EXHIBIT 99.2
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| PricewaterhouseCoopers LLP
| Chartered Accountants
| PricewaterhouseCoopers Place
| 250 Howe Street, Suite 700
| Vancouver, British Columbia
| Canada V6C 3S7
| Telephone +1 604 806 7000
| Facsimile +1 604 806 7806
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF TECK COMINCO LIMITED
We have completed integrated audits of Teck Cominco Limited's 2008, 2007 and
2006 consolidated financial statements and of its internal control over
financial reporting as at December 31, 2008. Our opinions, based on our audits,
are presented below.
CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of Teck Cominco
Limited as at December 31, 2008 and December 31, 2007, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity
and cash flows for each of the years in the three year period ended December
31, 2008. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of the Company's
financial statements as at December 31, 2008 and for each of the years in the
three year period then ended in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform an
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. A financial statement audit also includes assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
December 31, 2008 and December 31, 2007 and the results of its operations and
its cash flows for each of the years in the three year period ended December
31, 2008 in accordance with Canadian generally accepted accounting principles.
INTERNAL CONTROL OVER FINANCIAL REPORTING
We have also audited Teck Cominco Limited's internal control over financial
reporting as at December 31, 2008, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
"PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, an Ontario
limited liability partnership, or, as the context requires, the
PricewaterhouseCoopers global network or other member firms of the network,
each of which is a separate and independent legal entity.
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We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing
such other procedures as we consider necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as at December 31, 2008 based on
criteria established in Internal Control -- Integrated Framework issued by the
COSO.
(signed) PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
Vancouver BC
March 4, 2009
(2)
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[TECK COMINCO LOGO]
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TECK COMINCO LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2008, 2007 and 2006
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Consolidated Statements of Earnings
Years ended December 31
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(Cdn$ in millions, except per share data) 2008 2007 2006
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REVENUES $ 6,904 $ 6,371 $ 6,539
OPERATING EXPENSES (4,009) (3,300) (2,714)
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2,895 3,071 3,825
DEPRECIATION AND AMORTIZATION (513) (333) (264)
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OPERATING PROFIT 2,382 2,738 3,561
OTHER EXPENSES
General and administration (89) (109) (96)
Interest and financing (Note 11(h)) (182) (85) (97)
Exploration (135) (105) (72)
Research and development (23) (32) (17)
Asset impairment (Note 16) (589) (69) -
Other income (expense) (Note 17) 31 170 316
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EARNINGS BEFORE THE UNDERNOTED ITEMS 1,395 2,508 3,595
PROVISION FOR INCOME AND RESOURCE TAXES
(NOTE 13) (658) (795) (1,213)
NON-CONTROLLING INTERESTS (82) (47) (19)
EQUITY EARNINGS (LOSS) (Note 6(c)) 22 (5) 32
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NET EARNINGS FROM CONTINUING OPERATIONS 677 1,661 2,395
NET EARNINGS (LOSS) FROM DISCONTINUED
OPERATIONS (Note 21(b)) (18) (46) 36
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NET EARNINGS $ 659 $ 1,615 $ 2,431
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EARNINGS PER SHARE (Note 15(H))
BASIC $ 1.46 $ 3.74 $ 5.77
BASIC FROM CONTINUING OPERATIONS $ 1.50 $ 3.85 $ 5.68
DILUTED $ 1.45 $ 3.72 $ 5.60
DILUTED FROM CONTINUING OPERATIONS $ 1.49 $ 3.83 $ 5.52
WEIGHTED AVERAGE SHARES
OUTSTANDING (millions) 452.1 432.2 421.9
SHARES OUTSTANDING AT END OF
YEAR (millions) 486.9 442.7 432.4
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The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Cash Flows
Years ended December 31
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(Cdn$ in millions, except per share data) 2008 2007 2006
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OPERATING ACTIVITIES
Net earnings from continuing operations $ 677 $ 1,661 $ 2,395
Items not affecting cash
Depreciation and amortization 513 333 264
Provision (recovery) for future
income and resource taxes 1,488 (97) 59
Equity (earnings) loss (22) 5 (32)
Non-controlling interests 82 47 19
Asset impairment 589 69 -
Provision for marketable securities 292 - -
Gain on sale of investments and assets (16) (55) (201)
Other 28 55 70
Distributions received from equity
accounted investments 65 25 37
Net change in non-cash working capital
items (Note 19(b)) (1,564) (282) 299
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2,132 1,761 2,910
INVESTING ACTIVITIES
Property, plant and equipment (939) (571) (391)
Investments and other assets (659) (724) (272)
Acquisition of Fording Canadian
Coal Trust (Note 4(a)) (11,639) (599) -
Acquisition of Aur Resources Inc.
(Note 4(d)) - (2,588) -
Proceeds from sale of investments
and assets 29 194 885
Proceeds from other assets 187 - -
Decrease (increase) in temporary
investments (11) 194 759
Decrease (increase) in cash held
in trust - 105 (105)
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(13,032) (3,989) 876
FINANCING ACTIVITIES
Issuance of debt 11,842 14 123
Repayment of debt (Note 11(i)) (1,228) - (333)
Issuance of Class B subordinate
voting shares 6 13 16
Purchase and cancellation of Class B
subordinate voting shares - (577) -
Dividends paid (442) (426) (296)
Distributions to non-controlling
interests (102) (42) (5)
Redemption of exchangeable debentures - (105) (340)
Other (13) (5) -
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10,063 (1,123) (840)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS HELD IN U.S. DOLLARS 241 (335) 10
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS (596) (3,686) 2,956
CASH RECEIVED FROM DISCONTINUED
OPERATIONS (Note 21(b)) 38 40 -
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (558) (3,646) 2,956
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 1,408 5,054 2,098
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CASH AND CASH EQUIVALENTS AT END OF YEAR $ 850 $ 1,408 $ 5,054
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The accompanying notes are an integral part of these financial statements.
