million). These loss carry forwards expire at various dates
between 2008 and 2027.
37
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
18. INCOME AND RESOURCE TAXES, continued
(g) Valuation allowance
We have provided a valuation allowance of $77 million relating to tax
assets in jurisdictions that do not have established sources of
taxable income.
(h) Other disclosure
In the normal course of business, we are subject to audit by taxation
authorities. These audits may alter the timing or amount of taxable
income or deductions. The amount ultimately reassessed upon
resolution of issues raised may differ from the amounts accrued.
For our primary Canadian entities, audits by various Canadian
taxation authorities for years after 2000 have not been completed.
For US federal, state and local tax purposes, our principal US
entities are subject to examination by US tax authorities for the
years 1990 to the present; however, the tax years 1997, 1999 and 2000
are closed. We are subject to audit by Peruvian taxation authorities
for the years 2006 and 2007. For Chilean tax purposes, we are subject
to examination by tax authorities for years 2004 to the present.
38
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
19. PARTNERSHIPS AND JOINT VENTURES
Our principal operations that are accounted for using the proportionate
consolidation method are Elk Valley Coal, and the Antamina, Pogo, Hemlo
and Lennard Shelf mines. Our share of the assets and liabilities, revenues
and expenses and cash flows of these operations is as follows:
===============================================================================================
(Cdn$ in millions) 2007 2006 2005
-----------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 108 $ 88 $ 166
Other current assets 316 347 320
Mineral properties, plant and equipment 1,101 1,252 1,258
-----------------------------------------------------------------------------------------------
$ 1,525 $ 1,687 $ 1,744
===============================================================================================
Liabilities and equity
Current liabilities $ 194 $ 274 $ 223
Long-term liabilities 392 368 381
Equity 939 1,045 1,140
-----------------------------------------------------------------------------------------------
$ 1,525 $ 1,687 $ 1,744
===============================================================================================
Earnings
Revenues $ 1,955 $ 2,127 $ 1,847
Operating and other expenses (1,232) (1,077) (934)
Provision for income and resource taxes (205) (222) (99)
-----------------------------------------------------------------------------------------------
Net earnings $ 518 $ 3,426 $ 2,880
===============================================================================================
Cash flow
Operating activities $ 652 $ 981 $ 843
Financing activities 11 (38) (83)
Investing activities (71) (76) (203)
Distributions (559) (945) (526)
Effect of exchange rates on cash (13) - (8)
-----------------------------------------------------------------------------------------------
Increase (decrease) in cash $ 20 $ (78) $ 23
===============================================================================================
Income and resource taxes are only provided for incorporated joint
ventures. The liability for income taxes for partnerships and
unincorporated joint ventures rests at the parent entity level and is not
included in this table.
39
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
20. SUPPLEMENTARY CASH FLOW INFORMATION
=====================================================================================================
(Cdn$ in millions) 2007 2006 2005
-----------------------------------------------------------------------------------------------------
(a) Cash and cash equivalents
Cash $ 695 $ 156 $ 132
Money market investments with maturities from
the date of acquisition of 3 months or less 713 4,898 1,966
-----------------------------------------------------------------------------------------------------
$ 1,408 $ 5,054 $ 2,098
=====================================================================================================
(b) Changes to non-cash working capital items
Accounts and settlements receivable $ 178 $ (192) $ (164)
Inventories (94) (118) (120)
Accounts payable and accrued liabilities 99 321 34
Current income and resource taxes payable (465) 288 229
-----------------------------------------------------------------------------------------------------
$ (282) $ 299 $ (21)
=====================================================================================================
(c) Interest and taxes paid
Interest paid $ 90 $ 111 $ 49
Income and resource taxes paid $ 1,283 $ 846 $ 177
(d) Non-cash financing transaction
Shares issued on conversion
of debt (Note 16(d)) $ - $ 107 $ -
Shares issued on acquisition 52
of Aur Resources (Note 3) $ 9 $ - $ -
21. COMMITMENTS AND CONTINGENCIES
We consider provisions for all our outstanding and pending legal claims to
be adequate. The final outcome with respect to actions outstanding or
pending as at December 31, 2007, or with respect to future claims, cannot
be predicted with certainty.
(a) Upper Columbia River Basin (Lake Roosevelt)
Prior to our acquisition in 2000 of a majority interest in Cominco
Ltd. (TCML), the Trail smelter discharged smelter slag into the
Columbia River. These discharges commenced prior to TCML's
acquisition of the Trail smelter in 1906 and continued until 1996.
Slag was discharged pursuant to permits issued in British Columbia
subsequent to the enactment of relevant environmental legislation in
1967. Slag and other non-slag materials released from the Trail
smelter in British Columbia have travelled down river, as have
substances discharged from many other smelting and industrial
facilities located along the length of the Upper Columbia River
system in Canada and the United States.
Slag is a glass-like compound consisting primarily of silica, calcium
and iron, which contains small amounts of base metals including zinc,
lead, copper and cadmium. It is sufficiently inert that it is not
characterized as a hazardous waste under applicable Canadian or US
regulations and is sold to the cement industry. While slag has been
deposited into the river, further study is required to assess what
effect the presence of slag in the river has had and whether it poses
an unacceptable risk to human health or the environment. 21.
