EXHIBIT 99.3
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TECK COMINCO LIMITED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND OPERATING RESULTS
The management's discussion and analysis of our results of operations is
prepared as at March 3, 2008 and should be read in conjunction with our audited
consolidated financial statements and the notes thereto as at and for the year
ended December 31, 2007. Unless the context otherwise dictates, a reference to
Teck Cominco, the Company, or us, we or our, refers to Teck Cominco Limited and
its subsidiaries including Teck Cominco Metals Ltd.; a reference to TCML refers
to Teck Cominco Metals Ltd. and its subsidiaries; and a reference to Aur or Aur
Resources refers to Aur Resources Inc. and its subsidiaries. All dollar amounts
are in Canadian dollars, unless otherwise specified, and are based on our
consolidated financial statements that are prepared in accordance with Canadian
generally accepted accounting principles (GAAP). The effect of significant
differences between Canadian and US GAAP are disclosed in note 25 to our
consolidated financial statements. Certain comparative amounts have been
reclassified to conform to the presentation adopted for 2007. In addition, in
May 2007 our Class A common and Class B subordinate voting shares were split on
a two-for-one basis. All comparative figures related to outstanding shares and
per share amounts have been adjusted to reflect the share split.
This management's discussion and analysis refers to various measures that are
not recognized under GAAP in Canada or the United States and do not have a
standardized meaning prescribed by GAAP. These measures include adjusted net
earnings and EBITDA (earnings before interest, taxes, depreciation and
amortization). These measures may differ from those used by, and may not be
comparable to, such measures reported by other issuers. We disclose these
measures, which are derived from our financial statements and applied on a
consistent basis, because we believe they assist in understanding the results
of our operations and financial position and are meant to provide further
information about our financial results to shareholders.
The management's discussion and analysis contains certain forward looking
information and forward-looking statements. You should review the cautionary
statement on forward-looking information on page 44.
Additional information about us, including our most recent annual information
form, is available free of charge on our website at www.teckcominco.com, on the
Canadian Securities Administrators' website at www.sedar.com and on the EDGAR
section of the United States Securities and Exchange Commission's (SEC) website
at www.sec.gov.
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Teck Cominco 2007 MD&A 1
DIVISIONAL RESULTS
The table below shows our share of production of our major commodities for the
last five years and expected production for 2008.
FIVE-YEAR PRODUCTION RECORD AND 2008 PLAN (OUR PROPORTIONATE SHARE)
Units
(000's) 2003 2004 2005 2006 2007 2008 Plan
---------- ----------- ----------- ----------- ----------- ----------
PRINCIPAL PRODUCTS
Copper contained in concentrate tonnes 176 248 263 254 215 200
Copper cathodes tonnes - - - - 37 100
Refined zinc tonnes 412 413 223 296 292 295
Zinc contained in concentrate tonnes 665 619 657 627 699 705
Gold ounces 281 261 245 263 285 275
Metallurgical coal
Direct share tonnes 7,558 9,277 9,948 8,657 9,024 9,600
Indirect share tonnes 1,092 1,386 1,376 1,147 1,552 2,880
---------- ----------- ----------- ----------- ----------- ----------
8,650 10,663 11,324 9,804 10,576 12,480
---------- ----------- ----------- ----------- ----------- ----------
MAJOR BY-PRODUCTS
Molybdenum contained in
concentrate pounds 4,934 11,631 9,482 7,929 7,133 7,000
Refined lead tonnes 88 85 69 90 76 90
Lead contained in concentrate tonnes 125 119 110 129 146 130
Notes:
(1) In August 2007, we acquired the Quebrada Blanca, Andacollo and Duck Pond
mines as a result of our acquisition of Aur Resources Inc. Quebrada Blanca
and Andacollo produce cathode copper. Duck Pond produces copper and zinc
concentrate. In March 2004 we increased our interest in the Highland
Valley Copper mine from 63.9% to 97.5%.
(2) In April 2007, our Lennard Shelf zinc mine and Pogo gold mine achieved
commercial production.
(3) In 2005, refined zinc and lead production was affected by a three-month
strike at our Trail metallurgical operation. In December 2004 we sold our
Cajamarquilla zinc refinery.
(4) The direct share of coal production includes our proportionate share of
production from the Elk Valley Coal Partnership, which was 35% on February
28, 2003 and increased in various increments to 40% on April 1, 2006.
Fording Canadian Coal Trust owns the remaining interest in Elk Valley
Coal. The indirect share of coal production is from our investment in
units of Fording. We owned approximately 9% of Fording from February 28,
2003 to September 27, 2007 and on September 27, 2007 increased our
interest in Fording to 19.95%.
(5) We report 100% of the production of Highland Valley Copper, Quebrada
Blanca and Andacollo, even though we own 97.5%, 76.5% and 90%,
respectively, of these operations because we fully consolidate their
results in our financial statements.
Our business is the exploration for and development and production of natural
resources. Through our interests in mining and processing operations in Canada,
the United States, South America and Australia, we are an important producer of
copper and the world's second largest zinc miner. We hold a 52% direct and
indirect interest in and are the managing partner of the Elk Valley Coal
Partnership, which is the world's second largest producer of metallurgical coal
for the seaborne markets. Our principal products are copper, zinc,
metallurgical coal and gold. Lead, molybdenum, various specialty and other
metals, chemicals and fertilizers are by-products produced at our operations.
We also sell electrical power that is surplus to the requirements of our Trail
metallurgical operations and own a 20% interest in the Fort Hills oil sands
project and a 50% interest in various other oil sands leases.
We manage our activities along commodity lines and are organized into six
divisions as follows:
O COPPER O ZINC O COAL O GOLD O ENERGY O CORPORATE
Our energy division consists of our investments in our oils sands projects,
which are in various stages of exploration and development. Our interest in the
Fort Hills oil sands project is expected to become a significant contributor to
our future revenues, operating profits and cash flows. Our corporate division
includes all of our activities in other commodities, our corporate growth and
groups that provide administrative, technical, financial and other support to
all of our divisions.
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Teck Cominco 2007 MD&A 2
Our revenue, operating profit and EBITDA by division is summarized in the
following table.
Revenues Operating Profit EBITDA
--------------------------- --------------------------- ---------------------------
($ in millions) 2007 2006 2005 2007 2006 2005 2007 2006 2005
------- ------- ------- ------- ------- ------- ------- ------- -------
Copper $ 2,186 $ 2,220 $ 1,587 $ 1,354 $ 1,617 $ 980 $ 1,349 $ 1,628 $ 1,039
Zinc 3,052 2,999 1,530 1,180 1,493 461 1,210 1,715 592
Coal 951 1,177 1,171 209 444 512 295 526 635
Gold 182 143 127 (5) 7 9 (11) 7 22
Corporate - - - - - - (228) (47) (112)
$ 6,371 $ 6,539 $ 4,415 $ 2,738 $ 3,561 $ 1,962 $ 2,615 $ 3,829 $ 2,176
------- ------- ------- ------- ------- ------- ------- ------- -------
Note: EBITDA is our earnings before interest income and expense, taxes, and
depreciation and amortization. Taxes include the taxes in minority interests,
equity earnings (loss), and earnings (loss) from discontinued operations.
COPPER
2007 PRODUCTION - 556 MILLION POUNDS
OUR COPPER DIVISION includes our interests in the Highland Valley Copper mine
located in south central British Columbia, the Antamina mine in north central
Peru, the Quebrada Blanca and Andacollo mines located in Chile, and the Duck
Pond copper-zinc mine located in central Newfoundland.
Revenues Operating Profit EBITDA
---------------------------- --------------------------- ---------------------------
($ in millions) 2007 2006 2005 2007 2006 2005 2007 2006 2005
------- ------ ------- ------- ------- ----- ------- ------- -------
Highland Valley Copper $ 1,115 $1,413 $1,021 $ 737 $1,019 $ 613 $ 749 $ 1,038 $ 664
Antamina 775 807 524 565 598 355 597 632 394
Quebrada Blanca 215 - - 55 - - 33 - -
Andacollo 46 - - 1 - - 5 - -
Duck Pond 35 - - (4) - - 6 - -
Corporate and other - - 42 - - 12 (41) (42) (19)
$ 2,186 $2,220 $ 1,587 $ 1,354 $ 1,617 $ 980 $ 1,349 $ 1,628 $ 1,039
------- ------ ------- ------- ------- ----- ------- ------- -------
Our production and operating profits from these operations are summarized in
the following charts. In 2007, our copper operations accounted for 34% of our
revenue and 49% of our operating profit.
[GRAPHIC OMITTED -- BAR CHARTS]
The most significant event in our copper division was our acquisition of Aur
Resources Inc. on August 22, 2007. As a result of our acquisition of Aur, we
acquired interests in the Quebrada Blanca and Carmen de Andacollo copper mines,
and the Duck Pond copper-zinc mine. These three mines are expected to add
approximately 115,000 tonnes of annual copper production and 30,000 tonnes of
annual zinc production to our results in 2008.
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Teck Cominco 2007 MD&A 3
The Quebrada Blanca and Andacollo mines are open-pit mining operations that
produce cathode copper using heap and dump leaching together with
solvent-extraction electro-winning (SX-EW) refining. The Duck Pond copper-zinc
mine began production in early 2007 and achieved commercial production in
April, 2007. The mine is an underground operation using conventional flotation
processes to produce copper and zinc concentrates.
We have allocated the acquisition cost of Aur to the net assets acquired based
on preliminary fair value estimates only. This is a complex accounting exercise
that requires a detailed analysis and valuation of all of the assets acquired
and liabilities assumed, which is not expected to be completed until later in
2008. Accordingly, values allocated to net assets at December 31, 2007 may be
revised and the revisions could be material. The results of the final
allocation, when complete, may significantly affect depreciation and
amortization charges in future periods.
On a preliminary basis, we revalued the finished goods and work in process
inventories on hand at August 22, 2007 at these operations to estimated fair
values based on their copper and zinc content less costs to complete plus a
small margin. This adjustment increased inventories by $162 million at August
22, 2007. As these operations complete the processing and sale of these
inventories, the cost of goods sold reflects the higher assigned values,
resulting in reduced profits. In the period from the date of acquisition to the
end of 2007, profits were reduced in this manner by $104 million. The balance
of the inventory adjustment will reduce future profits as the inventories that
existed on the acquisition date are processed and sold. It does not impact cash
flows derived from these operations.
Based on the normal flow of production through the mining and processing
operations, we expect that approximately $30 million of the remaining inventory
adjustments may be charged to earnings in the first quarter of 2008, with
decreasing charges continuing until December 2008. These preliminary estimates
are subject to revision as we complete our detailed allocation of the purchase
price. As new ore is mined and processed, the cost of goods sold in future
periods will also be affected by increased depreciation and amortization
charges arising out of the final allocation of the acquisition price of Aur to
the operating assets. The three mines acquired have all performed well since we
acquired them. Their contribution to our operating profit before pricing
adjustments and the effects of the onetime fair value adjustments made to
inventories at the time of acquisition is summarized in the table below.
($ in millions) QUEBRADA BLANCA ANDACOLLO DUCK POND TOTAL
--------------- --------- --------- -----
Operating profit before the $ 146 $ 27 $ 10 $ 183
following items
Effect of inventory
adjustments on
acquisition (71) (24) (9) (104)
Negative pricing
adjustments (20) (2) (5) (27)
Operating profit (loss) as reported $ 55 $ 1 $ (4) $ 52
MARKETS
COPPER
The copper price averaged US$3.23 per pound in 2007, up 6% from 2006 levels.
However, with the strengthening of the Canadian dollar, the average Canadian
dollar copper price was largely unchanged at C$3.46 per pound in 2007 versus
C$3.45 in 2006.
At the end of November 2007, total global refined stocks stood at less than 18
days of global consumption while 25 year average levels are estimated at 34
days of global consumption.
In China, apparent consumption as reported by the International Copper Study
Group (ICSG) rebounded sharply after what appeared to be a decline in 2006.
Many analysts and the ICSG believe this dramatic change is due in part to a
destocking in 2006 and a restocking in 2007 of the unreported government
stockpile of copper in China. To November, apparent consumption in China was
reported by the ICSG to have fallen 2% in 2006 and rose 37% in 2007. It is more
likely that actual Chinese demand grew in line with industrial production
growth in 2006 and 2007 at 15% and 14% respectively.
Chinese imports of copper concentrates rose 26% to 1.35 million tonnes of
contained copper in 2007 over 2006. In 2007, significant increases in China's
smelting capacity pushed the global copper concentrate market further into
deficit and as a result, copper spot treatment charges have continued to fall,
nearing historically low levels. Although a small surplus of copper metal is
expected in the global marketplace in 2008, a continuation of the mine
production disruptions could again push the metal market into deficit.
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Teck Cominco 2007 MD&A 4
[GRAPHIC OMITTED -- CHARTS]
MOLYBDENUM
Molybdenum prices averaged US$30 per pound in 2007 compared with US$25 per
pound in 2006.
Demand for molybdenum remained strong across several sectors. While there are
no official statistics published for molybdenum, several analysts estimate that
molybdenum demand has grown between 5% and 7% in 2006 and 2007, well above
historical growth levels of 2% to 3% per annum. Chinese demand growth is
projected to remain strong as Chinese stainless steel mills continue to
increase melt capacity. Recent changes to the molybdenum import/export policies
in China began to take effect in August 2007. Ferromolybdenum exports by China
were 10% lower in the second half of 2007. Further cuts in the 2008 export
quotas and an increase in export duties on molybdenum products by China should
further reduce exports from China in 2008.
HIGHLAND VALLEY COPPER
We have a 97.5% interest in the Highland Valley Copper mine located in south
central British Columbia. The mine is one of the world's largest tonnage copper
mining and milling complexes. Operating profit was $737 million in 2007
compared with the record of $1.0 billion in 2006 and $613 million in 2005.
Highland Valley's operating results at the 100% level are summarized in the
following table:
2007 2006 2005
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TONNES MILLED (000's) 42,593 45,356 50,666
COPPER
Grade (%) 0.37 0.41 0.40
Recovery (%) 87.9 91.5 88.8
Production (000's tonnes) 139.5 171.3 179.0
Sales (000's tonnes) 140.2 186.0 186.2
MOLYBDENUM
Production(million pounds) 4.1 4.1 6.3
Sales(million pounds) 4.0 4.1 6.9
COST OF SALES($ millions)
Operating costs $308 $307 $300
Distribution costs $31 $41 $46
CAPITAL EXPENDITURES ($ millions) $161 $80 $14
OPERATING PROFIT ($ millions) $737 $1,019 $613
=======================================================================
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Teck Cominco 2007 MD&A 5
Highland Valley Copper is executing a two-phase mine life extension that
requires pushbacks of the east and west walls of the Valley pit, which will
permit mining until 2019. Production to 2013 is expected to average 142,000
tonnes of copper per year and production from 2014 to 2019 is expected to
average 125,000 tonnes of copper per year. Life of mine copper and molybdenum
grades are expected to decline by approximately 10% as a result of the
inclusion of lower grade ore in the mine plan. The total capital cost of the
2019 extension is expected to be $300 million, of which approximately $130
million is for equipment and $170 million is for preproduction stripping during
the period from 2009 through 2013.
The Valley in-pit crushers and conveying systems were relocated to the pit rim
to permit the pushback of the east pit wall. Major mining equipment orders have
been finalized to allow Valley west pit stripping to commence in 2009 for the
mine life extension to 2019. Spending on pre-production stripping of the east
wall of the Valley pit was $44 million in 2007. Capital expenditures for the
extension were $117 million in 2007 compared with $59 million in 2006.
Highland Valley's 2007 copper production was 139,500 tonnes, which was 19%
lower than in 2006. Molybdenum production was the same as 2006 levels at 4.1
million pounds. With the ongoing development work, we were mining harder, lower
grade ores in during 2007.
The reduction in Highland Valley's 2007 operating profit was due mainly to
lower copper sales volumes driven by the lower production levels, lower pricing
adjustments of $18 million compared with $86 million in 2006, and the stronger
Canadian dollar in 2007. Record operating profit in 2006 was significantly
higher than in 2005 due mainly to higher average copper prices.
As part of its mine life extension project, Highland Valley will continue to
draw a large proportion of clay-bearing ore from the Lornex pit, which will
adversely affect both grades and recoveries. A higher proportion of Lornex ore
in mill feed, approximately 50% in 2008 and 30% in 2009, will decrease copper
recovery. In general, the softer Lornex ore produces a coarser grind and lower
liberation of copper minerals, resulting in lower recovery of the coarser
fraction. In addition, ore from near the Lornex fault has a high clay content,
which can significantly lower copper recovery. Over the previous five to seven
years, mill feed averaged 23% Lornex ore (ranging from 10% to 35%) and copper
recovery averaged about 89%. Under the current mine plan, grades and recoveries
are expected to increase in 2010 and stripping ratios are expected to
significantly decline beginning in 2011. Highland Valley's copper production in
2008 is estimated at 113,000 tonnes.
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Teck Cominco 2007 MD&A 6
ANTAMINA
We have a 22.5% interest in the Antamina mine located in the north central
Peruvian Andes. BHP Billiton and Xstrata plc each indirectly own 33.75% and
Mitsubishi Corporation owns the remaining 10%. Our 22.5% share of Antamina
contributed $565 million to our operating profits in 2007 compared with $598
million in 2006 and $355 million in 2005.