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Consolidated Balance Sheets
As at December 31
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2008 2007
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 850 $ 1,408
Temporary investments 11 -
Income taxes receivable 1,130 33
Accounts and settlements receivable 769 560
Inventories (Note 5) 1,339 1,004
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4,099 3,005
Investments (Note 6) 948 1,506
Property, plant and equipment (Note 7) 23,909 7,807
Other assets (Note 8) 853 592
Goodwill (Note 9) 1,724 663
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$ 31,533 $ 13,573
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities
(Note 10) $ 1,506 $ 1,238
Current portion of long-term debt (Note 11) 1,336 31
Short-term debt (Note 11) 6,436 -
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9,278 1,269
Long-term debt (Note 11) 5,102 1,492
Other liabilities (Note 12) 1,184 994
Future income and resource taxes (Note 13(c)) 4,965 2,007
Non-controlling interests (Note 14) 104 92
Shareholders' equity (Note 15) 10,900 7,719
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$ 31,533 $ 13,573
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Liquidity risk (Note 2) Commitments and contingencies (Note 20) Subsequent
events (Note 4(e), 6(a) and 20(a)) Approved on behalf of the Board of Directors
/s/ Hugh J. Bolton /s/ Keith E. Steeves
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HUGH J. BOLTON KEITH E. STEEVES
Chairman of the Audit Committee Director
The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Shareholders' Equity
Years ended December 31
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(Cdn$ in millions) 2008 2007 2006
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CLASS A COMMON SHARES (Note 15)
Balance - beginning of year $ 7 $ 7 $ 7
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Balance - end of year 7 7 7
CLASS B SUBORDINATE VOTING SHARES
Balance - beginning of year 3,274 2,398 2,148
Issued on exercise of options (Note 15(e)) 7 16 20
Issued on settlement of exchangeable
debentures - - 230
Issued on business acquisitions
(Note 4(a) and 4(d)) 1,504 952 -
Issued on asset acquisition (Note 4(b)) 287 - -
Purchased through share repurchase
program (Note 15(j)) - (92) -
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Balance - end of year 5,072 3,274 2,398
RETAINED EARNINGS
Balance - beginning of year as
previously reported 5,038 4,225 2,228
Adoption of financial instruments
standards - 112 -
Net earnings 659 1,615 2,431
Dividends declared (221) (431) (431)
Class B subordinate voting shares
repurchased (Note 15(j)) - (483) -
Interest on exchangeable debentures,
net of taxes (Note 15(d)) - - (3)
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Balance - end of year 5,476 5,038 4,225
CONTRIBUTED SURPLUS
Balance - beginning of year 71 64 61
Stock-based compensation expense
(Note 15(e)) 13 11 7
Transfer to Class B subordinate voting
shares on exercise of options (2) (2) (4)
Share repurchase program (Note 15(j)) - (2) -
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Balance - end of year 82 71 64
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) (Note 15(g)) 263 (671) (145)
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TOTAL SHAREHOLDERS' EQUITY $ 10,900 $ 7,719 $ 6,549
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Consolidated Statements of Comprehensive Income
Years ended December 31
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(Cdn$ in millions) 2008 2007 2006
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NET EARNINGS $ 659 $ 1,615 $ 2,431
OTHER COMPREHENSIVE INCOME (LOSS) IN THE YEAR
Changes in foreign currency
translation adjustments 1,003 (550) 23
Changes in unrealized gains and losses of
available-for-sale instruments (48) (36) -
Changes in unrealized gains and losses of
derivatives designated as cash flow hedges (21) 10 -
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Total other comprehensive income (loss)
(Note 15(g)) 934 (576) 23
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COMPREHENSIVE INCOME $ 1,593 $ 1,039 $ 2,454
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The accompanying notes are an integral part of these financial statements.
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5
Notes to Consolidated Financial Statements
Years ended December 31, 2008, 2007 and 2006
1. NATURE OF OPERATIONS
Teck Cominco Limited and its subsidiaries ("we," "us," or "our") are
engaged in mining and related activities including exploration,
development, processing, smelting and refining. Our major products are
copper, metallurgical coal and zinc. We also produce precious metals,
lead, molybdenum, electrical power, fertilizers and various specialty
metals. Metal products are sold as refined metals or concentrates. We also
own an interest in certain oil sands leases and have a partnership
interest in an oil sands development project.
2. LIQUIDITY RISK
Our consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. Liquidity risk
is the risk that we will not be able to meet our financial obligations as
they become due.
On September 30, 2008, we entered into definitive financing agreements
related to bridge and term loan facilities and the conditions precedent to
our purchase of the assets of the Fording Canadian Coal Trust ("Fording")
and our lenders' funding obligations were substantially satisfied. Our
original plan for the acquisition was to refinance a substantial portion
of the acquisition facilities prior to or shortly after closing of the
transaction with various types of long-term debt and to repay the balance
with cash flow from operating activities prior to the maturity of the term
facility. In the fourth quarter of 2008 and prior to the closing of the
transaction, conditions in the credit markets deteriorated substantially,
effectively closing the credit markets to us. These credit market
conditions had a serious impact on the global economy, which has
contributed to a significant and rapid decline in the demand for and
selling price of the base metal products we produce. As a result of these
conditions, which have continued into 2009, our credit ratings were
lowered and our share price has declined substantially.
Current weak global economic conditions and the downgrade in our credit
ratings make access to the credit and capital markets difficult for us,
which may compromise our ability to repay or refinance all or a portion of
the acquisition loans as they become due. We are currently in compliance
with the financial covenants under our credit agreements, which establish
a maximum debt to total capitalization ratio of 60% at the end of each
calendar quarter until it declines to 50% at September 30, 2009. At
December 31, 2008, our debt to total capitalization ratio was 54%. To
maintain our current production forecasts for 2009, we expect capital
spending of approximately $500 million in 2009 and with the re-scaling of
that project, our contributions to the Fort Hills Energy Limited
Partnership ("FHELP") are expected to decline to $330 million for our
share of the remaining costs necessary to get to a sanctioning decision.
Based on expected free cash flow we will not generate sufficient funds
from operations to repay the entire obligation on the bridge facility that
is due on October 29, 2009, and will need to generate funds from other
sources to do so, or will need an extension or refinancing of the bridge
loan.
As at December 31, 2008, US$5.3 billion of the bridge facility and US$4
billion of the term facility were outstanding. All of the bridge facility
and US$1.1 billion of the term facility is due on or before October 29,
2009.