40
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
21. COMMITMENTS AND CONTINGENCIES, continued
A large number of studies regarding slag deposition and its effects
have been conducted by various governmental agencies on both sides of
the border. The historical studies of which we are aware have not
identified unacceptable risks resulting from the presence of slag in
the river. In June 2006, TCML and its affiliate, TCAI, entered into a
Settlement Agreement (the "Agreement") with the US Environmental
Protection Agency ("EPA") and the United States under which TCAI is
paying for and conducting a remedial investigation and feasibility
study ("RI/FS") of contamination in the Upper Columbia River (the
"Studies") under the oversight of the EPA. This multi-year study will
use the latest science developed by the EPA and other researchers to
determine the true risks in the reservoir system. The RI/FS is
scheduled for completion in 2011 and is being prepared by independent
consultants approved by the EPA and retained by TCAI. TCAI is paying
the EPA's oversight costs and providing funding for the participation
of other governmental parties, the State of Washington and two native
tribes, the Confederated Tribes of the Colville Nation (the "Colville
Tribe") and the Spokane Tribe. TCML has guaranteed TCAI's performance
of the Agreement. TCAI has also placed US$20 million in escrow as
financial assurance of its obligations under the Agreement and we
have accrued our estimate of the costs of the Studies.
Contemporaneously with the execution of the Agreement, the EPA
withdrew a unilateral administrative order ("UAO") purporting to
compel TCML to conduct the Studies.
The RI/FS process requires TCAI to submit a work plan for the
assessment of site conditions to the EPA which, when approved, will
lead to the development of a set of sampling and other plans and
actual field work. Data from field work will be used to determine
whether further studies are required. When sufficient data have been
compiled to adequately assess risk, a baseline human health and
environmental risk assessment ("RA") will be produced to identify
risks, if any, that may exist to humans and to various environmental
receptors. The RA will form the basis for the RI/FS. The remedial
investigation will identify potential remedial options available to
mitigate any unacceptable risks; the feasibility study will consider
engineering, procedural and practical constraints to these remedial
options. Based on the RI/FS, the EPA will determine whether and what
remedial actions are appropriate in accordance with criteria that
take into account, among other factors, technical feasibility,
effectiveness, cost, effects on the environment resulting from the
remediation action, and acceptability of the relevant remedial option
to the community. Each work product and plan in this process is
subject to EPA approval. Internal consultation processes of the EPA
will include consultation with state and other federal agencies and
the two Indian Tribes bordering the site.
While the UAO was outstanding, two citizens of Washington State and
members of the Colville Tribe commenced an enforcement proceeding
under Section 310(a)(i) of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") to enforce the UAO and to
seek fines and penalties against TCML for non-compliance. TCML sought
to have all claims dismissed on the basis that the court lacked
jurisdiction because the CERCLA statute, in TCML's view was not
intended to govern the discharges of a facility occurring in another
country. That case proceeded through US Federal District Court and
the Federal Court of Appeals for the 9th Circuit. The 9th Circuit
affirmed the District Court decision denying TCML's motion to dismiss
the case on jurisdictional grounds and found that CERCLA could be
applied to TCML's disposal practices in British Columbia because they
may have had an effect in Washington State. The 9th Circuit issued a
stay of its decision pending the resolution of a further appeal by
TCML to the US Supreme Court. In February 2007, TCML filed a petition
for review and reversal with the US Supreme Court. TCML's petition
was supported by amicus briefs filed by Canada, the Province of
British Columbia, the Mining Association of Canada, the US National
Mining Association, the US Association of Manufacturers, the Canadian
and US Chambers of Commerce and the Consumer Electronics Association.
In January 2008, the US Supreme Court denied TCML's petition for a
review of the 9th Circuit decision. The denial of review is not a
decision on the merits of TCML's defense, but rather reflects the US
Supreme Court's decision not to take up the case at this particular
time. 21.
41
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
21. COMMITMENTS AND CONTINGENCIES, continued
The case will now revert to the District Court of Eastern Washington
for a hearing on the merits of the original and amended complaints.
TCML will raise the defenses set out in its petition to the Supreme
Court and continue to vigorously defend against the claims. Should
the District Court find that TCML is liable under the CERCLA statute,
TCML will have the opportunity to appeal that decision to both the
9th Circuit and the US Supreme Court.
TCAI will continue to fulfill its obligations under the settlement
agreement reached with the United States and the EPA in June 2006 and
complete the RI/FS mentioned above. The settlement agreement is not
affected by the litigation.
In July 2007, we received notification from the Colville Tribe that
they have been appointed lead administrative trustee to the recently
formed Upper Columbia/Lake Roosevelt Natural Resource Trustee Council
comprised of the Colville Tribe, the Spokane Tribe, the State of
Washington and the US Department of Interior. We were advised that
the primary purpose of the council is the integration and
coordination of the assessment of potential natural resource damages
during the on-going RI/FS at the site. We believe and have so
informed the council, that it is premature to conduct such studies
until the RI/FS is further developed.
There can be no assurance that TCML will ultimately be successful in
its defense of the litigation or that TCML or its affiliates will not
be faced with further liability in relation to this matter. Until the
studies contemplated by the Agreement are completed, it is not
possible to estimate the extent and cost, if any, of remediation or
restoration that may be required. The studies may conclude, on the
basis of risk, cost, technical feasibility or other grounds, that no
remediation should be undertaken. If remediation is required, the
cost of remediation may be material.
(b) Commitments and guarantees
RED DOG COMMITMENTS
In 2006, in accordance with the operating agreement governing the Red
Dog mine, the royalty to NANA increased to 25% of net proceeds of
production. Previously, we paid an advance royalty of 4.5% of net
smelter returns. The increase in royalty rate is partially offset by
a decline in the base on which royalties are calculated, as
operating, distribution, selling and management fees, an allowance
for future reclamation and closure costs, capital costs and deemed
interest are deductible in the calculation of the royalty. The new
25% royalty became payable in the third quarter of 2007 after we had
recovered the cumulative advance royalties previously paid to NANA.
The NANA royalty charge in 2007 was US$190 million, compared with
US$57 million expensed under the previous advance royalty regime in
2006. The net proceeds of production royalty rate will increase by 5%
every fifth year to a maximum of 50%. The increase to 30% of net
proceeds of production will occur in 2012.