Antamina's operating results at the 100% level are summarized in the following
table:
2007 2006 2005
---- ---- ----
TONNES MILLED (000's)
Copper-only ore 20,326 22,875 24,053
Copper-zinc ore 10,848 7,381 6,291
31,174 30,256 30,344
COPPER (Note 1)
Grade (%) 1.21 1.38 1.35
Recovery (%) 89.1 91.0 90.3
Production (000's tonnes) 329.9 384.2 374.6
Sales (000's tonnes) 326.9 385.5 384.1
ZINC (Note 1)
Grade (%) 3.03 2.53 2.56
Recovery (%) 87.3 86.5 82.7
Production (000's tonnes) 291.7 156.1 184.3
Sales (000's tonnes)
292.5 158.3 190.5
MOLYBDENUM
Production (million pounds) 14.1 17.4 14.8
Sales (million pounds) 15.3 17.5 16.1
COST OF SALES (US$ millions)
Operating costs $395 $360 $324
Distribution costs $99 $67 $71
Royalties and other costs
(Note 2) $141 $136 $83
CAPITAL EXPENDITURES ($ millions) $78 $55 $62
OUR 22.5% SHARE OF OPERATING
PROFIT ($ millions) 565 $598 $355
(1) Copper ore grades and recoveries apply to all of the processed ores. Zinc
grades and recoveries apply to copper-zinc ores only.
(2) In addition to royalties paid by Antamina, we also pay a royalty granted
to the vendor of our interest in Antamina equivalent to 7.4% that is
deducted from our share of the project cash flow.
The Antamina ore body is complex and the nature of the deposit is such that it
must be mined in a systematic manner. For the first nine months of 2007,
Antamina was in a production phase during which it was mining a significantly
higher proportion of copper-zinc ore as opposed to copper-only ore. Due to the
relative strength of copper and molybdenum prices compared to zinc prices
towards the end of 2007, the mine focused on copper-only ores during the fourth
quarter to maximize revenue. Copper-only ores are softer and have higher
throughput rates through the mill. Variances in grade, recoveries, throughput
and production arise mainly as the result of this change in ore types. For
2007, these variations resulted in a 14% reduction in copper production and an
87% increase in zinc production compared with 2006.
The main grinding mill (SAG mill) failed on two separate occasions in the
fourth quarter causing 14 days of lost production. Problems with the mill motor
continued in early 2008 with 11 days of downtime in January. The SAG mill is
expected to operate at reduced speed and voltage in 2008 to lessen the
potential for further failures until the problems are fully understood and
rectified. Production of both copper-only and copper-zinc ores is expected to
be close to normal despite the slower speed. However there exists a significant
potential for similar stoppages during 2008.
In 2006, Antamina, together with other mining companies in Peru, agreed to
contribute extraordinary annual payments of 3.75% of after-tax earnings to a
fund established for the benefit of local communities. The payments are
required for the years 2006 through 2010, subject to annual metal prices
exceeding certain reference price levels for any given year. The payments are
not deductible for Peruvian income tax purposes. Our 22.5% share of the 2007
contribution was $15 million (2006 - $17 million).
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Teck Cominco 2007 MD&A 7
On the acquisition of our interest in the Antamina mine, we granted the vendor
a net profits royalty that is equivalent to 7.4% of our share of project cash
flow after recovery of capital costs and an interest factor. The royalty became
payable in the first quarter of 2006. The royalty expense was $22 million in
2007 compared with $33 million in 2006.
The reduction in our share of Antamina's 2007 operating profit was due mainly
to lower copper and molybdenum sales volumes driven by the lower production
levels arising from the changes in ore types being processed, lower positive
pricing adjustments of $5 million compared with $52 million in 2006, and the
effects of the stronger Canadian dollar. Operating profit in 2006, which was a
record, was higher than in 2005 due mainly to higher average metal prices.
Major capital projects in 2007 included US$7 million for a 15-metre tailings
dam lift, US$14 million for the reserve definition drill program and US$28
million for the pebble crusher project, which is expected to increase
throughput and recoveries and will be operational by the end of the first
quarter 2008.
Antamina's copper production in 2008 is expected to be similar to 2007 and zinc
production is expected to be approximately 270,000 tonnes, down slightly from
2007, with the changes due mainly to the ore mixes being processed in 2008.
This assumes that the problems with the electrical motor in the SAG mill do not
result in any significant production interruptions in 2008. Capital
expenditures for 2008 are planned at US$120 million. The major projects include
US$20 million for reserve definition drilling, US$19 million for construction
of a new camp facility, US$17 million on the tailings dam lift and US$15
million for additional haul trucks
QUEBRADA BLANCA
The Quebrada Blanca mine is located in northern Chile, 170 kilometres southeast
of the port city of Iquique. We own 76.5% of Quebrada Blanca. Inversiones
Mineras S.A., a Chilean private company, owns 13.5% of the mine and Empresa
Nacional de Minera (ENAMI), a Chilean government entity, owns the remaining
10%.
Quebrada Blanca's operating results at the 100% level for the period from
August 22, 2007, the date of acquisition, to December 31, 2007 are summarized
in the following table:
TONNES PLACED (000's)
Heap leach ore 2,608
Dump leach ore 3,769
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6,377
GRADE (%)
Heap leach ore 1.23
Dump leach ore 0.53
PRODUCTION (000's tonnes)
Heap leach ore 22.9
Dump leach ore 7.5
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30.4
COPPER SALES VOLUMES (000's tonnes) 32.1
CAPITAL EXPENDITURES ($ millions) $17
OPERATING PROFIT ($ millions) $55
==================================================================
Notes:
(1) TCu % is the percent assayed total copper grade.
(2) These figures do not include the minority interests' share of the results.
Since our acquisition, Quebrada Blanca's operating profit was $146 million in
2007 before deducting $71 million in respect of inventory revaluations to fair
value on acquisition and negative price adjustments of $20 million. The
inventory revaluation established a higher value for copper inventories based
on market prices at the date of acquisition. Since our acquisition of the mine,
settlements included $4 million of positive price adjustments relating to sales
that's occurred prior to our acquisition and $24 million of negative price
adjustments on sales that were originally recorded at average prices and
subsequently revalued to year-end prices.
Copper cathode production was 30,400 tonnes and sales volumes were 32,100
tonnes since we acquired the mine. Cathode production in 2007 totalled 83,000
tonnes, a new record for the mine. Total material mined in 2007 was 36 million
tonnes. Starting in 2008 and continuing over the next several years, mined
tonnage is expected to rise to approximately 60 million tonnes as stripping
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Teck Cominco 2007 MD&A 8
requirements increase to support current production rates. Early negotiations
with the staff and operational unions between December 2007 and February 2008
resulted in new four year collective agreements.
In late 2007, Teck Cominco completed a 200 metre spaced drill program to define
the hypogene (primary) mineralization exposed in the bottom of the current open
pit. Block models and preliminary pit optimization studies in early 2008
outlined a 1.03 billion tonne inferred resource grading 0.5% copper and 0.02%
molybdenum, containing approximately 11 billion pounds of copper and 450
million pounds of molybdenum. Copper grade continuity in the mine area has been
confirmed and all holes completed to date terminate in mineralization leaving
the deposit open at depth. The lateral extent of the deposit remains undefined.
Of this new resource, we have identified a higher-grade zone in the bottom of
the existing pit that contains approximately 300 million tonnes grading 0.55%
copper and 0.020% molybdenum. This could provide a substantial starter pit for
a 5 to 10 year period that would benefit from having been largely pre-stripped
by the on-going mining of the existing supergene ore body.
Quebrada Blanca is planning on drilling a further 25,000 to 30,000 metres in
the hypogene deposit in 2008. Our goal is to improve geological interpretation
and better define the extent of the resource. This next phase of the drilling
program is expected to be completed in the fourth quarter of 2008. Additional
engineering studies are also being conducted.
Copper cathode production in 2008 is expected to be approximately 80,000 tonnes
and capital expenditures are planned at US$27 million, of which US$16 million
is on expanding the equipment fleet in the mine.
CARMEN DE ANDACOLO
The Carmen de Andacollo (Andacollo) mine is located in Chile, adjacent to the
town of Andacollo, approximately 55 kilometres southeast of the city of La
Serena and 350 kilometres north of Santiago. We own 90% of Andacollo and the
remaining 10% is owned by ENAMI.
Andacollo's operating results at the 100% level for the period from August 22,
2007, the date of acquisition, to December 31, 2007 are summarized in the
following table:
TONNES PLACED (000's)
Heap leach ore 1,289
Dump leach ore 344
- ------------------------------------------------------------------
1,633
GRADE (%)
Heap leach ore 0.54
Dump leach ore 0.23
PRODUCTION (000's tonnes)
Heap leach ore 5.5
Dump leach ore 0.9
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6.4
COPPER SALES VOLUMES (000's tonnes) 6.6
CAPITAL EXPENDITURES ($ millions) $41
OPERATING PROFIT ($ millions) $1
==================================================================
Notes:
(1) TCu % is the percent assayed total copper grade.
(2) These figures do not include the minority interest's share of the results.
Andacollo has a hypogene deposit underneath the supergene deposit that is
currently being mined. The hypogene deposit is being developed with production
start-up scheduled for 2010, and a 21-year mine life. Development consists
primarily of the construction of a concentrator and tailings facility. The
current capital cost estimate for the project is approximately US$380 million
using an exchange rate of US$1 = 535 Chilean pesos. The development is expected
to produce 81,000 tonnes (178 million pounds) of copper and 66,000 ounces of
gold in concentrate annually over the first 10 years of the project. Cathode
copper production from the supergene deposit is scheduled to continue until
2012.
Since we acquired the mine, copper cathode production and sales volumes were
6,400 and 6,600 tonnes respectively. Production for the entire year was 18,600
tonnes of cathode copper. Early negotiations with both the staff and worker
unions were successful, with both agreements being ratified in the fourth
quarter of 2007. Both agreements are for a four-year term starting in January
2008.
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Teck Cominco 2007 MD&A 9
Andacollo's operating profit from August 22 to December 31, 2007 was $27
million before the effects of the revaluation of copper inventory to fair value
on acquisition and negative pricing adjustments. The revaluation established a
higher value for copper inventories, based on market prices at the date of
acquisition. This increased our cost of sales by $24 million and the subsequent
decline in metal prices resulted in a loss on the sale of these inventories. In
addition, the mine recorded negative pricing adjustments of $2 million since we
acquired it in August 2007. After these adjustments, Andacollo's operating
profit was $1 million.
Copper cathode production in 2008 is expected to be approximately 20,000 tonnes
and capital expenditures are planned at US$190 million, including US$185
million on the hypogene development.
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Teck Cominco 2007 MD&A 10
DUCK POND
The Duck Pond copper-zinc mine is located in central Newfoundland approximately
100 kilometres southwest of the town of Grand Falls-Windsor. Duck Pond achieved
commercial production in April 2007. The mine is an underground operation, with
the ore being processed using conventional flotation processes to produce
copper and zinc concentrates. The mine has an expected remaining life of about
six years, which may be extended a further two years if 1.1 million tonnes of
inferred resources can be upgraded to reserves.
Duck Pond's operating results for the period from August 22, 2007 to December
31, 2007 are summarized in the following table:
TONNES MILLED (000's) 205
COPPER
Grade (%) 2.6
Recovery (%) 86.0
Production (000's tonnes) 4.5
Sales (000's tonnes) 5.3
ZINC
Grade (%) 4.68
Recovery (%) 80.8
Production (000's tonnes) 8.4
Sales (000's tonnes) 6.8
CAPITAL EXPENDITURES ($ millions) $6
OPERATING LOSS ($ millions) $ (4)
==================================================================
Duck Pond's copper production from August 22 to the end of 2007 was 4,500
tonnes and zinc production was 8,400 tonnes. Design mill throughput was
consistently achieved during the latter portion of 2007 at designed mill feed
grades, although grade variability impacted total mill throughput. Grade
variability is expected to decline in 2008 as more ore sources are put into
production, permitting a greater level of mill feed blending. Since our
acquisition from Aur, Duck Pond's operating profit was $10 million, before
negative price adjustments of $5 million and the $9 million revaluation of
concentrate inventory to fair value at the time of acquisition.
Metal production in 2008 is expected to be approximately 15,000 tonnes of
contained copper and 30,000 tonnes of contained zinc. Capital expenditures for
2008 are planned at $16 million including $6 million for mine development, $5
million for replacement equipment and $4 million for sustaining capital.
COPPER EXPLORATION AND DEVELOPMENT PROJECTS
In 2007, we spent $46 million exploring on our copper projects, representing
44% of our total exploration expense.
[GRAPHIC OMITTED]
The main targets were large porphyry copper systems in Chile, Argentina, Mexico
and Arizona. Other copper targets included sediment-hosted systems in Namibia.
Several new copper porphyry systems were identified in northern Chile.
Significant drill programs are planned in Chile, Mexico and Namibia in 2008.
Approximately 65% of our copper exploration expense was directed to several
types of copper and copper-gold deposits in Australia, Chile, Argentina and
Canada. Encouraging drill results were returned from projects in Australia and
Turkey. We completed our drilling obligations on the Carrapateena project in
South Australia during 2007 and can acquire a 100% interest in the property by
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 11
making a final payment based on 66% of the fair market value of the property by
the end of 2008. We also earned back to a 60% interest in the Halilaga property
in Turkey. Plans for 2008 include drill testing several high priority projects
in Chile, Canada and Turkey.
Work continues at our 100%-owned MESABA copper-nickel project, which is located
in northern Minnesota adjacent to the iron ore mines of the Iron Range. The
region has seen almost 50 years of copper-nickel exploration and a number of
mineralized zones have been defined within the Duluth Complex. Mesaba is one of
the larger mineralized bodies covering a surface area of approximately four
square kilometres as originally outlined by drilling in the 1960s and 1970s.
Our program in 2008 involves extensive resource definition drilling, ore
characterization and metallurgy. Concentrate will be prepared from bulk ore
samples for pilot-scale CESL test work. Mesaba mineralization presents
metallurgical challenges for conventional concentrate production, but previous
work suggests that our proprietary CESL process could be an effective treatment
for low grade bulk copper-nickel concentrate.
PETAQUILLA. Along with our partners, Inmet and Petaquilla Copper, we previously
announced the results of an interim report on the FEED Study being conducted by
AMEC Americas Limited on the Petaquilla copper project in Panama.
The interim report estimates that the capital cost required to develop the
Petaquilla project would be US$3.5 billion (including a contingency of US$515
million but not including working capital and escalation). The capital cost
estimate includes approximately US$500 million for the construction of an
oil-fired power plant and approximately US$280 million for port facilities.
Cash costs, including operating and realization costs and net of by-product
credits, in years 1 to 10 of the project are estimated to average US$0.85 per
pound of copper produced. The study is based on the mine plan developed in
1998, which contemplates a 23-year mine life. The project includes a
concentrator capable of processing 120,000 tonnes per day of ore. Construction
is expected to take approximately 44 months from issuance of construction
permits. Permitting would follow the submission of a social and environmental
impact assessment that is expected to be completed in the fourth quarter of
2008.
Capital costs for the project have increased substantially over previously
published estimates both as a result of scope changes, including enhancements
in erosion control, water management and other environmental protection
measures, as well as increases in equipment and construction costs that have
been affecting projects worldwide.
Work is continuing on the FEED Study. A project review team is currently
studying opportunities to reduce the capital costs from the interim FEED study
estimate. Several possible opportunities have already been identified in the
area of the grinding circuit, power supply and port infrastructure. The project
review team will evaluate these opportunities and, where appropriate,
incorporate these changes into the capital cost estimate.
Inmet holds a 48% equity interest in Minera Petaquilla, S.A., the Panamanian
company that holds the Petaquilla concession, while Petaquilla Copper currently
holds a 52% equity interest. We have the right to acquire a 26% equity interest
in Minera Petaquilla by committing, prior to March 31, 2008, to participate in
work plans and budgets leading to commercial production, and by committing to
fund 52% of development costs for the project. If Teck Cominco funds those
development costs, it will recoup 26% of the development costs, plus interest
at US prime plus 2% per annum, prior to any distributions to Petaquilla Copper.
In lieu of receiving funding from us, Petaquilla Copper may elect, within 30
days of our production commitment, to finance all or part of the development
costs for its 26% equity interest in the project. We are the operator of the
project.
There can be no assurance that we will exercise our right to acquire a 26%
equity interest in the Petaquilla project on or before March 31, 2008.
GALORE CREEK. In August 2007, we formed a 50/50 partnership with NovaGold
Resources Inc. to develop the Galore Creek copper-gold deposit in northwest
British Columbia.
In November 2007, construction activities were suspended on the project due to
escalating cost estimates and reduced expected operating margins as a result of
the stronger Canadian dollar. Galore Creek has measured and indicated resources
containing approximately 8.9 billion pounds of copper and 7 million ounces of
gold and an inferred resource containing approximately 2.9 billion pounds of
copper and 2 million ounces of gold. Accordingly, we view the property as a
substantial resource, which is reflected in our commitment to undertake a
comprehensive review and evaluation of alternative development strategies.
As a result of the suspension of the project, our $264 million investment was
reduced by $50 million to $214 million, with the reduction being our 50% share
of the estimated $100 million of demobilization costs accrued and expensed by
the Galore Creek Partnership. The $50 million reduction resulted in a $33
million after-tax equity loss related to our investment in Galore Creek.