To address our near-term liquidity requirements, we have begun discussions
with our lenders to negotiate amendments to the bridge facility to provide
us with additional time to generate cash and/or access appropriate sources
of long-term financing to repay the bridge facility. There can be no
assurance that these negotiations will be successful. We have also taken a
number of other steps to assist us in meeting our repayment obligations,
including suspending the dividends on our Class A common and Class B
subordinate voting shares, reducing capital and discretionary spending,
expediting tax refunds of $1.1 billion, closing unprofitable operations
and reducing the size of our global workforce by approximately 13%. To
date we have sold our interest in the Lobo-Marte gold property for US$40
million, and 5.6 million Kinross shares, and have announced the sale of
our interest in the Hemlo mines for US$65 million, and our indirect
interest in a Peruvian company, Sociedad Minera El Brocal S.A.A., for
US$35 million. We are also pursuing other potential asset sales. There can
be no assurance that we will be able to complete further sufficient asset
sales on a timely basis.
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2. LIQUIDITY RISK, CONTINUED
Our ability to repay or refinance the bridge facility prior to its
maturity and make the quarterly instalment payments on the term facility
depends on a number of factors, some of which are beyond our control.
These include general global economic, credit and capital market
conditions, and the demand for and selling price of our products, in
particular, metallurgical coal. There can be no assurance that our credit
ratings will not be downgraded further, which would further increase our
costs of borrowing and further limit our ability to refinance our existing
debt. There is no assurance that the expected cash flows from operations
in combination with asset sales and other steps being taken will allow us
to meet these obligations as they become due, that we will continue to
meet the financial covenants under our various lending agreements, or that
we will be successful in renegotiating or refinancing the bridge facility.
Accordingly, it is possible that we could be in default of our various
lending agreements prior to the end of 2009, which could result in
outstanding obligations becoming immediately due and payable unless we can
obtain waivers from the lenders.
Although we have approximately $1.1 billion in unused credit lines under
various bank credit facilities, there can be no assurance, given our
current financial condition, that these credit lines will be available to
us if we should need to draw on them, or that our maturing credit lines of
US$50 million and miscellaneous letters of credit totalling $258 million
will be renewed in the ordinary course. Our existing debt obligations will
constrain our capital spending and that may have an adverse effect on our
operations. Our debt levels will also limit our ability to expand our
operations or make other investments that would enhance our
competitiveness.
In a cyclical industry such as ours, history has shown that periodic
spikes in commodity prices can result in substantial increases in our
company's cash flow. Many of our major operations are long-life assets
with significant reserves and resources and have lives exceeding 20 years
based on current production levels. If we are to realize the benefit of
the economic recovery when in occurs, we must more closely match the term
of our debt structure to the life of our assets. We believe that our
access to financial resources through capital markets transactions has
been limited mainly due to the effective closure of the capital markets
brought about by the significant deterioration in the financial markets in
the latter half of 2008, which we believe has also contributed to the
significant decline in the demand for and selling price of our products.
Accordingly, there is some risk that the steps described above will not be
successful in allowing us to meet our obligations, which may require us to
sell core assets or raise debt or equity capital, which management
believes would enable us to satisfy our obligations as they fall due.
However, these actions may have a material adverse effect on our business
and on the market prices of our equity and debt securities.
3. SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation, Accounting Principles and Adoption of New
Accounting Standards
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Our consolidated financial statements are prepared using Canadian
Generally Accepted Accounting Principles ("Canadian GAAP"). Note 24
reconciles the consolidated financial statements prepared in accordance
with Canadian GAAP to financial statements prepared in accordance with
United States Generally Accepted Accounting Principles ("US GAAP").
BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of Teck Cominco
Limited and all of its subsidiaries. Our significant operating
subsidiaries include Teck Cominco Metals Ltd. ("TCML"), Teck Cominco
American Inc. ("TCAI"), Teck Cominco Alaska Inc. ("TCAK"), Highland Valley
Copper Partnership ("Highland Valley Copper"), Teck Coal Partnership
("Teck Coal," previously known as Elk Valley Coal Partnership), Compania
Minera Quebrada Blanca S.A. ("Quebrada Blanca") and Compania Minera Carmen
de Andacollo ("Andacollo").
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3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Many of our mining activities are conducted through interests in entities
where we share joint control including Compania Minera Antamina
("Antamina") and Pogo Joint Venture ("Pogo"). These entities are accounted
for using the proportionate consolidation method. We shared joint control
of Teck Coal prior to our acquisition of Fording's 60% interest in Teck
Coal in October 2008 (Note 4(a)). We also consolidate entities that are
variable interest entities where we are the primary beneficiary.
Certain comparative figures have been reclassified to conform to the
presentation adopted for the current period. All dollar amounts are in
Canadian dollars unless otherwise specified.
INVENTORIES
In June 2007, the Canadian Institute of Chartered Accountants ("CICA")
issued Section 3031 "Inventories" to replace Section 3030. The new
section, which was effective on January 1, 2008, establishes standards for
the measurement and disclosure of inventories. Retrospective application
of this standard did not have an effect on our financial statements.
b) Significant Accounting Policies
USE OF ESTIMATES
The preparation of our financial statements in conformity with GAAP
requires estimates and assumptions that affect the amounts reported in the
consolidated financial statements. Significant areas where judgment is
applied include asset and investment valuations, ore reserve estimation,
finished and in-process inventory quantities, plant and equipment lives,
goodwill, contingent liabilities including matters in litigation, variable
interest entities, tax rates, provisions and future tax balances including
valuation allowances in respect of future tax balances, asset retirement
obligations, other environmental liabilities, pension and other
post-retirement benefits and other accrued liabilities.
As at December 31, 2008, global market conditions were unsettled and
volatile. In these circumstances, assumptions for value of non-exchange
traded assets and business units are even more subject to variability.
These valuations are the basis of impairment testing, particularly in
respect of goodwill. Actual results could differ from our estimates.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of Teck Cominco Limited, the parent entity, is the
Canadian dollar. For our integrated foreign operations, monetary assets
and liabilities are translated at year end exchange rates and other assets
and liabilities are translated at historical rates. Revenues, expenses and
cash flows are translated at monthly average exchange rates. Gains and
losses on translation of monetary assets and monetary liabilities are
charged to earnings.
The accounts of our self-sustaining foreign operations are translated at
year end exchange rates, and revenues and expenses are translated at
monthly average exchange rates. Differences arising from these foreign
currency translations are recorded in other comprehensive income until
they are realized by a reduction in the investment.
FINANCIAL INSTRUMENTS
We recognize financial assets and liabilities on the balance sheet when we
become a party to the contractual provisions of the instrument.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on account, demand deposits and
money market investments with maturities from the date of acquisition of
three months or less, which are readily convertible to known amounts of
cash and are subject to insignificant changes in value.