TCAK leases road and port facilities from the Alaska Industrial
Development and Export Authority through which it ships all
concentrates produced at the Red Dog mine. The lease requires TCAK to
pay a minimum annual user fee of US$18 million but has no minimum
tonnage requirements. There are also fee escalation provisions based
on zinc price and annual tonnage.
TCAK has also entered into agreements for the transportation and
handling of concentrates from the mill site. These agreements have
varying terms expiring at various dates through 2010 and include
provisions for extensions. There are minimum tonnage requirements and
the minimum annual fees amount to approximately US$10 million, with
adjustment provisions based on variable cost factors.
42
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
21. COMMITMENTS AND CONTINGENCIES, continued
ANTAMINA ROYALTY
On the acquisition of our interest in the Antamina mine, the vendor
was granted a net profits royalty equivalent to 7.4% of our share of
the project's free cash flow after recovery of capital costs and an
interest factor on approximately 60% of project costs. The recovery
of accumulated capital costs together with interest was completed in
2006 and an expense of $22 million was recorded in 2007 in respect of
this royalty.
FORT HILLS
Under the Fort Hills agreement, we have committed to contribute 34%
of the first $2.5 billion of partnership expenditures on the Fort
Hills project and 27.5% of project expenditures after the project
spending reaches $2.5 billion and before spending reaches $7.5
billion, after which our contributions revert to our 20% share. In
the event that the project is abandoned, all limited partners are
required to make additional contributions such that the aggregate
contributions of all partners equal $7.5 billion and any unexpended
amount will be distributed to the partners according to their
partnership interest.
ELK VALLEY COAL PARTNERSHIP GUARANTEE
Elk Valley Coal has provided an unsecured guarantee, limited in
recourse against us to the assets of Elk Valley Coal and the interest
of Teck Cominco Limited therein, with respect to up to $400 million
of borrowings by Fording incurred principally in connection with the
financing of the transaction pursuant to which we acquired its
interest in Elk Valley Coal. As at December 31, 2007, Fording had
$280 million outstanding under these borrowings, of which our 40%
share was $112 million.
OPERATING LEASES
Amounts payable under operating leases are $99 million, with annual
payments of $23 million in 2008, $13 million in 2009, $10 million in
2010, $7 million in 2011, $6 million in 2012, and $40 million
thereafter. The leases are primarily for office premises, mobile
equipment and rail cars.
FORWARD PURCHASE COMMITMENTS
We have a number of forward purchase commitments for the purchase of
concentrates and power and for shipping and distribution of products,
which are incurred in the normal course of business. The majority of
these contracts are subject to force majeure provisions.
ENVIRONMENTAL PROTECTION
Our operations are affected by federal, provincial, state and local
laws and regulations concerning environmental protection. Provisions
for future reclamation and site restoration are based on known
requirements. It is not possible to estimate the impact on operating
results, if any, of future legislative or regulatory developments.
43
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
22. ACCOUNTING FOR FINANCIAL INSTRUMENTS
(a) Financial Risk Management
Our activities expose us to a variety of financial risks, which
include foreign exchange risk, interest rate risk, commodity price
risk, credit risk and liquidity risk. From time-to-time, we may use
foreign exchange forward contracts, commodity price contracts and
interest rate swaps to manage exposure to fluctuations in foreign
exchange, metal prices and interest rates. We do not have a practice
of trading derivatives. Our use of derivatives is based on
established practices and parameters, which are subject to the
oversight of the Board of Directors.
FOREIGN EXCHANGE RISK
We operate on an international basis and therefore, foreign exchange
risk exposures arise from transactions denominated in a foreign
currency. Our foreign exchange risk arises primarily with respect to
the US dollar. Our cash flows from Canadian operations are exposed to
foreign exchange risk as commodity sales are denominated in US
dollars, and the majority of operating expenses are in Canadian
dollars. We have elected not to actively manage this exposure at this
time.
We also have various investments in US dollar self-sustaining
operations, whose net assets are exposed to foreign currency
translation risk. This currency exposure is managed in part through
our US dollar denominated debt as a hedge against self-sustaining
operations. As at December 31, 2007, $1.2 billion of debt was
designated in this manner.
Impact of US dollar foreign exchange risk on financial instruments:
=====================================================================
(Cdn$ in millions) 2007
---------------------------------------------------------------------
Net working capital $ 235
Long-term debt (1,457)
Net investment in foreign self-sustaining operations 6,518
=====================================================================
As at December 31, 2007, with other variables unchanged, a $0.01
strengthening (weakening) of the Canadian dollar against the US
dollar would have no significant effect on net earnings resulting
from our use of financial instruments. There would be a $53 million
decrease (increase) in other comprehensive income.
INTEREST RATE RISK
Our interest rate risk mainly arises from the interest rate impact on
our cash and cash equivalents, floating rate debt and interest rate
swaps. Our interest rate management policy is generally to borrow at
fixed rates to match the duration of our long lived assets. In some
circumstances, floating rate funding may be used for short term
borrowing. Cash and cash equivalents receive interest based on market
interest rates.
As at December 31, 2007, with other variables unchanged, a 1% change
in the LIBOR rate would have an insignificant impact on net earnings.
There would be no effect on other comprehensive income.
44
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
22. ACCOUNTING FOR FINANCIAL INSTRUMENTS, continued
COMMODITY PRICE RISK
We are subject to price risk from fluctuations in market prices of
commodities. We have elected not to actively manage our exposure to
commodity price risk at this time. From time-to-time, we may use commodity
price contracts to manage our exposure to fluctuations in commodities
prices. The use of derivatives is based on established practices and
parameters, and is subject to approval by our Hedging Committee and Board
authorization.