In 2008 we will be demobilizing the project, preparing it for care and
maintenance, and initiating the studies aimed at re-evaluating and optimizing
the project to determine whether Galore Creek can become a viable, operating
mine. Possible alternative design concepts include:
o reducing in-valley activities by: minimizing the amount of waste rock and
potential acid generating rock; by conducting more drilling to better
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 12
categorize the material or increase the proportion of economic ore in the
original design; finding alternative mining and ore hauling methods to
reduce waste generated, including steeper mine slopes, conveyer haulage,
and glory hole systems for lower extremities of the ore zones and
reviewing alternative ways to store tailings by lowering their water
content,
o mining and grinding ore in the valley and piping the ground ore to a more
optimum location, and
o considering alternative tailings storage locations that may allow for a
significant reduction in the size and cost of water diversion and dam
facilities.
We expect that this work could take several years to complete and may result in
the project having to be re-permitted. However, there can be no assurances that
this work will result in a commercially viable project.
By agreement with NovaGold at the time of the suspension, our funding
obligations in connection with the project were 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 the $72
million in project study costs), 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 an additional $72 million in the partnership
over the next five years to be used principally to reassess the project and
evaluate alternative development strategies. Under the terms of the revised
agreement, NovaGold is entitled to receive up to US$25 million of preferential
distributions if revenues in the first year of commercial production exceed
specific established targets.
ZINC
2007 PRODUCTION - 1.5 BILLION POUNDS OF ZINC IN CONCENTRATE
644 MILLION POUNDS OF REFINED ZINC
OUR ZINC DIVISION includes our Trail refining and smelting complex located in
south central British Columbia, the Red Dog mine located in the northwest
Alaska, the Pend Oreille mine in Washington State just south of our Trail
complex, and the Lennard Shelf operation in Western Australia.
Revenues Operating Profit EBITDA
-------------------------- ------------------------ ----------------------------
($ in millions) 2007 2006 2005 2007 2006 2005 2007 2006 2005
------ ------ ------ ------ ------ ---- ------ ------ ----
Trail $1,839 $1,802 $937 $345 $395 $134 $345 $442 $174
Red Dog 1,434 1,539 677 819 1,079 325 885 1,138 385
Pend Oreille 70 88 54 (6) 38 2 (15) 52 19
Lennard Shelf 47 - - (4) - - (8) - -
Inter-division sales and other (338) (430) (138) 26 (19) - (48) 83 14
------ ------ ------ ------ ------ ---- ------ ------ ----
$3,052 $2,999 $1,530 $1,180 $1,493 $461 $1,210 $1,715 $592
====== ====== ====== ====== ====== ==== ====== ====== ====
The major products produced at these operations are zinc and lead concentrates
at our mines and refined zinc and lead at our Trail metallurgical complex.
Trail also produces various precious and specialty metals, fertilizers and
chemicals, and produces electricity for the metallurgical facilities, selling
any that is surplus to our internal needs to various customers in Canada and
the US.
Our proportionate share of production and operating profits from each of our
zinc operations are summarized in the charts on following page. In 2007, our
zinc operations accounted for 48% of our revenue and 43% of our operating
profit.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 13
[GRAPHIC OMITTED -- CHARTS]
MARKETS
ZINC
According to the International Lead Zinc Study Group (ILZSG), global zinc
consumption is estimated to have grown by 3.7% in 2007, well above the trend
growth of 2.75%. China's zinc metal consumption grew by 15% in 2007, which more
than offset the 9% decline in the United States.
In 2007, London Metal Exchange (LME) stocks rose slightly to just over 89,000
tonnes. Total reported refined inventories (LME, Shanghai Futures Exchange,
Producer, Consumer and Merchant) at the end of 2007 were 617,000 tonnes or 20
days of global consumption, well below the 25-year average of 40 days of global
consumption.
Prices started the year near historic highs, at US$1.93 per pound, and fell
throughout the year to finish the year at US$1.04 per pound. In 2007, the
average price was US$1.47 per pound, virtually unchanged from the 2006 average
price of US$1.49. However, on a Canadian dollar equivalent basis, the average
2007 zinc price was down 7% from 2006.
According to Antaike, a Chinese metals information network, China imported 160%
more zinc concentrates in 2007 than in 2006, despite greater domestic mine
production growth (21%) than any other country. China was a net exporter in
2007 of 126,000 tonnes of refined zinc, up from 7,000 tonnes of net exports in
2006. At the end of 2006, China eliminated the VAT rebate on all non-SHG
refined zinc, but left a 5% rebate on SHG zinc available to exporters. At the
end of 2007 the Chinese government hinted at eliminating this 5% rebate and
potentially imposing an export tax, but the timetable is not clear at this
time. Potential changes in the export taxes and rebates could reduce or
eliminate exports of refined zinc from China.
The zinc market in 2007 was in transition for both concentrates and refined
metal. Prior to 2007, the zinc markets (concentrates and refined metal) were in
deficit, but with increasing mine production globally, the markets were
balanced in 2007.
While there are concerns over the American economy, we still believe that
growth in global zinc metal demand in 2008 will exceed the historical growth
rate of 2.75%.
Although increases in supply of concentrate and metal are expected to result in
small surpluses in 2008, stock levels for both are well below the 25-year
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 14
average, again providing no cushion for supply disruptions or unexpected metal
demand.
[GRAPHIC OMITTED -- CHARTS]
LEAD
The global market for refined lead recorded its fourth consecutive annual
deficit in 2007 and the lead price rose to historic cash price highs on October
15 when it hit US$1.81 per pound. The LME cash price averaged US$1.17 per pound
in 2007, up 98% from the 2006 average price of US$0.59 per pound. LME stocks
rose 4,350 tonnes in 2007.
According to ILZSG, global lead consumption grew 2.1% over 2006 levels and was
the sixth consecutive year in which global refined lead consumption was above
the 25-year trend growth of 1.8% per year. In 2007, China's growth was greater
than growth in the rest of the world, as China's battery production increased
significantly. China also instituted a 10% export tax on refined lead in June
2007. Consequently, exports dropped from an average of 24,000 tonnes per month
in the first half of 2007 to 12,000 tonnes per month in the second half,
reducing available lead metal for the rest of the world.
While it is believed that growth in lead metal demand will be strong in 2008,
supply will again play a pivotal part in the market. Refined lead stocks are
still near historic lows (12 days at the end of 2007 versus the 25-year average
of 28 days).
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 15
[GRAPHIC OMITTED -- CHARTS]
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 16
TRAIL
Trail's facilities, located in British Columbia, include one of the world's
largest fully integrated zinc and lead smelting and refining complexes, and the
Waneta hydroelectric dam and transmission system. Trail's metallurgical
operations produce refined zinc and lead and a variety of precious and
specialty metals, chemicals and fertilizer products. The Waneta dam provides
power to Trail's metallurgical operations and sells surplus power through the
transmission system to customers in British Columbia and the United States.
Trail contributed $345 million to our operating profits in 2007 compared with
$395 million in 2006 and $134 million in 2005. Our operating results for Trail
are summarized in the following table:
- ----------------------------------------------------------------------------
2007 2006 2005
- ----------------------------------------------------------------------------
METAL PRODUCTION
Zinc (tonnes) 291,900 296,100 223,200
Lead (tonnes) 76,400 90,300 68,600
Silver (000's ounces) 15,400 19,500 15,100
Gold (000's ounces) 54 87 84
METAL SALES
Zinc (tonnes) 292,100 290,300 228,300
Lead (tonnes) 76,300 88,100 69,300
POWER
Surplus power sold (gigawatt hrs) 1,130 891 1,278
Power price (US$/megawatt hr) $51 $44 $58
COST OF METAL SALES ($ millions)
Concentrates $1,010 $959 $426
Operating costs $348 $224 $225
Distribution costs and other $82 $77 $61
CAPITAL EXPENDITURES ($ millions) $87 $76 $34
OPERATING PROFIT ($ millions)
Metal operations $297 $370 $65
Power sales $48 $25 $69
- ----------------------------------------------------------------------------
$345 $395 $134
============================================================================
Trail continued its focus on operating performance and productivity
improvements, which realized strong production levels. Refined zinc production,
at 291,900 tonnes, was maintained at a near-record level. Refined lead
production at 76,400 tonnes was below 2006 output due to less contained lead in
the concentrate mix and the shutdown of the lead smelter facilities in
October/November to conduct scheduled maintenance on the KIVCET furnace, boiler
and related equipment.
The lead smelter and refinery resumed full production in November. The lead
smelter shutdown was the largest undertaken since the KIVCET technology came on
line in 1997. At a cost of $55 million, including capital expenditures, the
shutdown involved 23 individual projects and, at the peak of work, employed 750
contract employees. The shutdown was completed on time and under budget without
any hygiene issues or lost-time injuries. Plant start-up following the shutdown
occurred without any significant issues.
Trail set new annual production records for indium and germanium and consumed
35,000 tonnes of stockpiled zinc plant residues, which contain significant
metal values. This resulted in the elimination of the first of three of these
legacy stockpiles. We increased fertilizer production to take advantage of
strong markets, realizing the highest production level in the last nine years.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 18
As an integrated refining and smelting operation, different commodities can
make different contributions to Trail's operating profits, allowing operations
to optimize concentrate purchases and production plans to take advantage of
movements in commodity prices.
[GRAPHIC OMITTED - PIE CHARTS]
The cost of products sold increased primarily as a result of higher prices for
lead concentrate. Realized treatment charges, which are deducted from the
prices paid to suppliers, were lower in 2007, which resulted in higher net
concentrate costs. Operating costs also increased by $24 million, primarily due
to non-routine costs associated with the lead smelter maintenance shutdown.
The reduction in the 2007 operating profit from Trail's metallurgical
operations was due mainly to the 32-day lead smelter maintenance shutdown and
the strengthening of the Canadian dollar that occurred during the year,
partially offset by higher lead prices. Record operating profit in 2006 was
significantly higher than in 2005 due mainly to higher average metal prices and
a 79-day strike that interrupted production and reduced operating profits in
2005.
The Waneta dam is one of several hydroelectric generating plants in the region
operated through contractual arrangements under which we currently receive
approximately 2,740 gigawatt hours of energy entitlement per year, regardless
of the water flow available for power generation. We sell any of our
entitlement that is not used by Trail's metallurgical operations to third
parties at market rates.
The final phase of a multi-year project to upgrade the generating units at the
Waneta dam was completed in the first quarter of 2007 with the upgrade of the
fourth power generator unit. As part of other power upgrade activities, in the
fall, work was completed on the new $40 million Waneta dam substation, which is
now in service.
Operating profit from surplus power sales increased to $48 million in 2007 from
$25 million the previous year due to higher volumes of surplus power available
for sale and higher average prices. The extra sales volumes were a result of
additional generating capacity, lower metallurgical load requirements and the
timing of sales, as our power agreements provide significant flexibility in
determining the volumes of sales in each period.
Capital expenditures for the year totalled $87 million, of which $25 million
was expended on the lead smelter shutdown discussed above. A $10 million filter
replacement project in zinc leaching was completed and successfully
commissioned without any impact on zinc production. In addition, $25 million
was spent on the replacement of the Waneta dam substation.
Based on positive environmental performance resulting from a one year test
period in 2006, Trail obtained a permit from the BC Ministry of Environment to
allow the treatment of up to 10,000 tonnes per year of electronic waste. Over
4,300 tonnes of electronic waste were recycled through the smelter in 2007. The
goal is to treat 8,000 tonnes in 2008. The process addresses the critical
social and environmental issue of electronic waste while providing Trail
operations with a business opportunity that is independent of the metal price
cycle.
In 2008, Trail expects to produce 295,000 tonnes of refined zinc, 90,000 tonnes
of lead and 15.5 million ounces of silver. Capital expenditures are planned at
$77 million for various sustaining projects, infrastructure improvements and
business development opportunities. Trail's three-year labour contract with two
local unions of the United Steelworkers expires on May 31, 2008. Negotiations
to renew the agreement are expected to begin near the end of the first quarter
of 2008.
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Teck Cominco 2007 MD&A 18
UPPER COLUMBIA RIVER BASIN (LAKE ROOSEVELT)
Prior to our acquisition in 2000 of a majority interest in Cominco Ltd. (now
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 downriver 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. 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, Teck Cominco American Incorporated
(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 fieldwork. TCAI submitted the
first draft of the work plan in December 2006 and we expect the final version
to be approved in the first quarter of 2008. Data from field work will be used
to determine whether further studies are required. When sufficient data has
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 native 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
noncompliance TCML sought to have all claims dismissed on the basis that the
court lacked jurisdiction because the CER CLA statute, in TCML's view, was not
intended to govern the discharges of a facility occurring entirely in Canada
under Canadian federal and provincial permits. 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 CER CLA 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 on the US Supreme Court's decision not
to take up the case at this particular time. 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 CER CLA
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.
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Teck Cominco 2007 MD&A 19
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, made up of the
Colville Tribe, the Spokane Tribe, the State of Washington and the US
Department of the 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 ongoing 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.
RED DOG
The Red Dog mine, located in northwest Alaska, is the world's largest zinc
mine. We operate the open-pit mine under an agreement with NANA Regional
Corporation Inc. (NANA), an Alaskan native corporation. Operating profit was
$819 million in 2007 compared with $1.1 billion in 2006 and $325 million in
2005.
Our operating results for Red Dog are summarized in the following table:
- ---------------------------------------------------------------------------
2007 2006 2005
- ---------------------------------------------------------------------------
TONNES MILLED (000'S) 3,381 3,238 3,087
ZINC
Grade (%) 20.2 20.6 21.7
Recovery (%) 84.2 83.5 84.9
Production (000's tonnes) 575.4 557.5 568.0
Sales (000's tonnes) 575.7 536.0 544.8
LEAD
Grade (%) 6.1 6.1 5.6
Recovery (%) 65.9 62.8 59.0
Production (000's tonnes) 136.2 123.5 102.3
Sales (000's tonnes) 144.3 114.8 105.0
COST OF SALES (US$ millions)
Operating costs
$193 $155 $126
Distribution costs
$104 $90 $84
Royalties (NANA and State) $230 $112 $35
CAPITAL EXPENDITURES ($ millions) $43 $36 $34
OPERATING PROFIT ($ millions) $819 $1,079 $325
===========================================================================
Red Dog's location in northwest Alaska exposes the operation to severe weather
and winter ice conditions that can significantly impact its production volumes
and operating costs. In addition, the mine's bulk supply deliveries and all of
the concentrate shipments occur during a short ocean shipping window that
normally runs from early July to late October. Because of this short ocean
shipping window, Red Dog's sales volumes are normally higher in the last six
months of the year than in the first six months, which can result in
significant volatility in its quarterly earnings depending on metal prices.
In 2007, zinc and lead production were above 2006 due to higher recoveries and
additional mill throughput as a result of improved mill operating time. Site
operating costs increased 25% over 2006 due to higher sales volumes and a 9%
increase in unit operating costs due to higher fuel, supplies and labour costs.
We are continuing with our shallow gas exploration program to test the economic
potential of natural gas as a replacement for diesel fuel for power generation.
Long-term dewatering and monitoring of test wells was initiated in 2007 to
determine gas flow rates. Should this program ultimately prove to be
successful, it has the potential to reduce Red Dog's use of and costs for
diesel fuel.
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Teck Cominco 2007 MD&A 20
Red Dog's 2007 shipping season began on July 5 and was completed on October 24,
with a record total of 1,070,000 tonnes of zinc concentrate and 262,000 tonnes
of lead concentrate shipped from the mine. Metals in concentrate available for
sale from January 1, 2008 to the beginning of next year's shipping season are
240,000 tonnes of zinc in concentrate and 3,000 tonnes of lead in concentrate.
The significant increase in the mine's cost of sales was mainly due to the
change in the royalty regime that occurred in 2007. In the fourth quarter of
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 the
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. NANA has advised us that
it ultimately shares approximately 62% of the royalty with other Alaskan native
corporations.
The reduction in Red Dog's 2007 operating profit compared with 2006 was due
mainly to the lower zinc price, negative pricing adjustments of $81 million
compared with $42 million of positive adjustments in 2006 and the strengthening
of the Canadian dollar during the year, partially offset by the higher zinc and
lead sales volumes and the higher average lead price. Operating profit in 2006,
which was a record, was significantly higher than in 2005 due mainly to higher
average zinc and lead prices.
Major capital projects in 2007 included US$9 million for additional flotation
capacity, US$20 million for tailings dams and US$14 million on other sustaining
capital projects.
Production in 2008 is expected to be approximately 560,000 tonnes of zinc in
concentrate. Lead production is expected to be approximately 120,000 tonnes of
metal contained in concentrate. Capital expenditures for 2008 are planned at
US$67 million, including US$25 million on tailings dams and the balance on
sustaining capital projects.
WATER DISCHARGE PERMIT
In the third quarter of 2007, the US Environmental Protection Agency (EPA)
withdrew, for procedural reasons, a recently issued renewal of the Red Dog
mine's water discharge permit, in the face of an appeal of the permit by a
local community group and several environmental organizations. As a result, the
permit renewal is expected to form part of the review and approval of a
Supplemental Environmental Impact Statement (SEIS). The SEIS will focus on the
permit renewal and impacts from mining of the Aqqaluk deposit. The Aqqaluk
deposit is the next ore body scheduled to be developed by Red Dog and necessary
authorizations must be in place prior to 2010 to ensure continuous operation of
the mine at current production levels.