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3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
TEMPORARY INVESTMENTS
Temporary investments are designated as available-for-sale. These
investments include money market instruments with maturities of greater
than three months from the date of acquisition.
TRADE RECEIVABLES AND PAYABLES
Trade receivables and payables are non-interest bearing and are stated at
carrying values, which approximate fair values due to the short terms to
maturity. Where necessary, trade receivables are net of allowances for
uncollectable amounts.
INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities are designated as available-for-sale
and recorded at fair value. Fair values are determined by reference to
quoted market prices at the balance sheet date. Unrealized gains and
losses on available-for-sale investments are recognized in other
comprehensive income until investments are disposed of or when an
other-than-temporary decline in value occurs. Investment transactions are
recognized on the trade date with transaction costs included in the
underlying balance. At each balance sheet date, we assess for any
impairment in value that is considered to be other than temporary, and
record such impairments in net earnings for the period.
SHORT-TERM DEBT AND LONG-TERM DEBT
Short-term debt and long-term debt are initially recorded at total
proceeds received less direct issuance costs. Debt is subsequently
measured at amortized cost, calculated using the effective interest rate
method.
DERIVATIVE INSTRUMENTS
Derivative instruments, including embedded derivatives, are recorded on
the balance sheet at fair value. Unrealized gains and losses on
derivatives held for trading are recorded as part of other income
(expense) in net earnings. Fair values for derivative instruments held for
trading are determined using valuation techniques. These valuations use
assumptions based on market conditions existing at the balance sheet date.
Derivatives embedded in non-derivative contracts are recognized separately
unless they are closely related to the host contract.
HEDGING
Certain derivative investments may qualify for hedge accounting. For fair
value hedges, any gains or losses on the hedging instrument relating to
both the effective and ineffective portion of the hedge are recognized in
net earnings, which offsets the fair value changes in the hedged item.
For cash flow hedges, any unrealized gains and losses on the hedging
instrument relating to the effective portion of the hedge are initially
recorded in other comprehensive income. Gains and losses are recognized in
net earnings upon settlement of the hedging instrument, when the hedged
item ceases to exist, or when the hedge is determined to be ineffective.
For hedges of net investments in self-sustaining operations, any foreign
exchange gains or losses on the hedging instrument relating to the
effective portion of the hedge are initially recorded in other
comprehensive income. Gains and losses are recognized in net earnings on
the ineffective portion of the hedge, or when there is a reduction in the
net investment in the self-sustaining operation being hedged.
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3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INVENTORIES
Finished products, work in process and raw material inventories are valued
at the lower of cost and net realizable value. Raw materials include
concentrates for use at smelting and refining operations. Work in process
inventory includes inventory in the milling, smelting or refining process
and stockpiled ore at mining operations.
For work in process and finished product inventories, cost includes all
direct costs incurred in production including direct labour and materials,
freight, depreciation and amortization and directly attributable overhead
costs. Waste rock stripping costs related to mine production are included
in the cost of inventories as incurred.
When inventories have been written down to net realizable value, we make a
new assessment of net realizable value in each subsequent period. If the
circumstances that caused the write-down no longer exist, the amount of
the write-down is reversed.
We use both joint-product and by-product costing for work in process and
finished product inventories. Joint costing is applied to primary products
at the Red Dog, Antamina, Duck Pond and Pend Oreille mines and the Trail
operations, where the profitability of the operation is dependent upon the
production of a number of primary products. Joint costing allocates total
production costs based on the relative values of the products. Where
by-product costing is used, by-products are allocated the incremental
costs of processes that are specific to the production of that product.
Supplies inventory is valued at the lower of average cost and net
realizable value. Cost includes acquisition, freight and other directly
attributable costs.
INVESTMENTS SUBJECT TO SIGNIFICANT INFLUENCE
Investments over which we exercise significant influence are accounted for
using the equity method. We also equity account for variable interest
entities of which we are not the primary beneficiary. At each balance
sheet date, we assess the value of these investments for impairment.
PROPERTY, PLANT AND EQUIPMENT
PLANT AND EQUIPMENT
Plant and equipment are recorded at cost. The cost of buildings, plant and
processing equipment at our mining operations is amortized on a
units-of-production basis over the lesser of the estimated useful life of
the asset and the estimated proven and probable ore reserves. Amortization
of plant and equipment at our smelting operations is calculated on a
straight-line basis over the estimated useful life of the asset. Mobile
equipment is depreciated over the estimated equipment operating hours.
Buildings are amortized on a straight-line basis over their estimated
useful life, not exceeding the estimated life of the mine.
When we incur debt directly related to the construction of a new operation
or major expansion, the interest and financing costs associated with such
debt are capitalized during the construction period.
MINERAL PROPERTIES AND MINE DEVELOPMENT COSTS
The cost of acquiring and developing mineral properties or property
rights, including costs incurred during production to increase future
output by providing access to additional sources of reserves, are
deferred. Once available for use, mineral properties and mine development
costs are amortized on a units-of-production basis over the proven and
probable reserves to which they relate.
- -------------------------------------------------------------------------------
10
3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Underground mine development costs are amortized using the block
amortization method. Development costs associated with each distinct
section of the mine are amortized over the reserves to which they relate.
Exploration and evaluation costs are charged to earnings in the year in
which they are incurred, except where these costs relate to specific
properties for which resources, as defined under National Instrument
43-101, exist and it is expected that the expenditure can be recovered by
future exploitation or sale, in which case they are deferred.
DEVELOPMENT COSTS OF OIL SANDS PROPERTIES
The costs of acquiring, exploring, evaluating and developing oil sands
properties are deferred when it is expected that these costs will be
recovered through future exploitation or sale of the property.
ASSET IMPAIRMENT
We perform impairment tests on our property, plant and equipment when
events or changes in circumstances occur that indicate the carrying value
of an asset may not be recoverable. Estimated future cash flows are
calculated using estimated future prices, mineral resources, operating and
capital costs on an undiscounted basis. When the carrying value of the
mine or development project exceeds estimated undiscounted future cash
flows, the asset is impaired. Write-downs are recorded to the extent the
carrying value exceeds the discounted value of the estimated future cash
flows.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs, including shutdown maintenance costs, are
charged to expense as incurred, except when these repairs significantly
extend the life of an asset or result in an operating improvement. In
these instances the portion of these repairs relating to the betterment is
capitalized as part of plant and equipment.