Our commodity price risk associated with financial instruments primarily
relates to changes in fair value caused by settlement adjustments to
receivables and payables, the Cajamarquilla contingent receivable,
existing gold forward contracts and zinc forward contracts acquired with
Aur.
The following represents the financial instruments' effect on net earnings
after-tax from a 10% change to metal prices, based on the December 31,
2007 prices. There is no impact on other comprehensive income. The
sensitivity of our financial instruments to commodity price changes is
comprised of settlement receivables and payables and other instruments,
including forward sales (Note 22(c)) and receivables held in discontinued
operations (Note 22(b)).
Impact of commodity price risk on financial instruments:
=======================================================================================
Effect of
financial
instruments
Price on on net earnings
December 31, 2007 Change (Cdn$ in millions)
---------------------------------------------------------------------------------------
Zinc US$1.04/lb +10% $ (3)
Lead US$1.15/lb +10% 4
Gold US$837/oz +10% (4)
Copper US$3.03/lb +10% 29
=======================================================================================
CREDIT RISK
Credit risk arises from the non-performance by counterparties of
contractual financial obligations. Our primary counterparties related to
our money market investments carry investment grade ratings. We manage
credit risk for trade and other receivables through established credit
monitoring activities. We do not have a significant concentration of
credit risk with any single counterparty or group of counterparties. Our
maximum exposure to credit risk at the reporting date is the carrying
value of our receivables and derivative assets.
45
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
22. ACCOUNTING FOR FINANCIAL INSTRUMENTS, continued
LIQUIDITY RISK
We manage liquidity risk by maintaining adequate cash and cash equivalent
balances, and by appropriately utilizing our lines of credit. Our Treasury
department continuously monitors and reviews both actual and forecasted
cash flows, and also matches the maturity profile of financial assets and
liabilities.
Contractual undiscounted cash flow requirements for financial liabilities
as at December 31, 2007:
================================================================================================
Less than More than
(Cdn$ in millions) Total 1 year 2-3 years 4-5 years 5 years
------------------------------------------------------------------------------------------------
Long-term debt (Note 10(h)) $ 1,544 $ 31 $ 62 $ 460 $ 991
Derivative liabilities 125 37 64 24 -
------------------------------------------------------------------------------------------------
$ 1,669 $ 68 $ 126 $ 484 $ 991
================================================================================================
(b) Derivative financial instruments
Sales and purchases contracts
The majority of our metal concentrates are sold under pricing
arrangements where final prices are determined by quoted market
prices in a period subsequent to the date of sale. In these
circumstances, revenues are recorded at the time of sale based on
forward prices for the expected date of the final settlement. Metal
concentrates for smelting and refining operations are purchased under
similar arrangements. As a result, the values of our concentrate
receivables and payables change as the underlying market prices vary.
This component of the contracts is an embedded derivative, which is
recorded at fair value with changes in fair value recorded in revenue
or operating costs as appropriate.
Contingent receivable related to sale of discontinued operations
Pursuant to a price participation clause in the agreement for sale of
the Cajamarquilla zinc refinery in 2004, we are entitled to
additional consideration of US$365,000 for each US$0.01 by which the
average annual price of zinc exceeds US$0.454 per pound. This zinc
price participation expires in 2009. The agreement also provided for
additional consideration should certain other benchmarks be met. This
price participation is considered an embedded derivative.
Effective January 1, 2007, upon adoption of the new accounting
standards for financial instruments, we recorded an asset of $139
million in respect of the fair market value of the price
participation clause in the sale agreement. This investment is valued
based on discounted cash flows using a zinc forward price curve, US
dollar forward price and our credit adjusted risk-free interest rate.
We recorded an after-tax loss of $46 million in respect of these
items for the year (2006 - $36 million after-tax gain). In January
2007, we received a pre-tax amount of $48 million for the 2006 price
participation payment and in January 2008, we received a pre-tax
amount of $38 million for the 2007 price participation payment.
46
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
22. ACCOUNTING FOR FINANCIAL INSTRUMENTS, continued
(c) The fair value of our fixed forward sale and purchase contracts is
calculated using a discounted cash flow method based on forward metal
prices. A summary of our fixed forward sales contracts as at December
31, 2007 is as follows:
==========================================================================================================
Fair Market
2008 2009 2010 2011 Total Value
----------------------------------------------------------------------------------------------------------
(C$
millions)
Gold (thousands of ozs)
Forward sales contracts 44 43 - - 87
Average price (US$/oz) 350 350 - - 350 (42)
Zinc (millions of lbs)
Fixed forward sales contracts (i) 57 57 57 57 228
Average price (US$/lb) 0.78 0.72 0.67 0.63 0.70 (76)
Zinc (millions of lbs)
Fixed forward purchase contracts (ii) 6 - - - 6
Average price (US$/lb) 1.05 - - - 1.05 -
Lead (millions of lbs)
Fixed forward purchase contracts (ii) 1 - - - 1
Average price (US$/lb) 0.76 - - - 0.76 -
---------
$ (118)
==========================================================================================================
Interest Rate Swap
==============================================================================================
PRINCIPAL AMOUNT RATE SWAPPED RATE OBTAINED MATURITY DATE FAIR MARKET VALUE
----------------------------------------------------------------------------------------------
US$100 million 7.00% LIBOR plus 2.14% September 2012 Cdn$3 million
==============================================================================================
Notes:
(i) As part of the Aur acquisition, fixed forward sale commitments
were acquired.
(ii) From time-to-time, certain customers purchase refined metal
products at fixed forward prices from our smelter and refinery
operations. The forward purchase commitments for these metal
products are matched to these fixed price sales commitments to
customers.
47
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
23. CAPITAL RISK MANAGEMENT
Our objectives when managing capital are to safeguard our ability to
continue as a going concern, to provide an adequate return to
shareholders, and to meet external capital requirements on our debt and
credit facilities. We monitor capital based on the debt to
debt-plus-equity ratio. Debt is total debt shown on the balance sheet.