Pending approval of the SEIS and the issuance of the renewal permit, Red Dog
will continue to operate under its existing water discharge permit. The mine's
discharges are in compliance with the criteria established under the withdrawn
water discharge permit, which the EPA determined to be fully protective of the
environment. The previous permit, which was issued in 1998 and modified in
2003, is now back in effect and contains end-of-pipe limitations on total
dissolved solids (TDS) that the mine cannot meet on a sustained basis. TDS are
non-toxic salts created as a result of the water treatment process to eliminate
metals from the mine's discharge water. The largest constituent of this TDS is
gypsum.
In addition to treating mill effluent and runoff from areas disturbed by
mining, Red Dog collects and treats all areas where naturally occurring acidic
drainage has traditionally impacted water quality. As a result, water quality
has improved and fish now spawn in areas where pre-mining conditions caused
fish mortality.
We are working with NANA and the EPA to ensure that the mine can discharge
sufficient water to maintain a reasonable water balance in the tailings
impoundment and that the mining of Aqqaluk is not delayed. A group of technical
experts are reviewing the entire water treatment and discharge system with the
objective of addressing the TDS issue and the concerns of the appellants.
However, there can be no assurance that past and ongoing violations of the
existing permit will not result in other civil claims or appeals that could
delay the mining of Aqqaluk beyond 2010.
OTHER ZINC MINES
Our 100% owned Pend Oreille mine, located in northeastern Washington State,
produces zinc and lead concentrates, which are sold to our Trail smelter 80
kilometres to the north.
Mine production in 2007 was 28,800 tonnes of zinc and 4,200 tonnes of lead
compared with 34,200 tonnes of zinc and 5,100 tonnes of lead in 2006. Zinc
production in 2007 was 5,400 tonnes lower than 2006, primarily as a result of
the implementation of a revised ground control plan that impacted ore
production and mining lower grade ore zones.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 21
The mine recorded a $6 million operating loss in 2007 compared with a record
operating profit of $38 million last year due mainly to lower production,
higher operating costs and $4 million of negative price adjustments.
Ore grades improved late in 2007 and are forecast to improve further in 2008.
Although the mine continues to contribute positive cash flow and is an
important supplier of concentrate to our Trail operations, it is not expected
to generate profits after depreciation and amortization charges during the
remainder of its life at current zinc prices. Accordingly, we wrote down the
mine's assets by $31 million in the fourth quarter of 2007 to $41 million.
The Lennard Shelf operation is located in the Kimberley region of Western
Australia, 400 kilometres east of Broome and 2,600 kilometres north of Perth.
We and Xstrata plc each own 50% of the operation through Lennard Shelf Pty Ltd.
Since the mine achieved commercial production in April 2007, our 50% share of
Lennard Shelf's operating loss was $4 million.
The operation was on care and maintenance from October 2003 until April 2006
when a decision was made to restart the Pillara mine. Production began in the
first quarter of 2007 and the first shipments occurred in the second quarter of
the year.
Our share of the mine's operating loss in 2007 was mainly a result of lower
than expected production levels and higher unit operating costs. Mill
throughput and recoveries were very close to plan in 2007, but zinc production
was well below plan due to lower ore grades. Access to the main mining area in
Pillara South was delayed due to a water-bearing structure that was encountered
during development. As a result, underground production was supplemented with
lower grade material in the remnant areas. Negative price adjustments of $5
million also negatively impacted operating results.
As a result of lower production levels and higher than expected unit operating
costs, we are reviewing alternatives for the mine, including various cost
reduction initiatives and a shortening of its life. This review is expected to
be complete in the first quarter of 2008. However, we do not expect to recover
the carrying values of the mine assets and as a result, we wrote down the
mine's assets by $12 million in the quarter.
ZINC EXPLORATION AND DEVELOPMENT PROJECTS
In 2007, we spent $20 million exploring on our zinc exploration projects,
representing 19% of our total exploration expense.
[GRAPHIC OMITTED - PIE CHART]
The spending in 2007 was directed towards greenfields exploration. The two main
projects were the Noatak property in the Red Dog district in Alaska and our
program in the Irish Midlands. Drilling on both Noatak and the Irish Midlands
intersected encouraging sulphide intervals that warrant additional drilling in
2008. We have also acquired a large land position in northern Queensland that
is prospective for zinc. Other early stage zinc projects are in Australia,
China and Peru.
Our Product Technology Centre (PTC) in Mississauga, Ontario, supports our zinc
sales efforts by developing and marketing galvanizing technologies to our zinc
customers and providing ongoing technological support. In addition, the group
also supports the zinc market through research and development of zinc-related
batteries and stewardship through efforts to decrease the thickness of
galvanizing coatings while increasing their corrosion resistance.
In lead, the battery technology group at PTC develops and markets technologies
that improve the manufacture of lead-acid batteries and also decrease the
amount of lead in the battery while maintaining performance. Part of this
program is done in collaboration with our wholly owned subsidiary H. Folke
Sandelin AB in Sweden. Sandelin also develops and markets continuous extruders
that apply lead sheaths to power cables, a business that is currently expanding
because of the increased demand for down-hole cables in the oil and gas sector.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 23
COAL
2007 PRODUCTION - 10.6 MILLION TONNES, DIRECT AND INDIRECT SHARE
OUR COAL DIVISION includes our 40% interest in the Elk Valley Coal Partnership
and our 19.95% investment in the Fording Canadian Coal Trust, which owns 60% of
Elk Valley Coal, giving us a 52% direct and indirect interest in the
partnership.
Revenues Operating Profit EBITDA
------------------------ ------------------------ ------------------------
($ in millions) 2007 2006 2005 2007 2006 2005 2007 2006 2005
---- ---- ---- ---- ---- ---- ---- ---- ----
Elk Valley Coal $951 $1,177 $1,173 $209 $444 $512 $246 $478 $540
Partnership
Fording Canadian
Coal Trust - - - - - - 43 48 76
Corporate
and other - - (2) - - - 6 - 19
$951 $1,177 $1,171 $209 $444 $512 $295 $526 $635
---- ------ ------ ---- ---- ---- ---- ---- ----
In 2007, our coal division accounted for 15% of our revenue and 8% of our
operating profit.
[GRAPHIC OMITTED -- CHARTS]
MARKETS
The demand for hard coking coal, which is the highest quality of metallurgical
coal, is closely correlated with the steel production of integrated steel
mills. Since 2003, global steel production, and therefore the demand for hard
coking coal, has grown dramatically, driven primarily by rapid
industrialization and economic development in the BRIC (Brazil, Russia, India
and China) economies. This is expected to bring increased volatility to the
global steel and hard coking coal markets in the future because these countries
may experience sudden and irregular swings in their economic development.
China, in particular, has a key influence on the global steel and hard coking
coal markets. The massive construction boom in China has required it to
dramatically increase its domestic steel production capacity. China does not
currently import a significant amount of seaborne hard coking coal because the
requirements of its domestic steel mills can generally be met by Chinese coal
producers and imports from Mongolia. China is the world's largest producer of
metallurgical coal, but it does not currently export significant quantities
because domestic demand is so strong. However, an economic downturn in China
could potentially cause its exports of hard coking coal to increase in the
future.
Unlike most of our metal products, which are priced by reference to prices
determined by trading activity on metal exchanges, the prices of the majority
of metallurgical coal sales are settled through annual negotiations with
customers in the steel industry for the coal year running from April 1 to March
31, although there are some contracts that are based on other 12-month periods.
Because shipping schedules can delay delivery of annual contracted volumes
beyond the end of each coal year, the financial impact of the new prices
normally starts to take effect in the second quarter of a given year with the
full impact of new prices occurring in the third quarter. Depending on sales
volumes, this can contribute to volatility in quarterly earnings from our coal
operations.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 23
Contract negotiations with our customers for the 2008 coal year have not yet
been finalized, but current market sentiment and supply disruptions in
Australia accentuated by recent severe flooding conditions suggests that US
dollar coal prices may increase significantly over 2007 coal year prices.
ELK VALLEY COAL PARTNERSHIP
Elk Valley Coal operates five metallurgical coal mines in southeastern British
Columbia and one in west-central Alberta. It is the world's second-largest
exporter of seaborne hard coking coal, substantially all of which is ultimately
used in the production of steel. Our 40% share of Elk Valley Coal contributed
$209 million to our operating profits in 2007 compared with $444 million in
2006 and $512 million in 2005.
Elk Valley Coal's operating results, at the 100% level, are summarized in the
following table:
- -------------------------------------------------------------------------------
2007 2006 2005
- -------------------------------------------------------------------------------
PRODUCTION (000's tonnes) 22,561 21,790 25,679
SALES (000's tonnes) 22,677 22,614 24,124
AVERAGE SALES PRICE
US$/tonne $98 $113 $99
C$/tonne $105 $131 $125
OPERATING EXPENSES (C$/tonne)
Cost of product sold $42 $40 $33
Transportation $35 $37 $35
CAPITAL EXPENDITURES ($ millions) $77 $43 $198
OUR 40% SHARE OF OPERATING PROFIT ($ millions) (Note) $209 $444 $512
===============================================================================
Note: Results of Elk Valley Coal represent our 40% direct interest in Elk
Valley Coal commencing April 1, 2006, 39% from April 1, 2005 to March
31, 2006, and 38% from January 1, 2005 to March 31, 2005.
Coal sales volumes of 22.7 million tonnes in 2007 were similar to 2006 sales.
Average US dollar coal prices decreased approximately 13% to US$98 per tonne as
a result of lower prices for the 2007 coal year, which commenced April 1, 2007.
With the stronger Canadian dollar, our average Canadian dollar coal prices
decreased 20% to $105 per tonne.
The unit cost of product sold increased by 5% to $42 per tonne in 2007 compared
with $40 per tonne in 2006. Unplanned shutdowns and interruptions of production
in the first quarter of 2007 due to rail transportation problems caused unit
costs to be unusually high, which impacted our unit cost of product sold
throughout the year. Additional waste was moved in the first quarter in
response to the reduced production, which benefited strip ratios for the
balance of the year. As a result of the pre-stripping activities earlier in the
year, coal production volumes were higher during the latter part of the year,
which resulted in a reduction in fixed costs when calculated on a per unit
basis. Our operating costs were also affected by the labour contracts settled
in the second half of 2006 and higher prices for contract services, diesel
fuel, tires and other consumables.
Combined rail and port transportation costs in 2007 were $35 per tonne compared
with $37 in 2006. Lower contractual rail rates, which are variable in part with
lower average selling prices, were generally offset by increased vessel
demurrage costs due to inventory shortages at the ports, as well as higher
ocean freight rates.
In 2007, a five-year collective agreement was reached at Elk Valley's Cardinal
River mine. The new agreement expires on June 30, 2012 and with the settlement
of this agreement, all five of Elk Valley Coal's unionized mines are now
operating with multi-year contracts.
Elk Valley's capital spending in 2007 was $82 million, with $47 million on
mobile equipment, $9 million on wash plant projects and $20 million on tunnel
remediation, buildings and other projects.
Production in 2008 is expected to be approximately 24 million tonnes. Capital
expenditures for 2008 are expected to be approximately $200 million, with $130
million on mobile equipment, $37 million on the wash plants and $20 million on
development and permitting projects.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 24
FORDING CANADIAN COAL TRUST
We own 29.5 million units, or approximately 19.95% of the outstanding units of
Fording Canadian Coal Trust (Fording). We account for our investment in Fording
on an equity basis and its only significant asset is its 60% interest in Elk
Valley Coal. In 2007 we acquired 16.65 million units of Fording, representing
approximately 11.25% of the issued and outstanding units of Fording, from a
subsidiary of Ontario Teachers Pension Plan Board, for $599 million or $36 per
unit. 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 the transaction is
subsequently completed, or if we sell Fording units in either case at a price
in excess of C$36 per unit, we will pay the vendor such excess for the acquired
units.
In December 2007, Fording announced that it intended to explore strategic
alternatives to maximize value for its unitholders, which could include an
acquisition of all of its outstanding units by a third party, a sale of its
assets, including its interest in the Elk Valley Coal Partnership, a
combination, reorganization or similar form of transaction, or continuing with
its current business plan. As a result of Fording's initiative, we are
reviewing our options with respect to Fording and Elk Valley Coal to determine
if and how we might participate in any potential transaction in order to
maximize value for our shareholders. There can be no assurance that Fording's
process will result in any transaction, or that our interest in these two
entities will change in any manner should a potential transaction occur.
GOLD
2007 PRODUCTION - 285 THOUSAND OUNCES
Our gold division includes our 40% interest in the Pogo mine located southeast
of Fairbanks, Alaska, and our 50% interest in the Hemlo operations located in
northwestern Ontario. It also includes our 78.8%-owned Morelos project in
Mexico, our 60% owned Lobo-Marte property in Chile and various other
exploration properties.
Revenues Operating Profit EBITDA
------------------------ ------------------------- ------------------------
($ in millions) 2007 2006 2005 2007 2006 2005 2007 2006 2005
---- ---- ---- ---- ---- ---- ---- ---- ----
Pogo $59 - - $ (1) - - $16 $ - $ -
Hemlo 123 143 127 (4) 7 9 20 31 30
Corporate - - - - - - (46) (24) (8)
---- ---- ---- ---- -- -- ----- --- ---
$182 $143 $127 $ (5) $7 $9 $ (11) $ 7 $22
==== ==== ==== ==== == == ===== === ====
MARKETS
The London PM gold fix averaged US$697 per troy ounce in 2007, up 15% from the
2006 average and has reached historic highs in February 2008.
Growth in gold as an investment continues to be the main driver of the strong
prices. A falling US dollar, global economic uncertainty, higher oil prices and
fears of inflation have all contributed to gold's ascent. Exchange Traded Funds
(ETFs) have allowed investors easy access to gold investing. GFMS Ltd., a
precious metals consultancy firm, estimates that ET F holdings of gold have
rose 39% in 2007.
Global demand from the jewellery sector rose by 5.5% in 2007 following a 16%
decline in 2006. GFMS estimates that jewellery fabrication in China increased
18% in 2007 and expects continued growth in 2008.
Our production, sales volumes and operating profits from our gold operations
are summarized in the accompanying charts. In 2007, our gold operations
accounted for 3% of our revenue and incurred a $5 million operating loss.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 25
[GRAPHIC OMITTED -- CHARTS]
POGO
The Pogo gold mine is located 145 kilometres southeast of Fairbanks, Alaska. It
is a joint venture with Sumitomo Metal Mining Co. Ltd. (51%) and Sumitomo
Corporation (9%). Teck Cominco Limited has a 40% interest in the mine and is
the operator.
The mine achieved commercial production in April 2007 and since then, our 40%
share of Pogo's operating loss was $1 million. Pogo's operating results, at the
100% level, are summarized in the following table:
----------------------------------------------------------------
2007
----------------------------------------------------------------
Tonnes milled (000's) 649
Grade (grams/tonne) 14.7
Mill recovery (%) 84.4
Production (000's ounces) 260
Sales (000's ounces) 233
Cash operating cost per ounce (US$) $520
Capital expenditures (US$ millions) $15
Our 40% share of operating profit ($ millions) $ (1)
================================================================
Construction of the Pogo mine was completed in the first quarter of 2006 and
the installation of the underground ore conveying system was completed in the
second quarter, at a total cost of US$350 million. The Pogo mine commenced
operations in January 2006, with the first gold bar poured in February 2006.
Production in 2006 was limited by tailings filtration capacity, bottlenecks in
the paste backfill system and a construction accident in October that severely
damaged electrical systems at the mine site, resulting in a total loss of
electrical power that curtailed the mill operations until mid-December of that
year. A third filter press was commissioned in January 2007 and modifications
to the filtered tailings handling system to improve paste backfilling were
completed in the first quarter of 2007. These two projects cost US$21 million.
Pogo's gold production in 2007 was not at full capacity due to the construction
and commissioning of the filter projects in the first quarter and poor
equipment availability that impacted online time and throughput rates. The ore
at Pogo is extremely abrasive and continuous improvement projects are focused
on improving equipment reliability. The mine made good progress reducing
dilution by using smaller equipment in narrow ore headings during the second
half of 2007. Mill recoveries are improving and we are working on various
improvement projects, including automation of the flotation circuit that are
expected to be completed in the first half of 2008. Operating costs are
expected to improve somewhat in 2008, but will remain high over the next two
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 26
years due to the large number of optimization projects and the need to develop
additional areas underground to sustain planned production levels.
Gold sales of 233,000 ounces in 2007 were lower than production due to the
timing of shipments, and the average realized gold price was US$717 per ounce.
Efforts to reduce in-process gold inventory are ongoing, with gold sales
expected to exceed production in the first quarter of 2008. Gold production is
expected to be between 340,000 and 360,000 ounces in 2008.
We capitalized $14 million of Pogo's operating losses (2007 - $2 million; 2006
- - $12 million) incurred during the period from start-up in January 2006 until
commercial production was achieved in April 2007 as part of the mine's
development costs.
HEMLO
We have a 50% interest in the Williams and David Bell gold mines located
adjacent to each other approximately 350 kilometres east of Thunder Bay in
northwestern Ontario. We jointly operate the mines with Barrick Gold
Corporation.
Our 50% share of Hemlo's operating loss was $4 million in 2007 compared with
operating profits of $7 million in 2006 and $9 million in 2005.