GOODWILL
We allocate goodwill arising from business combinations to the reporting
units acquired based on estimates of the fair value of the reporting unit.
Any excess of the fair value of a reporting unit over the fair value of
the sum of its individual assets and liabilities is considered goodwill
for that reporting unit.
We perform goodwill impairment tests annually and when there are
impairment indicators. This impairment assessment involves estimating the
fair value of each reporting unit that has been assigned goodwill. We
compare the fair value to the total carrying amount of each reporting
unit, including goodwill. If the carrying amount exceeds fair value, then
we estimate the fair values of all identifiable assets and liabilities in
the reporting unit, and compare this net fair value of assets less
liabilities to the estimated fair value of the entire reporting unit. The
difference represents the fair value of goodwill. If the carrying amount
of goodwill exceeds this amount, we reduce goodwill by a charge to
earnings in the amount of the excess.
The fair value of assets and liabilities are estimated using a model of
discounted cash flows based on proven and probable reserves and value
beyond proven and probable reserves. Other major assumptions include
commodity prices, operating costs, foreign exchange rates and discount
rates.
Circumstances which result in an impairment and write-down of goodwill
could arise through a variety of factors including a reduction in the
reserve or resource base of the mineral property, a reduction in expected
future prices for the commodities produced, or other factors, including
changes in the timing of project development, host country tax regime and
external economic factors. In addition, general economic and capital
market conditions at the balance sheet date could result in a diminution
of fair value that would result in an impairment of goodwill.
- -------------------------------------------------------------------------------
11
3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION
Sales are recognized when title transfers, the rights and obligations of
ownership pass to the customer and the price is reasonably determinable.
The majority of our metal concentrates are sold under pricing arrangements
where final prices are determined by quoted market prices in a period
subsequent to the date of sale. In these circumstances, revenues are
recorded at the time of sale based on forward prices for the expected date
of the final settlement. As a result, the value of our concentrate
receivables change as the underlying commodity market prices vary. This
component of the contract is an embedded derivative, which is recorded at
fair value with changes in fair value recorded in revenues.
INCOME AND RESOURCE TAXES
Current income taxes are recorded based on the estimated income and
resource taxes receivable or payable on taxable income for the current
year. Future income tax assets and liabilities are recognized based on the
difference between the tax and accounting values of assets and liabilities
and are calculated using substantively enacted tax rates for the periods
in which the differences are expected to reverse. Tax rate changes are
recognized in earnings in the period of substantive enactment. Future tax
assets are recognized to the extent that they are considered more likely
than not to be realized.
We are subject to assessments by various taxation authorities which may
interpret tax legislation differently. The final amount of taxes to be
paid depends on a number of factors including outcomes of audits, appeals,
disputes, negotiations and litigation. We provide for such differences
based on our best estimate of the probable outcome of these matters.
PENSION AND OTHER EMPLOYEE FUTURE BENEFITS
DEFINED BENEFIT PENSION PLANS
Defined benefit pension plan obligations are based on actuarial
determinations. The projected benefit method prorated on services is used
to determine the accrued benefit obligation. Actuarial assumptions used in
the determination of defined benefit pension plan liabilities and
non-pension post-retirement benefits are based upon our best estimates,
including discount rate, expected plan performance, salary escalation,
expected health care costs and retirement dates of employees. The expected
return on plan assets is estimated based on the fair value of plan assets,
asset allocation and expected long-term rates of return.
Past service costs and transitional assets or liabilities are amortized on
a straight-line basis over the expected average remaining service period
of active employees expected to receive benefits under the plan up to the
full eligibility date.
Differences between the actuarial liabilities and the amounts recorded in
the financial statements will arise from changes in plan assumptions,
changes in benefits, or through experience as results differ from
actuarial assumptions. Cumulative differences which are greater than 10%
of either the fair value of the plan assets or the accrued benefit
obligation, whichever is greater, are amortized over the average remaining
service life of the related employees.
DEFINED CONTRIBUTION PENSION PLANS
The cost of providing benefits through defined contribution plans is
charged to earnings as the obligation to contribute is incurred.
- -------------------------------------------------------------------------------
12
3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NON-PENSION POST-RETIREMENT PLANS
We provide certain health care benefits for certain employees when they
retire. The cost of these benefits is expensed over the period in which
the employees render services. These non-pension post-retirement benefits
are funded by us as they become due.
STOCK-BASED COMPENSATION
The fair value method of accounting is used for stock-based compensation
awards. Under this method, the cost of options and other stock-based
compensation arrangements is recorded based on the estimated fair values
at the grant date and charged to earnings over the vesting period. For
employees eligible for normal retirement prior to vesting, the expense is
charged to earnings over the period from the grant date to the date they
are eligible for retirement.
Stock-based compensation expense relating to deferred and restricted share
units is accrued over the vesting period of the units based on the quoted
market value of Class B subordinate voting shares. As these awards will be
settled in cash, the expense and liability are adjusted each reporting
period for changes in the underlying share price.
RESEARCH AND DEVELOPMENT
Research costs are expensed as incurred. Development costs are only
deferred when the product or process is clearly defined, the technical
feasibility has been established, the future market for the product or
process is clearly defined and we are committed to, and have the resources
to, complete the project.
ASSET RETIREMENT OBLIGATIONS
Future obligations to retire an asset including dismantling, remediation
and ongoing treatment and monitoring of the site are initially recognized
and recorded as a liability at fair value, based on estimated future cash
flows, our current credit adjusted risk-free discount rate and an
estimated inflation factor. The liability is adjusted for changes in the
expected amounts and timing of cash flows required to discharge the
liability and accreted to full value over time through periodic charges to
earnings. For operating properties, the amount of the asset retirement
liability initially recognized and any subsequent adjustments are
capitalized as part of the asset's carrying value and amortized over the
asset's estimated useful life. For closed properties, any adjustments to
the liability are charged to other income (expense). Asset retirement
obligations are only recorded when the timing or amount of remediation
costs can be reasonably estimated.
EARNINGS PER SHARE
Earnings per share are calculated based on the weighted average number of
shares outstanding during the year. We follow the treasury stock method
for the calculation of diluted earnings per share. Under this method,
dilution is calculated based upon the net number of common shares issued
should "in-the-money" options and warrants be exercised and the proceeds
be used to repurchase common shares at the average market price in the
year. Dilution from convertible securities is calculated based on the
number of shares to be issued after taking into account the reduction of
the related after-tax interest expense.