Debt-plus-equity is calculated as debt as shown on the balance sheet, plus
total shareholders' equity which includes accumulated other comprehensive
income, share capital, contributed surplus and retained earnings.
Our strategy is to keep the debt to debt-plus-equity ratio below 40%.
However, the ratio may be higher for periods of time due to certain
transactions, such as an acquisition. These transactions, while causing
the ratio to be out of range for the short term, are intended to help us
meet our capital management objectives in the long run. Our debt to
debt-plus-equity ratio at December 31, 2007 and 2006 is 16% and 19%
respectively.
24. SEGMENTED INFORMATION
We have six reportable segments: copper, zinc, coal, gold, energy and
corporate, based on the primary products we produce or are developing. The
corporate segment includes all of our initiatives in other commodities,
our corporate growth activities and groups that provide administrative,
technical, financial and other support to all of our business units. Other
corporate income (expense) includes general and administrative costs,
research and development, and other income (expense). Prior year
comparatives have been restated to conform to current year presentation.
=========================================================================================================================
(Cdn$ in millions) 2007
--------------------------------------------------------------------------------
Copper Zinc Coal Gold Energy Corporate Total
-------------------------------------------------------------------------------------------------------------------------
Segment revenues $2,186 $3,439 $951 $182 $ - $ - $ 6,758
Less inter-segment revenues - (387) - - - - (387)
-------------------------------------------------------------------------------------------------------------------------
Revenues 2,186 3,052 951 182 - - 6,371
Operating profit (loss) 1,354 1,180 209 (5) - - 2,738
Interest expense (13) - (1) - - (71) (85)
Exploration (46) (20) - (22) - (17) (105)
Asset impairment charges - (43) - - - (26) (69)
Other corporate income (expense) - - - (28) - 57 29
-------------------------------------------------------------------------------------------------------------------------
Earnings before taxes, minority
interests, equity earnings and
discontinued operations 1,295 1,117 208 (55) - (57) 2,508
Capital expenditures 259 150 35 30 70 27 571
Total assets 6,524 2,865 1,359 357 529 1,939 13,573
48
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
24. SEGMENTED INFORMATION, continued
=========================================================================================================================
(Cdn$ in millions) 2006
-------------------------------------------------------------------------------
Copper Zinc Coal Gold Energy Corporate Total
-------------------------------------------------------------------------------------------------------------------------
Segment revenues $ 2,220 $ 3,467 $ 1,177 $ 143 $ - $ - $ 7,007
Less inter-segment revenues - (468) - - - - (468)
-------------------------------------------------------------------------------------------------------------------------
Revenues 2,220 2,999 1,177 143 - - 6,539
Operating profit 1,617 1,493 444 7 - - 3,561
Interest expense (11) - (2) - - (84) (97)
Exploration (38) (4) - (24) - (6) (72)
Other corporate income (expense) (10) - - - - 213 203
-------------------------------------------------------------------------------------------------------------------------
Earnings before taxes, minority
interests, equity earnings and
discontinued operations 1,558 1,489 442 (17) - 123 3,595
Capital expenditures 102 133 18 44 73 21 391
Total assets 1,211 4,431 779 402 190 4,434 11,447
-------------------------------------------------------------------------------------------------------------------------
=========================================================================================================================
(Cdn$ in millions) 2005
-------------------------------------------------------------------------------
Copper Zinc Coal Gold Energy Corporate Total
-------------------------------------------------------------------------------------------------------------------------
Segment revenues $1,587 $ 1,693 $ 1,173 $ 127 $ - $ - $ 4,580
Less inter-segment revenues - (163) (2) - - - (165)
-------------------------------------------------------------------------------------------------------------------------
Revenues 1,587 1,530 127 1,171 - - -
Operating profit 980 461 512 9 - - 1,962
Interest expense (14) - - - - (55) (14)
Exploration (38) (10) - (8) - (14) (70)
Other corporate income (expense) - - - - - 7 7
-------------------------------------------------------------------------------------------------------------------------
Earnings before taxes, minority
interests, equity earnings and
discontinued operations 928 451 512 1 - - 1,830
Capital expenditures 32 79 98 100 3 14 326
Total assets 1,217 3,034 809 358 20 3,371 8,809
49
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
24. SEGMENTED INFORMATION, continued
The geographic distribution our property, plant and equipment and external
sales revenue with revenue attributed to regions based on the location of
the customer is as follows:
=================================================================================================================
Property, plant and equipment Revenues
-------------------------------- -------------------------------------------
(Cdn$ in millions) 2007 2006 2007 2006 2005
-----------------------------------------------------------------------------------------------------------------
Canada $ 2,687 $ 1,886 $ 649 $ 724 $ 578
United States 1,059 1,308 1,563 1,487 842
Latin America 4,020 498 361 251 252
Asia 5 - 2,673 2,770 1,894
Europe 3 - 993 1,201 809
Australia 33 32 126 106 40
Africa - - 6 - -
-----------------------------------------------------------------------------------------------------------------
$ 7,807 $ 3,724 $ 6,371 $ 6,539 $ 4,415
=================================================================================================================
50
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
The effect of the material measurement differences between generally
accepted accounting principles in Canada and the United States on our net
earnings is summarized as follows:
==========================================================================================================
(Cdn$ in millions, except per share data) 2007 2006 2005
----------------------------------------------------------------------------------------------------------
Net earnings under Canadian GAAP $ 1,615 $ 2,431 $ 1,345
Add (deduct)