Hemlo's operating results at the 100% level are summarized in the following
table:
- --------------------------------------------------------------------------------
2007 2006 2005
- --------------------------------------------------------------------------------
Tonnes milled (000's) 3,036 3,355 3,503
Grade (grams/tonne) 3.7 4.0 4.4
Mill recovery (%) 94.1 94.2 93.7
Production (000's ounces) 337 410 460
Sales (000's ounces) 330 413 460
Cash operating cost per ounce (US$) $568 $465 $336
Capital expenditures ($ millions) $12 $16 $15
Our 50% share of operating profit (loss) ($ millions) $(4) $7 $9
================================================================================
A backfill failure underground at the Williams mine early in 2007 resulted in
the rescheduling of higher grade stopes to future years. The operation was also
incurring higher than expected unit costs due to the lower production. As a
result, a strategic review of the life of mine plan and operating cost
structure was completed in 2007. The review indicated a lower production
profile going forward, with declining head grades as underground ores are
becoming depleted and more low-grade open-pit ore is mined.
The higher grade David Bell mine is scheduled for closure in early 2010, while
both the open pit and underground operations at Williams are expected to
continue for 5 to 6 years if current resources in the underground C-zone are
successfully converted into reserves.
Definition and development of the underground Interlake region at Williams is
ongoing with production from this area expected in early 2009 assuming the
resource is confirmed by the drill program. With lower production and less
development activities planned going forward, the mine implemented cost-cutting
measures that included a work force reduction of 150 positions, including
contractors, and an overall reduction in operating costs by $60 to $70 million
per annum in order to stabilize future unit costs near current levels.
In 2007, a three-year collective agreement was reached with the union employees
at the David Bell mine. The new agreement expires in October 2010.
Gold production of 337,000 ounces was significantly less than previous years,
while cash operating costs increased to US$568 per ounce compared with US$465
per ounce in 2006, mainly due to lower production offset by the cost reduction
program that was implemented. The average realized gold price in 2007 was
US$694 per ounce compared with US$600 per ounce in 2006, although the effect of
the stronger Canadian dollar partly offset the higher US dollar gold price.
Production in 2008 is expected to be approximately 250,000 ounces of gold, down
26% from 2007, with our 50% share being 125,000 ounces. Capital expenditures
for 2008 are planned at $23 million, with approximately $9 million on equipment
and $14 million on mine services and development projects.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 27
GOLD EXPLORATION AND DEVELOPMENT PROJECTS
In 2007, we spent $22 million exploring on our gold projects, representing 21%
of our total exploration expense.
[GRAPHIC OMITTED -- PIE CHART]
Our 2007 spending was targeted on gold programs in Mexico, Canada, the US,
Australia and Turkey. In Turkey, we earned back to a 60% interest in the Agi
Dagi and Kirazli projects. Plans for 2008 include drilling several high
priority projects.
Pre-feasibility work continues on the Morelos gold project in Mexico. Roughly
32,000 metres of infill drilling on the main zones of mineralization was
completed during the year. In addition, environmental baseline studies and
social and community engagement programs are underway, and scoping level
engineering studies have been initiated to look at possible infrastructure
options. During the latter part of 2007 road access to a small part of the
project was illegally blocked by local interests. Discussions continue in an
attempt to resolve the access issue. Roughly 23,000 metres of drilling is
planned in early 2008 in order to complete an updated resource estimate. A
decision on further advancement of the project is anticipated in the second
half of 2008.
Near the end of the year we earned back to a 60% ownership interest in three
gold projects in western Turkey; Agi Dagi, Kirazli, and Halilaga. Agi Dagi and
Kirazli are projects with previously known resources; Halilaga is a potentially
new copper-gold discovery. Agi Dagi and Kirazli will see limited work in 2008,
mainly to finish target testing, confirm resource estimates, metallurgical
characteristics, and project economics. Drilling on Halilaga returned very
encouraging intersections, including 100 metres of 1% copper and 1 gram per
tonne of gold and 320 metres of 0.4% copper and 0.4 grams per tonne of gold.
More than 10,000 metres of drilling is planned for 2008.
A study to re-evaluate the potential economic viability, water availability and
likely environmental and permitting issues of our 60%-owned Lobo-Marte gold
property in Chile was initiated in 2007. The study, which is based on the 1998
feasibility study scope parameters, should be completed later this quarter but
in the current robust gold market the preliminary results appear encouraging.
ENERGY
1 BILLION BARRELS OF RECOVERABLE BITUMEN
Our energy division includes our 20% interest in the Fort Hills Energy Limited
Partnership, which is developing the Fort Hills oil sands project located in
northern Alberta and our 50% interest in various oil sands leases that we
jointly own with UT S Energy Corporation (UTS).
These oil sands projects are expected to be long-life assets with limited
exploration risk, use conventional technology, leverage our core skills of
large-scale truck and shovel mining operations, provide us with strong partners
and are located in a politically stable jurisdiction. The assets in our energy
division are expected to be significant contributors to our future revenues,
operating profits and cash flows.
FORT HILLS PROJECT
The Fort Hills oil sands project includes approximately 24,000 contiguous
hectares of oil sands leases located about 90 kilometres north of Fort McMurray
in northern Alberta and an upgrader that will be located in Sturgeon County,
just north of Edmonton. We hold a 20% interest in the Fort Hills Energy LP (the
Fort Hills Partnership), which owns the Fort Hills project with 20% being held
by UTS and the remaining 60% held by Petro-Canada, who is the operator of the
project.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 28
In 2005, we acquired a 15% interest in the Fort Hills Partnership by agreeing
to fund 34% of the first $2.5 billion of project expenditures, or $850 million,
and our 15% pro rata share thereafter. In 2007, we and Petro-Canada each
subscribed for an additional 5% interest in the Fort Hills Partnership. We will
earn our additional interest by funding a further $375 million of the Fort
Hills Partnership expenses beyond the existing earn-in obligations. We will
satisfy our $375 million commitment by contributing 27.5% of the Fort Hills
Partnership expenditures after project spending reaches $2.5 billion and before
project spending reaches $7.5 billion, which is expected to occur in late 2009
or early 2010. Thereafter we will fund our 20% pro rata share of project
spending. Our 20% interest in the Fort Hills project represents 806 million
barrels of recoverable bitumen based on the Fort Hills Partnership's December
31, 2007 best estimate of the contingent bitumen resource of 4.03 billion
barrels of recoverable bitumen, with a low estimate of 3.37 billion barrels and
a high estimate of 4.38 billion barrels, all on a 100% basis.
The Fort Hills Partnership is proceeding with the Front End Engineering and
Design (FEED) stage of project development, which is expected to be complete
around mid-2008, and the Environmental Impact Assessment for the upgrader. The
FEED process is expected to produce a definitive cost estimate and the basis on
which the final development decision on the project will be made. The Fort
Hills project is expected to be developed in two phases, with the first phase
producing 160,000 barrels per day of bitumen in late 2011 to be upgraded to
140,000 barrels per day of synthetic crude oil commencing in the second quarter
of 2012. The preliminary capital cost estimate for the mine and upgrading
components for the first phase is $15.2 billion, excluding third-party capital.
The second phase is expected to double capacity to 280,000 barrels per day of
synthetic crude. That phase should be completed by 2014 with additional capital
costs estimated at $13 billion, also excluding third-party capital.
We expect to receive regulatory approval for the upgrader in mid-2008 and
sanction the project in the second half of the year.
In 2007, our spending on the Fort Hills project was $119 million, bringing our
cumulative spending to $233 million at the end of 2007. Our share of funding
for the project in 2008, including our earn in commitments, is expected to be
approximately $760 million.
TECK COMINCO/ UTS JOINT VENTURE
We have jointly acquired oil sand leases located east and north of the Fort
Hills project totaling approximately 285,000 acres in three general areas. To
date, we have spent $219 million for our 50% share of the acquisition and
exploration costs of these leases. We expect to spend approximately $40 million
for our share of studies and exploration drilling planned for 2008.
The Lease 14 area consists of approximately 7,150 acres of oil sands leases
immediately west of the Fort Hills project and contains a contingent resource
estimate of approximately 350 million barrels of bitumen defined by 124 core
holes. The lease has the potential to support a 50,000 barrel per day bitumen
operation. Further engineering and environmental studies are planned for 2008.
The Lease 311 area is located 10 kilometres to the north of Lease 14 and
consists of approximately 150,000 acres of oil sands leases. 68 core holes have
been drilled on the southern portion of this area. A further 300 core holes,
engineering and environmental studies are planned for 2008.
The third lease area is north of the Fort Hills project on the east side of the
Athabasca River and consists of three lease blocks totaling approximately
126,000 acres of oil sand leases. Preliminary exploration work is planned for
2008.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 29
CORPORATE
Our corporate division includes all of our exploration and development projects
not included in our other divisions, our business development activities and
the activities undertaken by our various corporate groups that provide support
to all of our divisions.
EXPLORATION AND DEVELOPMENT PROJECTS
In 2007, we spent approximately $9 million exploring on our diamond projects,
$8 million on nickel projects, and representing 16% of our total exploration
expense.
[GRAPHIC OMITTED -- PIE CHART]
NICKEL
Approximately 7% of the exploration budget went towards nickel exploration,
mainly on laterite deposits in Brazil and sulphide deposits in Canada. At
December 31, 2007 we had earned a 54% interest in the Santa Fe/Ipora nickel
project in Brazil. Scoping level studies on that project will continue into
2008. Nickel exploration in Canada is focused in Labrador and Ontario.
DIAMONDS
Approximately 9% of our exploration expense was on one diamond project in
northern Canada. Four new kimberlite occurrences were drilled on the Darby
project. Complete results of 2007 drilling are expected in early 2008.
Depending on results, additional drilling may be undertaken in 2008.
In 2006, we invested in Tahera Diamond Corporation (Tahera). Tahera's primary
asset is its wholly-owned Jericho Diamond Mine located in the Nunavut Territory
in northern Canada. Due to the strengthening of the Canadian dollar, rising oil
prices, the relatively modest increases in diamond prices and ongoing
operational and production issues, the Jericho mine experienced financial
difficulties in 2007. As a result, we wrote off our investment in Tahera in
2007.
OTHER COMMODITIES
In 2006, we spent US$25 million to acquire approximately 7.6 million common
shares of Nautilus Minerals Inc. (Nautilus) and warrants to acquire an
additional three million shares at US$5 per share before June 1, 2008. Nautilus
is the first company to commercially explore the ocean floor for gold, copper,
zinc and silver in seafloor massive sulphide deposits. We also agreed to fund
US$12 million in research and development related to subsea exploration and
tenure acquisition costs in an area of interest consisting of six country areas
in the South Pacific Ocean. Exercising the warrants to acquire the three
million additional shares gave us an option to acquire the right to form joint
ventures with Nautilus in selected areas within the area of interest by
incurring US$25 million in exploration expenditures in each selected area
within two years of the selection date to acquire an initial 40% or 50%
interest, depending on the country selected. By incurring expenditures in
excess of the US$25 million, we may earn a 50.1% or 60% interest in specific
projects, depending on the country selected.
In late 2007, we exercised our warrants and acquired an additional three
million common shares of Nautilus for US$15 million, increasing our ownership
of Nautilus to approximately 7.2%. We also agreed with Nautilus that we may use
the aforementioned US$12 million to conduct and manage a ship-based exploration
program in 2008 in one or more of four designated areas in Papua New Guinea,
Tonga and New Zealand (the Areas), excluding a 17,500-squarekilometre tenement
package in Papua New Guinea and certain exploration licenses and applications
in Tonga and Fiji that were 100% owned and acquired by Nautilus prior to
October 20, 2006. We have until December 31, 2008 to select specific projects
in various countries in which we intend to acquire an interest.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 30
TECHNOLOGY
Our technology groups at our Applied Research and Technology (ART) centre in
Trail and CESL in Richmond, British Columbia, support our efforts in developing
and testing technologies for new growth projects, and by providing technology
transfer to assist with continuous improvement and value creation at our
operations.
ART has expertise in applied mineralogy, mineral processing and environmental
technology. These skills are also used to characterize new ore bodies and
verify existing, or provide alternative processing options. Currently much of
this work is focused on our oil sands projects, nickel laterite projects in
Brazil and the Aqqaluk ore body at Red Dog. Continuous improvement projects are
developed in collaboration with operations where value is created through
reduced costs, improved recovery, increased concentrate grade and other overall
efficiencies. Projects are underway at Antamina, the Elk Valley coal mines,
Pogo, Red Dog and Trail. Environmental technology is used to develop innovative
solutions to mitigate potential impacts at our operations. Recent work has
focused on water treatment at Red Dog and a collaborative program to determine
the acid rock drainage potential at Antamina.
Our proprietary hydrometallurgical technology has been developed by CESL to
provide an environmentally superior method for treating copper, copper-gold and
nickel-copper concentrates, particularly those that present challenges to the
conventional smelting route. Our current efforts are focused on the ongoing
construction and commissioning of Vale's 10,000 tonne per year CESL copper
plant in Carajas, Brazil, and on the development and testing of an appropriate
flow sheet to potentially process a bulk copper-nickel concentrate from our
Mesaba property. We continue to make process improvements, particularly in gold
and nickel, and pursue new opportunities where the CESL process offers an
economic advantage over the sale of concentrate due to metallurgical issues or
other logistical problems.
We also actively support a wide range of external research projects, many of
which are levered through collaborative programs that are organized by AMIRA
International and other similar research brokers or developed directly with
universities. In some cases, individual research projects are sponsored on a
one-on-one basis with professors and students. We are also active participants
in university-based research and educational programs, including chairs,
research groups and industry-faculty advisory committees. Our involvement with
universities across North America and elsewhere provides critical interaction
with potential employees.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 31
FINANCIAL OVERVIEW
FINANCIAL SUMMARY
- --------------------------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE DATA) 2007 2006 2005
- --------------------------------------------------------------------------------------------------
REVENUE AND EARNINGS
Revenue
$6,371 $6,539 $4,415
Operating profit
$2,738 $3,561 $1,962
EBITDA $2,615 $3,841 $2,176
Net earnings from continuing operations $1,661 $2,395 $1,345
Net earnings $1,615 $2,431 $1,345
CASH FLOW
Cash flow from operations $1,719 $2,905 $1,626
Capital expenditures $571 $391 $326
Investments $3,911 $272 $220
BALANCE SHEET
Cash and temporary investments $1,408 $5,281 $3,084
Total assets
$13,573 $11,447 $8,809
Long-term debt, including current portion $ 1,523 $1,509 $1,721
PER SHARE AMOUNTS
Net earnings from continuing operations
Basic $ 3.85 $5.68 $3.11
Diluted $ 3.83 $5.52 $3.11
Net earnings
Basic $ 3.74 $5.77 $3.31
Diluted $ 3.72 $5.60 $3.11
Dividends declared per share $ 1.00 $1.00 $0.40
==================================================================================================
Our revenues and earnings depend on prices for the commodities we produce, sell
and use in our production processes. Commodity prices are determined by the
supply of and demand for raw materials, which are influenced by global economic
growth. We normally sell the products that we produce at prevailing market
prices or at prices negotiated on annual contracts. Prices for these products,
particularly for exchange-traded commodities, can fluctuate widely and that
volatility can have a material affect on our strong financial results.
Recent economic conditions and historically high commodity prices have led to
rapid growth in global mining activities, which has created strong demand for
skilled labour, mining equipment and related operating supplies that exceed
supply. This has and may continue to lead to increased capital and operating
costs at our operations and development projects. In addition, if labour,
equipment or operating supplies cannot be procured on a timely basis, our
annual operating and future expansion and development activities could be
negatively affected.
We report our financial results using the Canadian dollar and accordingly, our
operating results and cash flows are affected by changes in the Canadian dollar
exchange rate relative to the currencies of other countries. Exchange rate
movements, particularly as they affect the US dollar, can have a significant
impact on our results as a significant portion of our operating costs are
incurred in Canadian and other currencies and most revenues are denominated in
US dollars.
Our net earnings for the year ended December 31, 2007, were $1.6 billion or
$3.74 per share compared with record net earnings of $2.4 billion or $5.77 per
share in 2006 and $1.3 billion or $3.31 per share in 2005.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 32
Our earnings in 2007 were affected by a $33 million equity loss ($50 million
pre-tax) related to our investment in the Galore Creek project where mine
construction was suspended due to escalating capital costs and a number of
asset writedowns totalling $51 million after taxes. The equity loss represents
our after-tax share of the Galore Creek partnership's estimated demobilization
costs. The asset writedowns relate to our investment in Tahera Diamond
Corporation, which was written down due to the severe financial difficulties
facing the company. Due to difficult mining conditions and low ore grades that
impact their ongoing profitability, we also wrote down the property, plant and
equipment at our Pend Oreille and Lennard Shelf zinc mines. We also had a $59
million cumulative foreign exchange loss related to the repatriation of US
dollars to Canada to provide funds for our acquisition of Aur. With new
accounting standards related to financial instruments, we had a $46 million
loss on our contingent receivable related to the sale of our Cajamarquilla
refinery compared with a $36 million gain in 2006, which was determined using a
previously applicable accounting standard.
In addition, we recorded after-tax negative settlement adjustments of $66
million during 2007 compared with $113 million of positive adjustments in 2006.
An $80 million gain on the reduction of future tax liabilities due to the
reduction in federal income tax rates in Canada and after-tax gains of $36
million on asset sales partially offset these effects.
Our 2006 net earnings included after tax gains of $126 million on the sale of
investments, including $103 million on the sale of our investment in Inco. Net
earnings in 2005 included gains on the sale of investments and assets totalling
$65 million and $94 million in favourable tax adjustments.
The table below shows the impact of these items on our earnings.