- -------------------------------------------------------------------------------
13
3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
c) New Canadian Accounting Pronouncements
GOODWILL AND INTANGIBLE ASSETS
In February 2008, the CICA issued Section 3064, "Goodwill and Intangible
Assets," which replaces Section 3062, "Goodwill and Other Intangible
Assets." This new standard provides guidance on the recognition,
measurement, presentation and disclosure of goodwill and intangible
assets. Concurrent with the adoption of this standard, CICA Emerging
Issues Committee Abstract 27, "Revenues and Expenditures in the
Pre-operating Period," ("EIC-27") was withdrawn.
This standard is effective for our fiscal year beginning January 1, 2009
with retrospective application. Deferred start-up costs of $19 million,
net of tax of $10 million, at December 31, 2008 will be written-off.
BUSINESS COMBINATIONS AND RELATED SECTIONS
In January 2009, the CICA issued Section 1582 "Business Combinations" to
replace Section 1581. Prospective application of the standard is effective
January 1, 2011, with early adoption permitted. This new standard
effectively harmonizes the business combinations standard under Canadian
GAAP with International Financial Reporting Standards ("IFRS"). The new
standard revises guidance on the determination of the carrying amount of
the assets acquired and liabilities assumed, goodwill and accounting for
non-controlling interests at the time of a business combination.
The CICA concurrently issued Section 1601 "Consolidated Financial
Statements" and Section 1602 "Non-Controlling Interests," which replace
Section 1600 "Consolidated Financial Statements." Section 1601 provides
revised guidance on the preparation of consolidated financial statements
and Section 1602 addresses accounting for non-controlling interests in
consolidated financial statements subsequent to a business combination.
These standards are effective January 1, 2011, unless they are early
adopted at the same time as Section 1582 "Business Combinations."
4. ACQUISITIONS AND DISPOSITIONS
a) Acquisition of Fording Canadian Coal Trust
In October 2008, we acquired all of the assets of Fording, which consisted
primarily of a royalty interest in respect of Fording's 60% non-operating
interest in Teck Coal, previously known as Elk Valley Coal Partnership
("EVCP"). Teck Coal operates six metallurgical coal mines located in south
eastern British Columbia and west central Alberta.
Prior to the acquisition we were the managing partner of Teck Coal and
owned a 52% effective interest in the partnership. This was comprised of a
40% direct interest in Teck Coal and a 19.6% interest in the outstanding
units of Fording. We acquired an 8.7% interest in Fording in 2003 for $150
million and a further 11.2% interest in 2007 for $599 million. Our 19.6%
interest in Fording, represented by 29.5 million Fording units, was an
effective 11.8% interest in Teck Coal and we accounted for this interest
using the equity method. We recorded equity earnings from Fording until
October 30, 2008.
As part of the plan of arrangement to acquire the assets of Fording, we
sold our Fording units. The net proceeds of approximately $2.9 billion
were used to partially fund the acquisition of Fording's assets. The net
proceeds from the disposition of the units have been offset against the
purchase price of Fording's assets. These transactions resulted in the
acquisition of an 80.4% interest in the assets and liabilities of Fording.
- -------------------------------------------------------------------------------
14
4. ACQUISITIONS AND DISPOSITIONS, CONTINUED
The separate acquisitions have been accounted for using the purchase
method. Accordingly, the values assigned to assets acquired and
liabilities assumed from Fording reflect the nature of a step-by-step
purchase with the assets and liabilities measured at their estimated
individual fair values on each respective date of acquisition. Our
consolidated earnings and cash flows include 100% of Fording's results of
operations from October 30, 2008.
The purchase cost of $13,644 million was funded with a combination of cash
and Class B subordinate voting shares as follows:
===========================================================================
(Cdn $ in millions)
---------------------------------------------------------------------------
Cash $ 14,635
Issuance of 36,828,787 Class B subordinate voting shares 1,504
Proceeds on disposal of Fording units (2,870)
Transaction costs, including taxes 375
---------------------------------------------------------------------------
Total purchase price $ 13,644
===========================================================================
Each Class B subordinate voting share was valued at $42.98, being the
average closing price on the Toronto Stock Exchange for two trading days
before and one trading day after the announcement of our offer for
Fording, less deemed issuance costs.
Our allocation of the purchase cost to the assets acquired and liabilities
assumed is based upon estimated fair values at the time of acquisition. We
have substantially completed the process of determining fair values for
assets acquired and liabilities assumed. Matters still under review
principally relate to income and resource taxes and could affect values
assigned to future tax liabilities and goodwill. As a result, the purchase
price allocation is subject to change in 2009 as the valuation process is
completed.
- -------------------------------------------------------------------------------
15
4. ACQUISITIONS AND DISPOSITIONS, CONTINUED
Our current allocation of the purchase price to the estimated fair value
of the assets and liabilities of Fording from the various steps is as
follows:
===========================================================================
(Cdn $ in millions) 2003 and 2007 2008 Total
---------------------------------------------------------------------------
Cash $ 25 $ 101 $ 126
Accounts receivable 45 187 232
Inventory 33 327 360
Property, plant and equipment 849 13,438 14,287
Goodwill 308 883 1,191
Future income and resource tax assets - 1,400 1,400
Other 5 15 20
---------------------------------------------------------------------------
Total assets acquired 1,265 16,351 17,616
Current liabilities (50) (292) (342)
Derivative instrument liability (58) (239) (297)
Long-term debt (8) (281) (289)
Long-term liabilities (36) (147) (183)
Future income and resource
tax liabilities (273) (1,735) (2,008)
Non-controlling interests (1) (13) (14)
---------------------------------------------------------------------------
Total liabilities assumed (426) (2,707) (3,133)
---------------------------------------------------------------------------
Net assets acquired $ 839 $ 13,644 $ 14,483
===========================================================================
The goodwill balances arising from the Fording acquisitions are in part
due to the accounting requirement to recognize a future tax liability but
also reflect, for the 2008 purchase, changes in expected future coal
prices and US/Canadian dollar exchange rates between the date of the
acquisition announcement in July 2008 and the closing of the acquisition
on October 30, 2008.