Exchangeable debentures due 2024 (b) - (4) (6)
Unrealized holding gains (losses) on investments (c) - (14) 33
Deferred start-up costs (d) 3 (11) 3
Exploration expenses (e) (32) (21) -
Derivative instruments (f)
Embedded derivatives - 94 (25)
Non-hedge derivatives 18 (53) (62)
Asset retirement obligations (g) (3) (3) (3)
Deferred stripping (h) (40) (17) -
Cumulative translation adjustment on
partial redemption of subsidiary (i) 59 - -
Other (j) (3) (2) 7
Tax effect of adjustments noted above 37 40 23
Tax benefit on redemption of exchangeable debentures (b) - 124 -
----------------------------------------------------------------------------------------------------------
Net earnings under US GAAP
before comprehensive income adjustments 1,654 2,564 1,315
----------------------------------------------------------------------------------------------------------
Other comprehensive income under Canadian GAAP (576) - -
Add (deduct)
Unrealized gains (losses) on investments (c)
Arising during the period - 104 102
Less: reclassification adjustments to net income - (78) (51)
----------------------------------------------------------------------------------------------------------
- (13) (30)
Losses on derivatives designated as cash flow hedges (f)
Arising during the period - - (4)
Less: reclassification adjustments to net income (18) (13) (26)
----------------------------------------------------------------------------------------------------------
(18) 21 (51)
Cumulative translation adjustment (i)(k) (63) 21 (51)
Additional pension liability (l) 42 8 (22)
Tax effect of adjustments (10) (2) 11
----------------------------------------------------------------------------------------------------------
Other comprehensive income under US GAAP (625) 40 (41)
----------------------------------------------------------------------------------------------------------
Comprehensive income $ 1,029 $ 2,604 $ 1,274
==========================================================================================================
Earnings per share under US GAAP
before comprehensive income adjustments
Basic $ 3.83 $ 6.09 $ 3.25
Diluted $ 3.81 $ 5.92 $ 3.05
Basic from continuing operations $ 3.75 $ 5.82 $ 3.25
Diluted from continuing operations $ 3.74 $ 5.65 $ 3.05
51
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
Balance sheets under Canadian GAAP and US GAAP
==================================================================================================================
(Cdn$ in millions) 2007 2006
------------------------------------------------------------------------------------------------------------------
Canadian US Canadian US
GAAP GAAP GAAP GAAP
------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,408 $ 1,408 $ 5,054 $ 5,054
Temporary investments - - 227 227
Cash held in trust - - 105 105
Accounts and settlements receivable 593 593 723 723
Inventories 1,004 1,004 786 786
------------------------------------------------------------------------------------------------------------------
3,005 3,005 6,895 6,895
Investments (c) 1,506 1,494 365 538
Property, plant and equipment (d)(e)(g)(h)(j) 7,807 7,576 3,724 3,483
Other assets (f)(l) 592 435 463 467
Goodwill 663 663 - -
------------------------------------------------------------------------------------------------------------------
$ 13,573 $ 13,173 $ 4,552 $ 4,488
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities (f) $ 1,017 $ 1,017 $ 763 $ 794
Dividends payable 221 221 216 216
Current portion of long-term debt 31 31 - -
Current income and resource taxes payable - - 443 443
Current portion of future income and resource taxes 81 81 161 161
Exchangeable debentures - - 105 105
------------------------------------------------------------------------------------------------------------------
1,350 1,350 925 925
Long-term debt (b) 1,492 1,492 1,509 1,498
Other liabilities (f)(g)(l) 994 974 821 911
Future income and resource taxes 1,926 1,687 880 760
Minority interests 92 92 - -
Shareholders' equity 7,719 7,578 6,549 6,495
------------------------------------------------------------------------------------------------------------------
$13,573 $ 13,173 $ 9,759 $ 9,664
==================================================================================================================
52
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
Shareholders' equity under Canadian GAAP and US GAAP
==================================================================================================================
(Cdn$ in millions) 2007 2006
------------------------------------------------------------------------------------------------------------------
Canadian US Canadian US
GAAP GAAP GAAP GAAP
------------------------------------------------------------------------------------------------------------------
Capital stock $ 3,281 $ 3,157 $ 2,405 $ 2,281
Retained earnings 5,038 5,213 4,225 4,388
Contributed surplus 71 71 64 64
Accumulated other comprehensive income (k) (671) (863) (145) (238)
------------------------------------------------------------------------------------------------------------------
$ 7,719 $ 7,578 $ 6,549 $ 12,990
==================================================================================================================
(a) Adoption of new accounting standards
(i) Accounting for uncertainty in income tax
We adopted the provisions of FASB Interpretation No. 48 (FIN No.
48), "Accounting for Uncertainty in Income Taxes," on January 1,
2007. FIN No. 48 prescribes a recognition and measurement model
for uncertain tax positions taken or expected to be taken in our
tax returns. In addition, FIN No. 48 also provides guidance on
derecognition, classification, presentation and disclosure of
unrecognized tax benefits. As a result of the adoption, we
recognized an increase to opening retained earnings of $85
million, with a corresponding reduction in tax liabilities.
During the year, an additional tax recovery and a corresponding
decrease in tax liabilities of $3 million was required under US
GAAP.
Our unrecognized tax benefits on January 1, 2007 were $11
million. There were no additions, reductions or settlements to
unrecognized tax benefits throughout the year and, as a result,
the unrecognized tax benefits on December 31, 2007 remain at $11
million.
Our unrecognized tax benefits, if recognized, would not
significantly affect our effective tax rate. We recognize
interest and penalties related to unrecognized tax benefits in
other income and expenses. During the years ended December 31,
2007, 2006 and 2005, we did not recognize any significant tax
related interest and penalties. We also did not accrue
significant amounts of tax related interest and penalties at
December 31, 2007 and 2006.