- -----------------------------------------------------------------------------------------------
2007 2006 2005
- -----------------------------------------------------------------------------------------------
NET EARNINGS AS REPORTED $1,614 $2,431 $1,345
ADD (DEDUCT) THE AFTER-TAX EFFECT OF:
Loss (earnings) from discontinued operations 46 (36) -
Negative (positive) final pricing adjustments
On prior year's sales 56 (42) (44)
On current year's sales 10 (71) (22)
Realization of cumulative translation adjustment loss 59 - -
Asset write downs and equity loss 84 -
Tax rate adjustments (63) (26) (94)
Gain on disposition of our investment in Inco - (103) -
Asset sales and other (36) (23) (65)
- -----------------------------------------------------------------------------------------------
156 (301) (225)
ADJUSTED NET EARNINGS $1,754 $2,130 $1,120
================================================================================================
Adjusted net earnings were $1.8 billion ($4.06 per share) compared with $2.1
billion ($5.06 per share) earned in 2006. Earnings were lower in 2007 primarily
as a result of lower zinc prices in the last half of the year, lower coal
prices, the strengthening of the Canadian dollar, lower production at Highland
Valley Copper as it moves through its mine life extension program, and the
higher royalty expense at our Red Dog zinc mine. The US dollar averaged C$1.07
over the year compared with C$1.13 a year ago. The stronger Canadian dollar
reduced the profit margin for our Canadian operations, particularly Highland
Valley Copper, Trail and Elk Valley Coal, and the value of the profits we earn
from operations that we account for using the US dollar, such as Red Dog,
Antamina and Quebrada Blanca. This reduced net earnings by approximately $160
million.
Our earnings from coal operations are particularly sensitive to fluctuations in
the Canadian/US dollar exchange rate. Although costs remained relatively
constant compared with last year, the coal price averaged US$98 per tonne
compared with US$113 per tonne in the previous year. Combined with the effect
on operating margins from the stronger Canadian dollar, our 40% direct share of
operating profits from the Elk Valley Coal Partnership declined from $444
million in 2006 to $209 million in 2007.
Other significant factors affecting earnings in 2007 included the effects of
the month-long maintenance shutdown of the KIVCET lead smelter at our Trail
operations, lower production and sales volume at Highland Valley Copper and
production disruptions at Antamina due to electrical motor problems in the main
grinding mill during November and December.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 33
Net earnings in 2006 increased substantially over 2005 due mainly to
significantly higher copper and zinc prices, with the average LME prices
increasing by 83% and 137% respectively over the previous year. The average
coal price in 2006 of US$113 per tonne was 14% higher than the US$99 per tonne
realized in 2005. The weaker US dollar partially offset these higher commodity
prices, with an average Canadian/US dollar exchange rate of 1.13 in 2006
compared with 1.21 in 2005.
Copper sales volumes were down 12,000 tonnes in 2007 compared with 2006 due to
lower production at Highland Valley, resulting from our mine life extension
plan and Antamina mining a higher proportion of zinc bearing ore in the year.
The reductions at Highland Valley and Antamina were partially offset by the
addition of copper sales from the three Aur mines acquired in August 2007.
Zinc sales volumes were 10% higher in 2007 than in 2006. Increases came from
higher production at Red Dog due to improvements in ore throughput, a near
doubling of zinc production at Antamina due to the mix of ores being mined, the
new zinc production from the Lennard Shelf mine that achieved commercial
production in April 2007, and the Duck Pond mine acquired in August.
Metallurgical coal sales volumes were up slightly from 2006 and gold sales from
our mining operations were 5% higher than 2006 levels.
Sales volumes of copper, zinc, lead and gold from mine operations in 2006 were
similar to 2005, except coal sales volumes, which were 4% lower. Sales of
refined zinc in 2006 increased by 27% over 2005 as a 79-day strike at Trail
reduced production and sales in 2005. Molybdenum sales in 2006 were 25% lower
than 2005 as a result of lower production due to lower ore grades.
Cash flow from operations in 2007, before changes in non-cash working capital
items, was $2.0 billion compared with $2.6 billion in 2006 and $1.6 billion in
2005. The changes in cash flow from operations in the last two years were due
mainly to the volatility in commodity prices and the strengthening of the
Canadian dollar.
Cash flow from operations, after changes in non-cash working capital items,
less scheduled debt repayments, dividends and sustaining capital expenditures,
was $1.1 billion in 2007 compared with $2.1 billion in 2006 and $1.3 billion in
2005. At December 31, 2007, our cash and temporary investments were $1.4
billion. Long-term debt was $1.5 billion and our total debt to debt-plus-equity
ratio was 16% compared with 19% at December 31, 2006.
OPERATING PROFIT
Our operating profit is made up of our revenues less the operating,
depreciation and amortization expenses at our producing operations. Income and
expenses from our business activities that do not produce commodities for sale
are included in our other income and expenses.
Our principal commodities are copper, zinc, metallurgical coal and gold, which
accounted for 28%, 31%, 15% and 4% of revenues respectively in 2007. Molybdenum
is a significant by-product of our copper operations, and lead is a significant
by-product of our zinc operations, respectively accounting for 3% and 10% of
our 2007 revenue. In addition, our Antamina copper mine produces a significant
volume of zinc concentrate. Other products include silver, various specialty
metals, chemicals and fertilizers, and electricity and in total accounted for
9% of our revenue in 2007.
[GRAPHIC OMITTED -- CHARTS]
Our revenues are affected by sales volumes, which are determined by our
production levels and demand for the commodities we produce, commodity prices
and currency exchange rates. Average commodity prices and the Canadian/US
dollar exchange rate are presented in the table below.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 34
AVERAGE METAL PRICES AND EXCHANGE RATES
US$ CDN$
--------------------------------------- ------------------------------------------
2007 % CHG 2006 % CHG 2005 2007 % CHG 2006 % CHG 2005
- --------------------------------------------------------------------------------------------------------------------------
Copper (LME Cash-$/pound)
3.23 +6% 3.05 +83% 1.67 3.46 - 3.45 +71% 2.02
Molybdenum (Platts*-$/pound)
30 +20% 25 -22% 32 32 +14% 28 -28% 39
Zinc (LME Cash-$/pound)
1.47 -1% 1.49 +137% 0.63 1.57 -7% 1.68 +121% 0.76
Lead (LME Cash-$/pound)
1.17 +98% 0.59 +34% 0.44 1.25 +87% 0.67 +26% 0.53
Coal (realized-$/tonne) 98 -13% 113 +14% 99 105 -20% 131 +7% 120
Gold (LME PM Fix-$/ounce) 697 +15% 604 +36% 445 746 +9% 683 +27% 538
==========================================================================================================================
Exchange rate (Bank of Canada)
US$1 = Cdn$ 1.07 -5% 1.13 -7% 1.21
Cdn$1 = US$ 0.93 +6% 0.88 +6% 0.83
=========================================================================
* Published major supplier selling price in Platts Metals Week.
Demand for all our major products was above historic trends in 2007, with
strong global economic growth led by China.
Overall, our consolidated revenues were $6.4 billion in 2007 compared with $6.5
billion in 2006 and $4.4 billion in 2005. Our 2007 revenues increased by $296
million as a result of just over four months of revenue from the three mines
acquired through our acquisition of Aur. The addition of the Pogo and Lennard
Shelf operations added $106 million to revenues since achieving commercial
production in April 2007. The strengthening of the Canadian dollar decreased
our revenues by $340 million, while lower commodity prices reduced revenues by
$106 million. In addition, lower sales volumes from Highland Valley Copper,
partially offset by increased volumes at Red Dog, reduced revenues by $124
million.
At December 31, 2006, outstanding receivables included 171 million pounds of
copper provisionally valued at US$2.86 per pound and 306 million pounds of zinc
provisionally valued at US$1.94 per pound. During 2007, the copper receivables
were settled at an average final price of US$2.83 per pound and zinc
receivables were settled at an average final price of US$1.62 per pound,
resulting in negative after-tax final pricing adjustments of $56 million in the
year compared with positive adjustments of $42 million in 2006. At December 31,
2007, outstanding receivables included 180 million pounds of copper
provisionally valued at an average of US$3.04 per pound, 296 million pounds of
zinc valued at an average of US$1.05 per pound and 74 million pounds of lead
provisionally valued at an average of US$1.15 per pound.
Our operating costs include all of the expenses required to produce our
products, such as labour, energy, operating supplies, concentrates purchased at
our Trail refining and smelting operation, royalties, and marketing and
distribution costs required to sell and transport our products to various
delivery points. Due to the geographic locations of many of our operations, we
are highly dependent on third parties for the provision of rail, port and other
distribution services. In certain circumstances, we negotiate prices for the
provision of these services where we may not have viable alternatives to using
specific providers, or may not have access to regulated rate-setting
mechanisms. Contractual disputes, demurrage charges, rail and port capacity
issues, availability of vessels and railcars, weather problems and other
factors can have a material effect on our ability to transport materials from
our suppliers and to our customers in accordance with schedules and contractual
commitments.
The magnitude of our operating costs is dictated mainly by our production
volumes, the costs of labour, operating supplies and concentrate purchases; by
strip ratios, haul distances and ore grades; and by distribution costs,
commodity prices and costs related to non-routine maintenance projects.
Production volumes mainly affect our variable operating and our distribution
costs. In addition, production may also affect our sales volumes and, when
combined with commodity prices, affects profitability and ultimately our
royalty expenses.
Our operating expenses were $3.3 billion in 2007 compared with $2.7 billion in
2006 and $2.2 billion in 2005. Like many of our competitors, we have been
facing rising costs for labour, fuel and energy, consumables and other
operating supplies. In addition to general cost increases, significant
increases in our 2007 operating expense include $210 million from the three
mines added through our acquisition of Aur and a $145 million increase in the
royalty at our Red Dog zinc mine following our recovery of our capital
investment and cumulative operating expense plus an interest factor in the
fourth quarter of 2006.
We determine our depreciation and amortization expense using various methods.
Plant and equipment are depreciated and amortized on a straight-line basis over
their estimated useful lives at our refining and smelting operations in Trail.
Plant and processing facilities at our mines are amortized on a
units-of-production basis over the lesser of their useful lives or the
estimated proven and probable ore reserves. Mobile equipment is depreciated and
amortized using operating hours and buildings, and other site infrastructure
over their estimated useful lives. Accordingly, our depreciation and
amortization expense varies to some degree with our production volumes. In 2007
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 35
our depreciation expense was $333 million compared with $264 million in 2006
and $272 million in 2005. The main reason for the increase was our acquisition
of Aur, which resulted in an additional $34 million of depreciation and
amortization compared with last year. General and administration expense was
$109 million in 2007 compared with $96 million in 2006 and $74 million in 2005.
The increase in 2007 was due to an increase in general business activities. The
increases in 2006 over 2005 was due mainly to stock-based compensation expense
resulting from increases in the price of our Class B subordinate voting shares.
OTHER EXPENSES
- ------------------------------------------------------------------------------
2007 2006 2005
- ------------------------------------------------------------------------------
General and administrative $109 $96 $74
Interest on long-term debt 85 97 69
Exploration
RRRRRRR 105 72 70
Research and development 32 17 13
Asset impairment charges 69 - -
Other expense (income) (170) (316) (94)
Provision for income and resource taxes 795 1,213 546
Minority interests, net of tax 47 19 11
Equity (earnings) loss, net of tax 5 (32) (50)
Loss (earnings) from discontinued
operations, net of tax 46 (36) -
- ------------------------------------------------------------------------------
$1,123 $1,130 $617
==============================================================================
Our interest expense of $85 million in 2007 was 12% lower than the $97 million
for 2006, due mainly to lower average debt levels, lower interest rates and the
strengthening of the Canadian dollar, as substantially all of our borrowings
are denominated in US dollars. Interest expense in 2006 was $28 million higher
than 2005 due to a full year of interest on US$1.0 billion of bonds issued in
September of 2005. Partially offsetting this increase in indebtedness were the
repayments of our US$150 million debentures in February 2006 and the Inco
exchangeable debentures late in 2006.
We must continually replace our reserves as they are depleted in order to
maintain production levels over the long term. We endeavour to do this through
our exploration and development program and through acquisition of interests in
new properties or in companies that own such properties. Exploration for
minerals and oil and gas is highly speculative and the projects involve many
risks. The vast majority of exploration projects are unsuccessful and there are
no assurances that current or future exploration programs will find deposits
that are ultimately brought into production.
Our main exploration efforts in 2007 were focused on copper, zinc, gold, nickel
and diamonds. We also participated in several equity financings with junior
companies exploring for the same commodities in favourable jurisdictions.
Exploration expense was $105 million in 2007 compared with $72 million in 2006
and $70 million in 2005. Increased exploration activities are the main reason
for the rising exploration expense in 2007 and 2006.
[GRAPHIC OMITTED -- PIE CHARTS]
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 36
Our research and development expenditures are focused on advancing our
proprietary CESL hydrometallurgical technology, the development of internal and
external growth opportunities and the development of new or modified processing
methods and technologies. In 2007, our research and development expenditures
were $32 million compared with $17 million in 2006 and $13 million in 2005.
Asset impairment charges totalling $69 million were taken against (i) our
investment in Tahera Diamonds, which sought protection from creditors in
January 2008 due to operating and financial difficulties, (ii) our Lennard
Shelf zinc mine and (iii) our Pend Oreille zinc mine. Both zinc mines are
operating with lower than expected ore grades and higher unit operating costs.
Operating cost increases and potentially shortened mine lives underlie the
writedowns.
Other income and expense netted to $170 million in 2007 compared with $316
million in 2006 and $94 million in 2005. Interest income was $177 million in
2007 and we had $55 million of gains from the sale of investments. With the
decline in the zinc price in the latter part of 2007, our derivative liability
on the Duck Pond zinc positions was reduced by $53 million. Offsetting this
other income was a $59 million cumulative foreign exchange loss related to the
repatriation of US dollars to Canada to provide funds for the acquisition of
Aur, $26 million of reclamation at our closed operations and $31 million on
non-hedge derivative losses mainly on our gold positions. In 2006, we had $186
million of interest income and $201 million of gains on the disposition of our
investments in Inco and other companies, compared with interest income of $56
million and gain on sale of investments of $77 million in 2005.
Income and resource taxes were m$795 million, or 32% of pre-tax earnings,
slightly less than the Canadian statutory tax rate of 34%. The primary reason
for the difference was the enactment of reductions in Canadian statutory rates
for future years that resulted in an $80 million decrease in our future tax
liability. Before the effect of these reductions, our tax expense was 35% of
pre-tax earnings. Overall, our tax expense was $418 million less that the 2006
expense of $1.2 billion due mainly to our lower operating profits.
Our minority interest expense relates to our ownership interests in the
Highland Valley, Quebrada Blanca, Andacollo and Elkview mines that are held by
other companies. The $28 million increase in 2007 was due to our acquisition of
Quebrada Blanca and Andacollo as part of our acquisition of Aur, partially
offset by the reduction in minority interest expense resulting from lower
earnings at Highland Valley and Elkview compared with 2006.
We account for our investments in the Fording Canadian Coal Trust, Fort Hills
Limited Partnership and the Galore Creek Partnership using the equity method.
In September 2007, we increased our interest in the Fording Canadian Coal Trust
to 19.95% by purchasing an additional 16.65 million units for $599 million. Our
equity earnings from Fording were $28 million in 2007, $32 million in 2006 and
$50 million in 2005, with the general decline due to lower sales prices, and
the strengthening of the Canadian dollar. Our 2007 equity earnings from Fording
were more than offset by our share of losses from the Galore Creek Partnership,
which were mainly due to our share of demobilization costs related to the
decision to suspend construction of the Galore Creek project.
Our earnings from discontinued operations relate to a price participation
provision in a 2004 agreement to sell our Cajamarquilla zinc refinery. 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 at the end of 2009. In 2006, we accrued $36 million, net
of taxes, for the additional consideration based on the average annual zinc
price for the year. Effective January 1, 2007, upon adoption of a new
accounting standard for financial instruments, we recorded an asset of $139
million by increasing our retained earnings in respect of the contingent
receivable, which was valued based on the zinc forward curve at December 31,
2006. The new standard for financial instruments requires us to mark this
receivable to market at the end of each quarter. With the decline in the zinc
price that occurred during 2007 from historical highs in late 2006, the
mark-to-market adjustment in 2007 resulted in a $46 million after-tax reduction
in the receivable. In January 2007, we received approximately US$36 million for
the 2006 price participation payment and in January 2008 we received
approximately US$38 million for the 2007 payment.
FINANCIAL POSITION AND LIQUIDITY
OPERATING CASH FLOW
Cash flow from operations was $1.7 billion in 2007 compared with $2.9 billion
in 2006. Non-cash working capital changes in 2007 included final tax
installments on 2006 earnings of $125 million and $115 million related to
royalties payable on 2006 earnings. Significant tax installments are paid after
year-end for years such as 2006 when taxable earnings have greatly increased
over the previous year.
Cash flow from operations, before non-cash working capital changes, was $2.0
billion for the year ended December 31, 2007 compared to $2.6 billion in 2006.
In addition to lower profits in 2007, there was a $282 million increase in
working capital in 2007 compared with a $299 million decrease in 2006.
Operating cash flow in 2006 was higher than the $1.6 billion in 2005 due mainly
to significantly higher copper and zinc prices.