The net cash cost of the acquisition was as follows:
===========================================================================
(Cdn $ in millions) 2008
---------------------------------------------------------------------------
Cash paid to Fording unit holders $ 14,635
Less cash proceeds on disposal of Fording units (2,870)
Less Fording's cash balance on acquisition date (126)
---------------------------------------------------------------------------
$ 11,639
---------------------------------------------------------------------------
b) Acquisition of Relincho Copper Project
In August 2008, we completed the acquisition of the Relincho copper
project in Chile by way of a plan of arrangement involving Global Copper
Corp., the owner of the project. The purchase price was $424 million,
being $136 million paid in cash, the issuance of 6.9 million Class B
subordinate voting shares valued at $287 million, less $1 million of
transaction costs. We accounted for this transaction as an asset
acquisition and recorded a future income tax liability based upon the
difference between the accounting and tax basis of the assets acquired.
The purchase price has been allocated as follows: $681 million to mineral
properties, $252 million to future income tax liability and $5 million to
net liabilities assumed.
- -------------------------------------------------------------------------------
16
4. ACQUISITIONS AND DISPOSITIONS, CONTINUED
c) Disposition of Minera Petaquilla
In March 2008, we satisfied contractual requirements to earn a 26% equity
interest in Minera Petaquilla S.A. ("MPSA"), the Panamanian company that
holds the Petaquilla concession. We also entered into an agreement with
Inmet Mining Corporation ("Inmet"), whereby Inmet would provide our share
of the required project funding on an interim basis, and act as operators
of the project on our behalf. In November 2008, we elected to withdraw
from the Petaquilla project and our 26% interest in MPSA was assigned to
Inmet. We have no further funding obligations for this project.
Our withdrawal from the project resulted in a pre-tax, non-cash charge of
$22 million, which is included in the asset impairment charges disclosed
in Note 16.
d) Acquisition of Aur Resources Inc.
In August 2007, we acquired 100% of the outstanding common shares of Aur
Resources Inc. ("Aur") for $4,054 million. Aur owned interests in the
Quebrada Blanca (76.5%) and Andacollo (90%) copper mines located in Chile
and the Duck Pond (100%) copper-zinc mine located in Newfoundland, Canada.
We accounted for the acquisition of Aur using the purchase method. Aur's
results of operations are included in our consolidated financial
statements from August 22, 2007.
The purchase cost of $4,054 million was funded with a combination of cash
and Class B subordinate voting shares as follows:
===========================================================================
(Cdn $ in millions)
---------------------------------------------------------------------------
Cash $ 3,089
Issuance of 21,971,906 Class B subordinate voting shares 952
Transaction costs 13
---------------------------------------------------------------------------
Total purchase price $ 4,054
===========================================================================
Each Class B subordinate voting share was valued at $43.33, being the
average closing price on the Toronto Stock Exchange for two trading days
before and one day after the announcement of our offer for Aur, less
deemed issuance costs.
In 2008 we completed the process of determining fair values for the assets
and liabilities acquired from Aur. The significant changes from the
preliminary allocation at December 31, 2007 include an increase to
goodwill of $44 million, a $15 million increase to other assets, an
increase to the future income tax liability of $62 million and a $3
million adjustment to other accounts.
- -------------------------------------------------------------------------------
17
4. ACQUISITIONS AND DISPOSITIONS, CONTINUED
Our final allocation of the purchase price to the estimated fair value of
the assets and liabilities of Aur is as follows:
===========================================================================
(Cdn $ in millions)
---------------------------------------------------------------------------
Cash $ 501
Inventory 267
Property, plant and equipment 4,135
Goodwill 750
Other 345
---------------------------------------------------------------------------
Total assets acquired 5,998
Current liabilities (197)
Long-term liabilities (393)
Future income tax liability (1,325)
Non-controlling interests (29)
---------------------------------------------------------------------------
Total liabilities assumed (1,944)
---------------------------------------------------------------------------
Net assets acquired $ 4,054
---------------------------------------------------------------------------
The net cash cost of the acquisition was as follows:
===========================================================================
(Cdn $ in millions)
---------------------------------------------------------------------------
Cash paid to Aur shareholders $ 3,089
Less Aur's cash balance on acquisition date (501)
---------------------------------------------------------------------------
$ 2,588
===========================================================================
The goodwill balance arising from the Aur acquisition is a result of the
accounting requirement to recognize a future tax liability calculated as
the difference between the fair values of the assets and liabilities and
the tax bases on an undiscounted basis.
As a result of the decline in commodity prices in the fourth quarter of
2008, a goodwill impairment test was performed for Aur which indicated
that a write-down of the goodwill arising in the acquisition was required
(Note 16(b)).
e) Dispositions Subsequent to December 31, 2008
In January 2009, we sold our 60% interest in the Lobo-Marte gold project
in Chile to Kinross Gold Corporation ("Kinross") for US$40 million in cash
and approximately 5.6 million Kinross common shares valued at US$97
million at the date of the sale. We also received a 1.75% net smelter
return royalty, which shall not exceed US$40 million, in respect of 60% of
the gold produced from Lobo-Marte payable when gold prices on the London
Metal Exchange exceed US$760 per ounce. An estimated pre-tax gain of $160
million will be recognized in the first quarter of 2009.
The Kinross shares received as consideration are subject to a four month
restriction on resale that expires on May 6, 2009. We can enter into a
transaction that has the economic effect of a sale of the Kinross shares
with the consent of Kinross, which cannot be unreasonably withheld.
- -------------------------------------------------------------------------------
18
4. ACQUISITIONS AND DISPOSITIONS, CONTINUED
In February 2009, we announced the sale of our interest in the Williams
and David Bell ("Hemlo") mines for US$65 million to an affiliate of
Barrick Gold Corporation. The transaction will have an effective date of
January 1, 2009. Closing is subject to customary conditions, including
receipt of regulatory approvals and is expected to occur in the second
quarter. An estimated pre-tax gain of $60 million will be recognized upon
closing.
Also in February 2009, we announced the sale of our indirect interest in
Sociedad Minera El Brocal S.A.A. for US$35 million. Closing is subject to
customary conditions and is expected to occur in the first quarter of
2009. An estimated pre-tax gain of $42 million will be recognized upon
closing.
5. INVENTORIES
====================================================================================
(Cdn$ in millions) 2008 2007
------------------------------------------------------------------------------------
Finished product $ 534 $ 312
Work in process 371 350
Raw materials 91 153
Supplies 343 189
------------------------------------------------------------------------------------
$ 1,339 $ 1,004
====================================================================================
Operating expenses include $300 million (2007 - $(2) million, 2006 - $(59)
million) of costs of inventories. As at December 31, 2008 we recorded a
write-down of $24 million (2007 - nil) on a portion of our product
inventory to its net realizable value of $116 million.