(ii) Accounting for defined benefit pension and other post-retirement
plans
In 2006, we adopted FASB Statement No. 158 "Employers'
Accounting for Defined Benefit Pension and Other Post-Retirement
Plans - an Amendment of FASB Statements No. 87, 88, 106 and
132(R)." Under SFAS No. 158, we recognize a net liability or
asset for the funded or underfunded status of our defined
benefit pension and other post-retirement benefit plans on our
balance sheets. Changes in the funded status during the year
will be recorded in other comprehensive income. The standard
does not change the calculation of periodic pension expense
under US GAAP, but affects other comprehensive income. Before
adoption of this standard, we had an additional minimum pension
liability of $21 million. The adoption of this standard resulted
in a $263 million charge, net of $99 million of taxes, directly
to accumulated other comprehensive income at December 31, 2006
and had no impact on our net earnings or retained earnings.
53
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(iii) Post-production stripping costs
Effective January 1, 2006, we adopted EITF 04-6 "Accounting for
Stripping Costs Incurred during Production in the Mining
Industry." It requires stripping costs to be accounted for as a
variable production cost to be included in the costs of
inventory produced during the production phase.
Under Canadian GAAP, we elected to prospectively adopt EIC-160,
the related Canadian standard, and amortize the existing
balance sheet amount relating to deferred stripping costs over
the reserves to which it relates. Under US GAAP, we have
retroactively adopted EITF 04-06 and have elected to recognize
the cumulative effect of the adjustment in the opening balance
of retained earnings. This resulted in an initial US GAAP
difference to decrease property, plant and equipment by $52
million, decrease future income tax liabilities by $23 million
and decrease retained earnings by $29 million.
Canadian GAAP permits capitalization of stripping activity which
represents a betterment of a mineral property. Betterment occurs
when the stripping activity increases future output of the mine
by providing access to additional sources of reserves.
Capitalized stripping costs are amortized on a
units-of-production basis over the proven and probable reserves
to which they relate. Under US GAAP, all stripping costs are
treated as variable production costs.
(b) Exchangeable debentures due 2024
Our exchangeable debentures due 2024, redeemed in 2006, were
classified as equity with related interest being charged directly to
retained earnings. Under US GAAP, we classified these instruments as
liabilities and interest was charged against current period earnings.
The redemption of the debentures in 2006 was treated as a
non-monetary transaction and the carrying value of the debentures was
transferred to share capital. Tax benefits arising on the settlement
of the debt instrument were recorded in earnings for US GAAP
purposes.
(c) Unrealized holding gains (losses) on investments
Under Canadian GAAP, prior to adopting the new financial instruments
accounting standards we recorded investments in marketable securities
at cost. For US GAAP, our marketable securities are designated as
available-for-sale. Available-for-sale securities are carried at fair
value with unrealized gains or losses included in other comprehensive
income until realized, or until an other than temporary decline
occurs. With the adoption of the new Canadian financial instruments
standards on January 1, 2007, we recognize our marketable securities
at fair value for Canadian GAAP.
(d) Deferred start-up costs
Under Canadian GAAP, we defer mine start-up costs until the mine
reaches commercial levels of production and amortize these amounts
over the life of the project. Under US GAAP, we expense mine start-up
costs as incurred.
54
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(e) Exploration expense
Under Canadian GAAP, we capitalize exploration expenditures where
resources, as defined under National Instrument 43-101, exist and it
is expected that the expenditures can be recovered by future
exploitation or sale. For US GAAP, exploration expenditures are
expensed unless proven and probable reserves have been established by
a feasibility study.
(f) Derivative instruments
Under Canadian GAAP, we adopted the new financial instruments
accounting standards. Prior to adoption, derivative instruments, to
which hedge accounting was applied, were held off-balance sheet with
realized gains and losses recorded in net earnings. Non-hedge
derivative instruments were recorded on the balance sheet at fair
value with changes in fair value recorded in other income.
For US GAAP purposes, all derivatives are recorded on the balance
sheet as either assets or liabilities at fair value. The accounting
for changes in the fair value of derivatives depends on whether the
derivative has been designated as a fair value or cash flow hedge and
whether it qualifies as part of a hedging relationship.
(i) For fair value hedges, the effective portion of the changes in
fair value of the derivatives is offset by changes in the fair
value of the hedged item in net earnings. For cash flow hedges,
the effective portion of the changes in fair value is
accumulated in other comprehensive income and released into net
earnings when the hedged item affects net earnings. For
derivatives not accounted for as part of a hedging
relationship, changes in fair value are included in net
earnings.
(ii) The Inco exchangeable debentures, settled in 2006, included an
option to settle the debt with Inco shares. Under US GAAP, this
option constituted an embedded derivative which was accounted
for as a separate derivative instrument and recorded on the
balance sheet at fair value with changes in fair value included
in net earnings.
(iii) TCAK's agreement with the Northwest Arctic Borough includes an
escalation clause based on zinc price. This constitutes an
embedded derivative and the derivative instrument has been
separately valued and recorded at fair value on the balance
sheet. Changes in fair value are included in net earnings. With
the adoption of the new Canadian GAAP financial instruments
standards on January 1, 2007, we recognized this embedded
derivative for Canadian GAAP.
(iv) Our contingent consideration from the sale of Cajamarquilla
based on zinc prices (Note 22(b)) constitutes an embedded
derivative under US GAAP and the derivative instrument has been
separately valued and recorded at fair value on the balance
sheet. Changes in fair value are included in net earnings. With
the adoption of the new Canadian GAAP financial instruments
standards on January 1, 2007 we recognized this embedded
derivative for Canadian GAAP.
55
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(v) With the adoption of the Canadian GAAP financial instruments
accounting standards on January 1, 2007, our unrealized losses
on cash flow hedges were charged, net of taxes, directly to
opening accumulated other comprehensive income. As these
previously designated cash flow hedges mature, losses are
brought into net earnings. Under US GAAP, these derivatives
were not designated as cash flow hedges, and accordingly,
unrealized gains and losses are recorded in net earnings.