- --------------------------------------------------------------------------------
Teck Cominco 2007 MD&A 37
INVESTING ACTIVITIES
Capital expenditures and investments totalled $5.9 billion in 2007. Capital
expenditures were $571 million, of which $218 million was on sustaining capital
expenditures, $161 million on the Highland Valley Copper mine life extension
project and $192 million on other development projects. Our capital spending in
2006 totalled $391 million with $171 million on sustaining capital and $220
million on development projects.
In 2007, we acquired interests in other companies and projects for
consideration of $5.4 billion. Our major investments included $4.1 billion to
acquire 100% of Aur Resources, $599 million to acquire an additional 16.65
million units of Fording, $264 million to acquire our interest in the Galore
Creek project, $119 million for our share of funding required for the Fort
Hills oil sands project, including our earn-in amount, and $341 million on
strategic and exploration-related investments. Proceeds from the disposal of
investments were $194 million in 2007.
Our investments in 2006 totalled $272 million, with the major investments being
Fort Hills, Tahera Diamond Corporation, Nautilus Minerals Inc. and ZincOx
Resources plc. Proceeds from the disposal of investments totalled $885 million
in 2006, including $770 million received from the tendering of our Inco shares
and the balance from the sale of other marketable securities. A portion of the
Inco shares were pledged against our Inco exchangeable debenture and the
related proceeds were used to repay the debenture. Dispositions of marketable
securities totalled $118 million in 2005.
FINANCING ACTIVITIES
During 2007, we recorded $13 million as proceeds on the exercise of employee
and director stock options compared with $16 million in 2006. We also issued
approximately 22 million Class B subordinate voting shares related to our
acquisition of Aur for consideration of $952 million.
In October 2007, we filed a preliminary base shelf prospectus under the
multijurisdictional disclosure system. The base shelf prospectus qualifies for
sale in the United States up to US$2.5 billion of debt securities over a period
of 25 months from the date of the final prospectus and will permit us to access
the debt capital markets over that period as or when deemed appropriate.
In May 2007, we completed a two-for-one share split of our Class A common
shares and Class B subordinate voting shares. All share and per share
information included in our annual report and consolidated financial statements
and accompanying notes have been adjusted to reflect this share split for all
periods presented. As a result of the share split, our semi-annual eligible
dividend for both classes of shares is currently $0.50 per share.
In February 2007, we received regulatory approval to purchase up to 40 million
(20 million on a pre-split basis) of our outstanding Class B subordinate voting
shares pursuant to a normal course issuer bid. To the end of 2007, we purchased
and cancelled 13.1 million shares under this program at a cost of $577 million.
When combined with $426 million of dividends paid, we returned just over $1
billion to shareholders during 2007. The share buyback program expired on
February 21, 2008.
In the fourth quarter of 2006, the majority of the holders of the Inco
exchangeable debentures tendered their debentures for exchange and we repaid
these debentures with the equivalent cash. Cash of $105 million was placed in
trust to satisfy the redemption requirements of the debentures that remained
outstanding at the end of the 2006, all of which were redeemed in 2007.
In September 2006, the remaining Antamina project debt was refinanced on a
non-recourse basis with a syndicated five-year revolving term bank facility
that has a final payment at maturity. The facility is extendable annually with
the concurrence of the participating banks.
In June 2006, we completed a series of transactions culminating in the
redemption of $112 million of the principal amount of our exchangeable
debentures that were due in 2024. In the course of these transactions, all
outstanding exchangeable debentures were tendered for exchange and we issued
11.5 million Class B subordinate voting shares. The exchange did not affect our
cash flow or earnings because shares were issued and the debentures were
included in shareholders' equity on the balance sheet.
In February 2006, we repaid the US$150 million 6.875% debenture that we issued
in 1996.
CASH RESOURCES AND LIQUIDITY
At December 31, 2007, we held cash and temporary investments of $1.4 billion
against total debt of $1.5 billion, of which substantially all is denominated
in US dollars. Our long-term debt to debt plus equity ratio was 16% compared
with 19% at the end of 2006. We have $553 million of mandatory corporate debt
payments due in the next five years and approximately 44% of the outstanding
$1.5 billion of debt is not due until 2035.
At December 31, 2007, we had bank credit facilities aggregating $1.1 billion,
82% of which matures in 2012 and beyond. Our unused credit lines under these
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Teck Cominco 2007 MD&A 38
facilities after drawdowns and letters of credit issued on our behalf amounted
to $819 million at the end of 2007.
In 2007, Moody's Investor Services upgraded its credit rating for our senior
unsecured debt to Baa1 with a stable outlook from Baa2. Our ratings from
Standard & Poor's and Dominion Bond Rating Service remain at BBB and BBB (high)
respectively, both with stable outlooks. Credit ratings are intended to provide
investors with an independent measure of the credit quality of an issue of
securities and are indicators of the likelihood of payment and of the capacity
and willingness of a company to meet its financial commitment on an obligation
in accordance with the terms of the obligation. They are not recommendations to
purchase, hold or sell securities and do not address the market price or
suitability of a specific security for a particular investor.
[GRAPHIC OMITTED - BAR CHART]
We have seen a recent tightening of credit conditions as financial markets were
affected by concerns over asset backed commercial paper and related products
together with the weakness in US economy, which has continued into 2008.
Although some central banks have and may continue reducing interest rates in
2008 to stimulate economic activity, accessing capital, if required, to fund
future development projects may become more difficult and/or certain terms and
conditions of borrowing obligations could be more onerous than those on our
existing loans.
2007 2006
-------------------------------------------------- --------------------------------------------------
Q1 Q2 Q3 Q4 TOTAL Q1 Q2 Q3 Q4 Total
-- -- -- -- ----- -- -- -- -- -----
Revenues $1,340 $1,561 $1,932 $1,538 $6,371 $1,273 $1,546 $1,632 $2,088 $6,539
Operating profit $620 $764 $894 $460 $2,738 $624 $894 $876 $1,167 $3,561
Net earnings $360 $485 $490 $263 $1,598 $448 $613 $504 $866 $2,431
Earnings per share $0.83 $1.14 $1.15 $0.60 $3.70 $1.09 $1.48 $1.17 $2.01 $5.77
Cash flow from
continuing
operations $152 $193 $814 $560 $1,719 $371 $600 $752 $1,182 $2,905
NOTE: $ IN MILLIONS, EXCEPT PER SHARE INFORMATION
In the fourth quarter of 2007, revenues from operations were $1.5 billion
compared with $2.1 billion in the same period a year ago. Net earnings were
$280 million or $0.64 per share in the fourth quarter, down significantly from
$866 million or $2.01 per share in the fourth quarter of 2006. In 2006,
one-time items included a $115 million gain on the disposition of Inco shares.
Our fourth quarter earnings were affected by significantly lower prices for
zinc (-38%) and coal (-26%), the stronger Canadian dollar and its effect on our
cost base, lower zinc sales volumes from the Red Dog mine versus last year and
reduced sales from Highland Valley due to the mine life extension program. The
reduced revenues were partially offset by higher lead prices and revenue
increases from the new copper mines acquired from Aur. In addition, we recorded
after-tax writedowns totalling $51 million related to our investment in Tahera
Diamonds and our Lennard Shelf and Pend Oreille zinc mines, and a $50 million
pre-tax ($33 million after-tax) equity loss related to our investment in Galore
Creek.
In addition, we recorded negative settlement adjustments of $94 million as base
metal prices fell substantially in the quarter. This amount is made up of $37
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Teck Cominco 2007 MD&A 39
million of settlement adjustments on sales from the previous quarter and $57
million on sales that were initially recorded at the average price for the
month of sale and subsequently revalued to quarter-end forward-curve prices. A
$69 million gain on the reduction of future tax liabilities due to the
reduction in federal income tax rates in Canada, and after-tax gains of $25
million on asset sales partially offset these effects.
The primary reasons for the decline in earnings were lower zinc prices and
sales volumes, and the stronger Canadian dollar. Zinc prices averaged US$1.19
per pound in the quarter compared to US$1.91 per pound in 2006, and the lower
price accounted for approximately $160 million of the decline in earnings. The
US dollar averaged C$0.98 in the quarter compared with C$1.14 a year ago. The
stronger Canadian dollar reduced the profit margin for our Canadian operations,
particularly Highland Valley Copper and Elk Valley Coal, and the value of the
profits we earn in US dollar economies from operations such as Red Dog,
Antamina and Quebrada Blanca. This reduced net earnings by approximately $125
million. Higher lead prices partially offset these reductions while average
copper prices were relatively unchanged.
Our earnings from coal operations are particularly sensitive to fluctuations in
the Canadian/US dollar exchange rate. Although costs remained relatively
constant compared with last year, the coal price averaged US$93 per tonne
compared with US$106 per tonne in the previous year. Combined with the effect
on operating margins from the stronger Canadian dollar, our 40% direct share of
quarterly operating profits from the Elk Valley Coal Partnership declined from
$100 million in 2006 to $30 million in 2007.
Other significant factors affecting earnings in the quarter included the
effects of the month-long maintenance shutdown of the KIVCET lead smelter at
our Trail operations, lower sales at Red Dog, production disruptions at
Antamina and lower production and sales at Highland Valley Copper.
In the fourth quarter of 2006, earnings included unusually large zinc sales
from Red Dog when shipping delays in the third quarter of 2006 shifted sales
and the related profits into the fourth quarter. In 2007, sales volumes were
reflective of normal seasonal sales pattern and represented 33% of annual zinc
sales compared with 46% in 2006.
We moved a 32-day maintenance shutdown of the KIVCET lead furnace, boiler and
related equipment at Trail from 2008 forward into the last quarter of 2007.
This resulted in a reduction of lead production and sales in the quarter by
approximately 25%. We incurred additional maintenance costs of $20 million
during the shutdown.
Copper production at Highland Valley Copper was down by approximately 25% in
the quarter compared to 2006. This decline was primarily a result of lower
grades in the areas mined in the current phase of the mine plan. Copper
recoveries were lower as a result of higher clay content in the mined ore. The
mining of the areas with higher clay content will continue into 2008 and 2009.
These activities facilitate the previously announced expansion pre-stripping,
which will extend the mine life until 2019.
The three mines acquired from Aur contributed operating profits of $105 million
in the quarter before negative final pricing adjustments and the effects of
one-time mark-to-market adjustments made to inventories at the time of
acquisition. Work-in-process inventories on hand at the acquisition date were
assigned fair values based on their copper content less costs to complete and a
small margin. As the acquired operations complete the processing and sale of
these inventories, the cost of goods sold will reflect the higher assigned
values resulting in reduced profits. Operating profits were reduced by $62
million in the fourth quarter as a result of these revaluations.
Cash flow from operations was $560 million in the fourth quarter compared with
$1.2 billion in the fourth quarter of 2006. The reduction is primarily the
result of lower profits and a smaller reduction in Red Dog's inventory for the
quarter than last year. Acquisition adjustments of $62 million to
work-in-process inventories acquired in the acquisition of Aur Resources affect
operating profits, but not cash flows. During the third and fourth quarters of
each year, cash flow from operations is positively affected by the seasonal
decline of Red Dog concentrate inventories. This decline was not as substantial
as in 2006 when third quarter sales were pushed into the fourth quarter due to
the late start to the shipping season that year.
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Teck Cominco 2007 MD&A 40
OUTLOOK
Commodity prices are a key driver of our earnings and current prices are well
above historic averages. On the supply side, the depleting nature of ore
reserves, difficulties in finding new ore bodies, progressing through the
permitting process, finding skilled resources to develop projects,
infrastructure constraints and significant cost inflation may continue to have
a moderating impact on the growth in future production. Although we are
concerned about current global economic conditions, particularly in the United
States, we believe that as China and India continue to industrialize, those two
economies will continue to be major positive factors in the future demand for
commodities. We believe that the long-term price environment for our products
remains favourable.
Based on our expected 2008 production and prices prevailing at December 31,
2007, the sensitivity of our annual earnings to a 1% change in the US dollar
exchange rate and commodity prices before pricing adjustments is as follows:
2008 Impact of a 1% change
Production on Annual After-Tax
Plan Earnings EPS
---------- --------------------- ---------
US$1 = C$ $26 million 5.9(cent)
Copper (tonnes) 300,000 $11 million 2.5(cent)
Coal (tonnes) 1,000,000 $7 million 1.6(cent)
Zinc (tonnes) 9,600,000 $6 million 1.4(cent)
Lead (tonnes) 220,000 $2 million 0.5(cent)
Gold (ounces 275,000 $1 million 0.2(cent)
Molybdenum (pounds) 7,000,000 $1 million 0.2(cent)
Notes:
(1) The effect on our earnings of commodity price and exchange rate movements
will vary from quarter to quarter depending on sales volumes.
(2) Zinc includes 295,000 tonnes of refined zinc and 705,000 tonnes of zinc
contained in concentrate.
(3) Lead includes 90,000 tonnes of refined lead and 130,000 tonnes of lead
contained in concentrate.
At December 31, 2007, outstanding receivables included 180 million pounds of
copper provisionally valued at an average of US$3.04 per pound, 296 million
pounds of zinc valued at an average of US$1.05 per pound and 74 million pounds
of lead provisionally valued at an average of US$1.15 per pound. Final price
adjustments on these outstanding receivables will increase or decrease our
revenue in 2008 depending on metal prices at the time of settlement.
At the current time, copper and lead prices are slightly higher than 2007
average prices. The zinc price is approximately 28% lower and gold is
approximately 30% higher than the 2007 average prices respectively. As
previously mentioned, market sentiment indicates that coal prices may increase,
but if they do, the impact is not likely to start to be felt until the second
quarter of 2008. In addition, the Canadian dollar is currently near par against
the US dollar compared with US$1 averaging C$1.07 in 2007.
Our copper production for 2008 is expected to be about 50,000 tonnes higher
than production in 2007, due mainly to the addition of the three mines acquired
in August 2007 from Aur. Highland Valley's copper production is expected to
decrease by approximately 9% from the 2007 as we mine lower grade ore as part
of the mine life extension program. Our share of copper production at Antamina
is expected to be similar to 2007, however, Antamina has recently been
experiencing problems with its main grinding mill. If these problems persist,
they could impact Antamina's production and financial results in 2008.
Our zinc production in 2008 is expected to be slightly higher than in 2007,
with the increase due mainly to the additional zinc production from the Duck
Pond mine acquired from Aur in August 2007. Due to sea ice conditions, Red Dog
has a shipping window that normally starts in early July and ends in late
October. If ice or other weather conditions are such that the shipping season
is delayed, our quarterly sales patterns can vary substantially. Sales and
profits of the Red Dog mine follow a seasonal pattern, with higher sales
volumes of zinc and most of the lead sales occurring in the last five months of
the year following the commencement of the shipping season in July.
Elk Valley's 2008 sales volumes are estimated at 23 to 25 million tonnes, of
which our share is 40%. Negotiations are under way for coal prices and volumes
for the coal year commencing April 1, 2008 and prices and volumes have not yet
been finalized, although current market sentiment indicates that US dollar coal
year prices may increase significantly for the 2008 coal year over the 2007
prices. Coal prices in the first quarter of 2008 are expected to be similar to
the fourth quarter average price of US$93 per tonne. Elk Valley will not see
the full benefit of higher 2008 coal year prices until possibly the third
quarter of 2008. It is expected that a substantial portion of Elk Valley's
sales in the second quarter of 2008 will be at 2007 pricing due to the
carryover of tonnes from the 2007 coal year. Further, the winter months
typically present challenging shipping conditions for Elk Valley Coal that
could potentially impact first quarter results and further increase the amount
of carryover. Our share of gold production is expected to decrease by
approximately 10,000 ounces in 2008 compared with 2007 due to a 44,000-ounce
reduction at Hemlo partially offset by higher planned production from the Pogo
mine. Our share of gold production from Pogo is expected to be 135,000 to
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Teck Cominco 2007 MD&A 41
145,000 ounces, while our share of production from the Hemlo joint venture is
expected to be 26% lower than 2007 at approximately 125,000 ounces.
Based on the information above, and depending on commodity prices and the
US/Canadian dollar exchange rate, we expect that our earnings will be stronger
in the second half of the year than the first half of the year. This is due
mainly to Red Dog's sales volumes generally being higher in the latter half of
the year due to the short shipping window and metallurgical coal prices, which
are expected to rise beginning in the second quarter of 2008.
Like many of our competitors, we are facing significant cost increases and
longer construction schedules in bringing new projects into production. The
current robust demand for commodities has resulted in significant inflation in
the cost of labour, fuel, raw materials and other key inputs required by the
mining industry. In addition, lead times required to source major capital
equipment and the challenge of attracting and retaining skilled labour has made
it difficult to bring major projects into production on time and on budget.
These increases could adversely affect the viability of a project and
consequently our asset values, costs, earnings and cash flows.
Our 2008 capital expenditures are planned at approximately $840 million,
including $465 million of sustaining capital expenditures, $285 million on
development projects and $90 million for our share of the various oil sands
properties that we jointly own with UTS Energy Corporation. This estimate does
not include any amounts for the development of the Petaquilla copper project in
Panama should we decide in March 2008 to proceed with its development. In
addition, we expect to spend approximately $760 million on our share of costs
in the Fort Hills oil sands project and $20 million on engineering studies for
the Galore Creek project. Although we believe our estimates to be reasonable at
this time, we may not be able to complete all of our projects on time and our
cost estimates could change by a significant amount due to the pressures
described above. In addition, with the recent tightening in the financial
markets that began in the summer of 2007 with concerns over asset backed
commercial paper, obtaining any financing for future development projects could
be more difficult and expensive than in recent years.
FINANCIAL INSTRUMENTS AND DERIVATIVES
We hold a number of financial instruments and derivatives, the most significant
of which are marketable securities, fixed price forward metal sales contracts,
settlements receivable and price participation payments on the sale of the
Cajamarquilla zinc refinery. The Cajamarquilla price participation payments are
economically similar to a fixed price forward purchase of zinc. The financial
instruments and derivatives are all recorded at fair values on the company's
balance sheet with gains and losses in each period included in other
comprehensive income, net earnings from continuing operations and net earnings
from discontinued operations as appropriate. Some of our gains and losses on
metal-related financial instruments are affected by smelter price participation
and are taken into account in determining royalties and other expenses. All are
subject to varying rates of taxation depending on their nature and
jurisdiction.
CRITICAL ACCOUNTING ESTIMATES
In preparing financial statements, management has to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Based on historical experience, current conditions and expert
advice, management makes assumptions that are believed to be reasonable under
the circumstances. These estimates and assumptions form the basis for judgments
about the carrying value of assets and liabilities and reported amounts for
revenues and expenses. Different assumptions would result in different
estimates, and actual results may differ from results based on these estimates.
These estimates and assumptions are also affected by management's application
of accounting policies. Critical accounting estimates are those that affect the
consolidated financial statements materially and involve a significant level of
judgment by management. Management's critical accounting estimates apply to the
assessment for the impairment of property, plant and equipment and the
valuation of other assets and liabilities such as inventory, plant and
equipment, investments, restoration and post-closure costs, accounting for
income and resource taxes, mineral reserves, contingencies and pension and
other post-retirement benefits.
PROPERTY, PLANT AND EQUIPMENT
We capitalize development costs of mining projects when resources as defined
under National Instrument 43-101 are present and it is expected that the
expenditure can be recovered by future exploitation or sale. Upon commencement
of commercial production, these costs are amortized over the proven and
probable reserves to which they relate calculated on a units of production
basis. The estimation of the extent of reserves is a complex task in which a
number of estimates and assumptions are made. These involve the use of
geological sampling and models as well as estimates of future costs. New
knowledge derived from further exploration and development of the ore body may
affect reserve estimates. In addition, the estimation of economic reserves
depends on assumptions regarding long-term commodity prices and in some cases
exchange rates, which may prove to be incorrect.
Where impairment conditions may exist, the expected undiscounted future cash
flows from an asset are compared with its carrying value. These future cash
flows are developed using assumptions that reflect the long-term operating
plans for an asset, given management's best estimate of the most probable set
of economic conditions. Commodity prices used reflect market conditions and
expectations with respect to future prices at the time the model is developed.
These models are updated from time to time, and lower prices are used should
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Teck Cominco 2007 MD&A 42
market conditions deteriorate. Inherent in these assumptions are significant
risks and uncertainties. In management's view, based on assumptions which
management believes to be reasonable, a reduction in the carrying value of
property, plant and equipment is not required at December 31, 2007 other than
for our Lennard Shelf and Pend Oreille zinc mines as described on previous
pages. Changes in market conditions, reserve estimates and other assumptions
used in these estimates may result in future writedowns.
INCOME AND RESOURCE TAXES
The determination of our tax expense for the year and its future tax
liabilities and assets involves significant management estimation and judgment
involving a number of assumptions. In determining these amounts, management
interprets tax legislation in a variety of jurisdictions and makes estimates of
the expected timing of the reversal of future tax assets and liabilities.
Management also makes estimates of the future earnings, which affects the
extent to which potential future tax benefits may be used. We are subject to
assessments by various taxation authorities who may interpret tax legislation
differently. These differences may affect the final amount or the timing of the
payment of taxes. We provide for these differences, where known, based on
management's best estimate of the probable outcome of these matters.
PENSION AND OTHER POST-RETIREMENT BENEFITS
The cost of providing benefits through defined benefit pension plans and
postretirement benefit plans is actuarially determined. Cost and obligation
estimates depend on management's assumptions about future events, which are
used by the actuaries in calculating such amounts. These include assumptions
with respect to discount rates, the expected plan investment performance,
future compensation increases, health care cost trends and retirement dates of
employees. In addition, actuarial consultants utilize subjective assumptions
regarding matters such as withdrawal and mortality rates. Actual results may
differ materially from those estimates based on these assumptions.
ASSET RETIREMENT OBLIGATIONS
The amounts recorded for asset retirement costs are based on estimates included
in closure and remediation plans. These estimates are based on engineering
studies of the work that is required by environmental laws or public statements
by management that result in an obligation. These estimates are based on
assumptions as to the timing of remediation work and the rate at which costs
may inflate in future periods. Actual costs and the timing of expenditures
could differ from these estimates.
RECOGNITION OF CONTINGENCIES
We are subject to a number of lawsuits and threatened lawsuits. A provision is
made for amounts claimed through these lawsuits when management believes that it
is more likely than not that the plaintiffs will be awarded damages or a
monetary settlement will be made. Management seeks the advice of outside counsel
in making such judgments when the amounts involved are material.
ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS
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 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
nonfinancial 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.
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. Mark-to-market
adjustments on these instruments are included in net income, 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 will be recorded at cost or amortized cost,
subject to impairment reviews. The criteria for assessing an other than
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Teck Cominco 2007 MD&A 43
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 OHedging
RelationshipsO and Section 1650 OForeign Currency TranslationO, 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 (OOCIO) 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. As prescribed by these standards,
prior periods have not been restated.
VARIABLE INTEREST ENTITIES (VIE), EIC-163
Effective January 1, 2007 we adopted the CICA Emerging Issues Committee
Abstract 163 (EIC-163) ODetermining the Variability to be Considered in
Applying AcG-15O. 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 using a two-step approach.
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, income statement or retained earnings.
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
financial. We have chosen to early adopt this standard, which would have
otherwise been effective beginning January 1, 2008.
CAPITAL DISCLOSURES
Effective December 31, 2007, we early adopted Section 1535 Capital Disclosures,
which would otherwise have been effective beginning January 1, 2008. This
standard requires disclosure of qualitative and quantitative information that
enables users to evaluate our objectives, policies and process for managing
capital.
DEFERRED STRIPPING
Effective January 1, 2006, we adopted the CICA Emerging Issues Committee
Abstract 160 (EIC-160) OStripping Costs Incurred in the Production Phase of a
Mining OperationO. 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 the stripping costs would be capitalized. Betterment
occurs when stripping activity increases future output of the mine by providing
access to additional sources of reserves. Capitalized stripping costs would be
amortized on a unit 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.
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Teck Cominco 2007 MD&A 44
OTHER INFORMATION
OUTSTANDING SHARE DATA
As at February 27, 2008, there were 433,380,126 Class B subordinate voting
shares and 9,353,470 Class A common shares outstanding. In addition, there were
3,789,841 director and employee stock options outstanding with exercise prices
ranging between $3.20 and $43.74 per share. More information on these
instruments and the terms of their conversion are set out in note 16 to our
2007 consolidated financial statements.
CONTRACTUAL AND OTHER OBLIGATIONS
Our contractual and other obligations as at December 31, 2007 are summarized as
follows:
($ in millions) Less than 1 More than 5
Year 2 - 3 Years 4 - 5 Years Years Total
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt $31 $62 $460 $991 $1,544
Operating leases 23 23 14 39 99
Road and port lease at Red Dog (Note 1) 18 36 36 528 618
Minimum purchase obligations (Note 2)
Concentrate, supply and other purchases 241 10 7 10 268
Shipping and distribution 14 20 6 - 40
Pension funding (Note 3) 42 - - - 42
Other non-pension post-retirement benefits (Note 4) 10 20 22 208 260
Asset retirement obligations (Note 5) 28 34 26 286 374
Other long-term liabilities (Note 6) 63 73 9 64 209
Contributions to the Fort Hills oil sands project 722 2,694 1,845 914 6,175
(Note 7)
Contributions to Galore Creek (Note 8) 95 22 22 - 139
$1,287 $2,994 $2,447 $3,040 $9,768
=========================================================================================================================
Notes:
(1) We lease road and port facilities from the Alaska Industrial Development
and Export Authority through which it ships metal concentrates produced at
the Red Dog mine. Minimum lease payments are US$18 million per annum and
are subject to deferral and abatement for force majeure events.
(2) The majority of the our minimum purchase obligations are subject to
continuing operations and force majeure provisions.
(3) As at December 31, 2007 the company had a net pension deficit of $3
million based on actuarial estimates prepared on a going concern basis.
The amount of minimum funding for 2007 in respect of defined benefit
pension plans is $42 million. The timing and amount of additional funding
after 2008 is dependent upon future returns on plan assets, discount
rates, and other actuarial assumptions.
(4) We had a discounted, actuarially determined liability of $260 million in
respect of other non-pension post-retirement benefits as at December 31,
2007. Amounts shown are estimated expenditures in the indicated years.
(5) We accrue environmental and reclamation obligations over the life of our
mining operations and amounts shown are estimated expenditures in the
indicated years. In addition to the above, the company has ongoing
treatment and monitoring costs of $3.9 million per annum for 2008-2032 and
$10.5 million per annum for 2033-2107, before adjusting for inflation.
(6) Other long-term liabilities include amounts for post-closure,
environmental costs and other items.
(7) We have committed to contribute 34% of the first $2.5 billion, 27.5% of
the next $5 billion, and 20% of expenditures thereafter on the Fort Hills
oil sands project. Total project costs have not been finalized as project
scope and costs are under review.
(8) Our obligation to fund project costs incurred after August 1, 2007 is $403
million. As at December 31, 2007, $139 million of this obligation remains,
$72 million of which relates to funding over the next 5 years to be used
principally to reassess the project and evaluate alternative development
strategies.
DISCLOSURE CONTROLS AND INTERNAL CONTROL OVER FINANCIAL REPORTING
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance
that material information is gathered and reported to senior management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to permit timely decisions regarding public disclosure. Management,
including the Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in the rules of the US Securities and
Exchange Commission and Canadian Securities Administration, as at December 31,
2007. Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective to ensure that information required to be disclosed in reports filed
or submitted by us under United States and Canadian securities legislation is
recorded, processed, summarized and reported within the time periods specified
in those rules.
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Teck Cominco 2007 MD&A 45
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Any system of internal control over
financial reporting, no matter how well-designed, has inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.
Management has used the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) framework to evaluate the effectiveness of our internal
control over financial reporting. Based on this assessment, management has
concluded that as at December 31, 2007, our internal control over financial
reporting was effective.
On August 22, 2007, we completed our acquisition of Aur Resources Inc. We
consider the acquisition of Aur material to our results of operations,
financial position and cash flows from the date of acquisition through December
31, 2007, and believe that the internal controls and procedures at Aur have a
material effect on our internal control over financial reporting. We are in the
process of integrating the Aur operations and will be expanding our internal
control over financial reporting compliance program to include Aur over the
next year. We excluded Aur from our annual assessment of internal control over
financial reporting for the year ended December 31, 2007 as permitted by the
SARBANES-OXLEY ACT and applicable rules relating to business acquisitions. The
Aur operations represent $5.51 billion of total assets and $296 million of
consolidated revenues as at and for the year ended December 31, 2007
The effectiveness of our internal controls over financial reporting has been
audited by PricewaterhouseCoopers LLP , an independent registered public
accounting firm, who have expressed their opinion in their report included with
our annual consolidated financial statements.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Although we have generally maintained our internal controls over financial
reporting that were in effect prior to the acquisition of Aur, subsequent to
the acquisition we have performed additional controls relating to the
consolidation of financial information used in the preparation of the
consolidated financial statements. We believe that these changes have not
negatively affected our internal control over financial reporting during the
year ended December 31, 2007.
CAUTION ON FORWARD-LOOKING INFORMATION
This document contains certain forward-looking information and forward-looking
statements, as defined in applicable securities laws (collectively referred to
as "forward-looking statements"). Often, but not always, forward-looking
statements can be identified by the use of words such as "plans," "expects" or
"does not expect," "is expected," "budget," "scheduled," "estimates,"
"continues," "forecasts," "projects," "predicts," "intends," "anticipates" or
"does not anticipate," or "believes," or variations of such words and phrases,
or state that certain actions, events or results "may," "could," "would,"
"should," "might" or "will" be taken, occur or be achieved. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements to be materially
different from any of our future results, performance or achievements expressed
or implied by the forward-looking statements.
These risks, uncertainties and other factors include, but are not limited to:
prices and price volatility for zinc, copper, coal, gold and other products and
commodities that we produce and sell as well as oil, natural gas and petroleum
products; the long-term demand for and supply of zinc, copper, coal, gold and
other products and commodities that we produce and sell as well as oil, natural
gas and petroleum products; changes in foreign currency exchange rates; our
premiums realized over London Metal Exchange cash and other benchmark prices
and the sensitivity of our financial results to changes in metals and minerals
prices; treatment and refining charges; our strategies and objectives; our
interest and other expenses; our tax position and the tax rates and royalty
rates applicable to us; political unrest or instability in countries where we
operate and its impact on our foreign assets, including our interest in the
Antamina copper-zinc mine and the Quebrada Blanca and Andacollo copper mines;
the timing of decisions regarding, the timing and costs of construction and
production with respect to, and the issuance of, the necessary permits and
other authorizations required for, certain of our development and expansion
projects, including, among others, the Fort Hills project in Alberta, the
Galore Creek project in British Columbia, the Aqquluk deposit at the Red Dog
mine in Alaska, and the Andacollo hypogene copper-gold deposit in Chile; our
estimates of the quantity and quality of our mineral reserves and resources and
oil resources; the production capacity of our operations; our planned capital
expenditures and our estimates of reclamation and other costs related to
environmental protection; our future capital and production costs and
production levels, including the costs and potential impact of complying with
existing and proposed environmental laws and regulations in the operation and
closure of various operations; our cost reduction and other financial and
operating objectives; our exploration projects; our environmental, health and
safety initiatives; the availability of qualified employees for our operations,
including our new developments; the satisfactory negotiation of collective
agreements with unionized employees; the outcome of legal proceedings and other
disputes in which we are involved; general business and economic conditions;
the outcome of our coal sales negotiations and negotiations with metals and
concentrate customers concerning treatment charges, price adjustments and
premiums; and our dividend policy.
Inherent in forward-looking statements are risks and uncertainties beyond our
ability to predict or control, including, but not limited to, the following:
risks that may affect our operating or capital plans; risks generally
encountered in the development and operation of mineral and oil and gas
properties such as unusual or unexpected geological formations, unanticipated
metallurgical difficulties, ground control problems, adverse weather
conditions, process upsets and equipment malfunctions; risks associated with
labour disturbances and unavailability of skilled labour; fluctuations in the
market price of our principal commodity products that are cyclical and subject
to substantial price fluctuations; risks created through competition for mining
and oil and gas properties; risks associated with lack of access to markets;
risks associated with mineral and oil and gas reserve and resource estimates,
including the risk of errors in assumptions and methodologies; risks posed by
fluctuations in exchange rates and interest rates, as well as general economic
conditions; risks associated with environmental compliance and changes in
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Teck Cominco 2007 MD&A 46
environmental legislation and regulation or failure to maintain permits or to
obtain them on a timely basis; risks associated with our dependence on third
parties for the provision of transportation and other critical services; risks
associated with non-performance by contractual counterparties; risks associated
with aboriginal title claims and other title risks; social and political risks
associated with our operations in foreign countries; risks of changes in tax
laws or their interpretation or in royalty rates and their application to our
operations; and risks associated with tax reassessments and legal proceedings.
Actual results and developments are likely to differ, and may differ
materially, from those expressed or implied by the forward-looking statements
contained in this report. Such statements are based on a number of assumptions
that may prove to be incorrect, including, but not limited to, assumptions
about: general business and economic conditions; interest rates and foreign
currency exchange rates; the supply and demand for, deliveries of, and the
level and volatility of prices of zinc, copper, coal and gold and other primary
metals and minerals as well as oil, natural gas and petroleum products produced
by us; the timing of the receipt of regulatory and governmental approvals for
our development projects and other operations; the availability of financing
for our development projects on reasonable terms; our costs of production and
our production and productivity levels, as well as those of our competitors;
power prices; our ability to secure adequate transportation for our products;
our ability to procure equipment and operating supplies in sufficient
quantities and on a timely basis; our ability to attract and retain skilled
staff; the impact of changes in Canadian/US dollar and other foreign exchange
rates on our costs and results; engineering and construction timetables and
capital costs for our development and expansion projects; costs of closure of
our various operations; market competition; the accuracy of our reserve and
resource estimates (including with respect to size, grade and recoverability)
and the geological, operational and price assumptions on which these are based;
premiums realized over London Metal Exchange cash and other benchmark prices;
tax benefits and tax and royalty rates; the outcome of our coal price and
refining and treatment charge negotiations with customers; the resolution of
environmental and other proceedings or disputes; and our ongoing relations with
our employees and with our business partners and joint venturers.
We caution you that the foregoing list of important factors and assumptions is
not exhaustive. Events or circumstances could cause our actual results to
differ materially from those estimated or projected and expressed in, or
implied by, these forward-looking statements. You should also carefully
consider the matters discussed under ORisk FactorsO in our most recent annual
information form. We undertake no obligation to update publicly or otherwise
revise any forward-looking statements or the foregoing list of factors, whether
as a result of new information or future events or otherwise, except as may be
required under applicable laws.
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Teck Cominco 2007 MD&A 47