(g) Asset retirement obligations
For US GAAP purposes, we adopted FASB Statement No. 143, "Accounting
for Asset Retirement Obligations," effective January 1, 2003. We
adopted the provisions of CICA 3110, "Asset Retirement Obligations,"
for Canadian GAAP purposes effective January 1, 2004.
The United States and Canadian standards for asset retirement
obligations are substantially the same; however, due to the
difference in adoption dates, different discount rate assumptions
were used in initial liability recognition. This resulted in
differences in the asset and liability balances on adoption and will
result in different amortization and accretion charges over time.
(h) Deferred stripping
Canadian GAAP differs from US GAAP in that it allows the
capitalization of deferred stripping costs when such costs are
considered a betterment of the asset.
(i) Cumulative translation losses
Under Canadian GAAP, when a foreign subsidiary pays a dividend to the
parent company and there has been a reduction in the net investment,
a gain or loss equivalent to a proportionate amount of cumulative
translation adjustment is recognized in net income. Under US GAAP, a
gain or loss from the cumulative translation adjustment is only
recognized when the foreign subsidiary is sold, or the parent
completely or substantially liquidates its investment.
(j) Other
Other adjustments include differences in respect of equity earnings,
long-term debt discounts, interest capitalization and other items.
(k) Comprehensive income
Under US GAAP, comprehensive income is recognized and measured in
accordance with FASB Statement No. 130, "Reporting Comprehensive
Income." Comprehensive income includes all changes in equity other
than those resulting from investments by owners and distributions to
owners. Comprehensive income includes two components, net income and
other comprehensive income. Other comprehensive income includes
amounts that are recorded as an element of shareholders' equity, but
are excluded from net income as these transactions or events were
attributable to changes from non-owner sources. These items include
pension liability adjustments, holding gains and losses on certain
investments, gains and losses on certain derivative instruments and
foreign currency gains and losses related to self-sustaining foreign
operations (cumulative translation adjustment). We adopted the
Canadian GAAP standard for comprehensive income and other
comprehensive income on January 1, 2007.
56
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(l) Pension liability
For US GAAP purposes, we are required to report the overfunded asset
or underfunded liability of our defined benefit pension and other
post-retirement plans on the balance sheet. Changes in the funded
status are recorded through other comprehensive income. The
information set out below should be read in conjunction with the
information disclosed under Canadian GAAP requirements for pension
and other employee future benefits provided in Note 15.
The funded status at the end of the year and the related amounts
recognized on the statement of financial position for US GAAP
purposes are as follows:
=============================================================================================================
2007 2006
-------------------------------------------------------------------------------------------------------------
Other post- Other post-
Pension retirement Pension retirement
(Cdn$ in millions) benefits benefits benefits benefits
-------------------------------------------------------------------------------------------------------------
Funded status at end of year
Fair value of plan assets $ 1,257 $ - $ 1,275 $ -
Benefit obligations 1,260 260 1,270 316
---------------------------------------------------------------------------------------------------------
Funded status (3) (260) 5 (316)
=============================================================================================================
Amounts recognized in the balance sheet
Non-current asset $ 79 $ - $ 95 $ -
Current liability (4) (10) (3) (10)
Non-current liability (78) (250) (87) (306)
-------------------------------------------------------------------------------------------------------------
$ (3) $(260) $ 150 $ 134
=============================================================================================================
Amounts recognized in accumulated other comprehensive
income
Net actuarial loss (gain) $ 110 $ 22 $ 75 $ 112
Prior service cost (credit) 68 29 75 22
-------------------------------------------------------------------------------------------------------------
$ 178 $ 51 $ - $ -
=============================================================================================================
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for pension plans with an accumulated
benefit obligation in excess of plan assets at December 31, 2007 and
2006 were as follows:
==========================================================================================================
(Cdn$ in millions) 2007 2006
----------------------------------------------------------------------------------------------------------
Accumulated benefit obligation in excess of plan assets
Projected benefit obligation at end of year $ 347 $ 239
Accumulated benefit obligation at end of year 321 218
Fair value of plan assets at end of year 269 160
==========================================================================================================
57
Teck Cominco Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2007, 2006 and 2005
- --------------------------------------------------------------------------------
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
The estimated amounts that will be amortized from accumulated other
comprehensive income into net periodic benefit cost in 2008 are as
follows:
=====================================================================
Other post-
Pension retirement
(Cdn$ in millions) benefits benefits
---------------------------------------------------------------------
Actuarial loss $ 5 $ 1
Prior service cost 14 6
---------------------------------------------------------------------
Total $ 19 $ 7
=====================================================================
(m) Cash flow from operating activities
Under US GAAP, cash flow from operating activities must be presented
as the amount calculated after taking into effect the changes in
non-cash working capital items. The disclosure of a subtotal
referring to the amount of cash flow from operating activities before
changes to working capital items is not permitted.
(n) Proportionate consolidation
US GAAP requires investments in joint ventures to be accounted for
under the equity method, while under Canadian GAAP the accounts of
joint ventures are proportionately consolidated. All of our joint
ventures qualify for the Securities and Exchange Commission's
accommodation, which allows us to continue to follow proportionate
consolidation. Additional information concerning our interests in
joint ventures is presented in Note 19.
(o) Recent US accounting pronouncements
Fair value measurements
In September 2006, FASB issued SFAS No. 157, which defines fair
value, establishes a framework for measuring fair value under US GAAP
and expands disclosures about fair values. This standard does not
require any new fair value measurements. The standard is applicable
for fiscal years beginning after November 15, 2007. We are currently
considering the impact of the adoption of this interpretation.
58