6. INVESTMENTS
====================================================================================
(Cdn$ in millions) 2008 2007
------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
value value value value
------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE INVESTMENTS
Marketable securities $ 104 $ 104 $ 308 $ 308
HELD FOR TRADING INVESTMENTS
Warrants - - 1 1
------------------------------------------------------------------------------------
104 $ 104 309 $ 309
INVESTMENTS ACCOUNTED FOR UNDER
THE EQUITY METHOD
Fording Canadian Coal Trust (Note 4(a)) - 750
Galore Creek Partnership
(50% interest) (a) 299 214
Fort Hills Energy Limited Partnership
(20% interest) (b) 545 233
------- -------
$ 948 $ 1,506
======= =======
- -------------------------------------------------------------------------------
19
6. INVESTMENTS, CONTINUED
a) Galore Creek Partnership
In August 2007, we formed a 50/50 partnership with NovaGold Resources Inc.
("NovaGold") to develop the Galore Creek copper-gold deposit in northwest
British Columbia. In November 2007, construction activities at the project
were suspended as a result of our review of the first season of
construction, and a more extensive engineering study that anticipated
substantially higher capital costs and a longer construction schedule.
The funding agreement was amended with NovaGold at the time of the
suspension in November 2007. Our funding obligation for project costs
incurred after August 1, 2007 was reduced from the original $528 million
to $403 million. Of this total, $264 million had been spent by us as of
the suspension date. In addition, of the next $100 million of project
costs, we were to fund two-thirds and NovaGold would fund one-third.
Thereafter, each partner would fund its pro rata share of partnership
costs. In addition, we were committed to spend an additional $72 million
on studies to reassess the Galore Creek Project by December 31, 2012.
During the fourth quarter of 2008 the optimization study for the Galore
Creek project was completed. Due to the present economic situation the
decision was made not to proceed with updating the final feasibility based
upon the results of the optimization study, but rather place the Galore
Creek site on care and maintenance. During 2008 the Galore Creek
Partnership incurred $15 million of care and maintenance costs, which were
expensed as incurred.
In February 2009, we further amended certain provisions of the partnership
agreement relating to the Galore Creek project. Under the amended
agreement, our committed funding on Galore Creek has been reduced from $72
million to $60 million including $15.8 million contributed by us on
account of studies prior to December 31, 2008 and $8.6 million contributed
by us on account of the November and December 2008 cash calls. While we
are making these committed contributions, which will represent 100% of
project funding, we will have a casting vote on the Galore Creek
management committee with respect to the timing and nature of expenses to
be funded.
The Galore Creek partnership is a variable interest entity ("VIE").
NovaGold is determined to be the primary beneficiary. Accordingly we
account for our interest in the partnership using the equity method. In
2008, we recorded equity earnings of $18 million, which primarily
represents a recovery of previously accrued costs.
b) Fort Hills Energy Limited Partnership
In November 2005, we acquired a 15% interest in the Fort Hills Energy
Limited Partnership, which is developing the Fort Hills oil sands project
in Alberta, Canada. As consideration for our initial 15% interest, we are
required to contribute 34% of the first $2.5 billion of project
expenditures. In September 2007, we acquired an additional 5% interest,
bringing our interest to 20%. To earn our additional 5% interest, we are
required to contribute 27.5% of project expenditures after project
spending reaches $2.5 billion and before project spending reaches $7.5
billion. Thereafter, we are responsible for funding our 20% share of
development costs. In the event that the project is abandoned, all limited
partners are required to make additional contributions such that the
aggregate contributions of all partners equal $7.5 billion and any
unexpended amount will be distributed to the partners according to their
partnership interest. Project spending totalled $1.9 billion as of
December 31, 2008. Our interest in FHELP is recorded as an investment
using the equity method of accounting. In November 2008, FHELP announced
that it will defer the final investment decision on the mining and
extraction portion of the Fort Hills oil sands project until a cost
estimate consistent with the current market environment can be
established. The partnership now anticipates making a final investment
decision in 2009. The upgrader portion of the project, located in Sturgeon
County, has been put on hold and a decision whether to proceed with the
upgrader will be made at a later date. As a result of this deferral, we
recorded an equity loss of $85 million relating to costs associated with
the upgrader.
We have ongoing commitments to fund FHELP which we expect to total $330
million in 2009 and $1,265 million thereafter.
- -------------------------------------------------------------------------------
20
6. INVESTMENTS, CONTINUED
c) Equity earnings (loss) is as follows:
===========================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------
Fording Canadian Coal Trust (Note 4(a)) $ 89 $ 28 $ 32
Galore Creek Partnership (a) 18 (33) -
Fort Hills Energy Limited Partnership (b) (85) - -
---------------------------------------------------------------------------
$ 22 $ (5) $ 32
===========================================================================
7. PROPERTY, PLANT AND EQUIPMENT
===========================================================================
(Cdn$ in millions) 2008 2007
---------------------------------------------------------------------------
OPERATING
Mines and mining facilities $ 25,241 $ 9,013
Accumulated depreciation and amortization (3,502) (2,695)
---------------------------------------------------------------------------
21,739 6,318
Smelter and refineries 1,818 1,778
Accumulated depreciation and amortization (764) (717)
---------------------------------------------------------------------------
1,054 1,061
OTHER RESOURCE PROPERTIES
Mineral properties 768 132
Oil sands leases 348 296
---------------------------------------------------------------------------
$ 23,909 $ 7,807
===========================================================================
During 2008, we capitalized $90 million (2007 - $44 million) of waste rock
stripping costs associated with mine expansion at Highland Valley Copper
and as at December 31, 2008, we have cumulative capitalized waste rock
stripping costs of $158 million (2007 - $68 million), all of which
represents the capitalized expansion costs at Highland Valley Copper. In
addition, we have $35 million (2007 - $41 million) of remaining
unamortized capitalized stripping costs related to the transitional
balance on adoption of EIC-160 in 2006.
- -------------------------------------------------------------------------------
21
8. OTHER ASSETS
===========================================================================
(Cdn$ in millions) 2008 2007
---------------------------------------------------------------------------
Future income and resource tax assets (net of current
portion of $nil (2007 - $3 million))(Note 13(c)) $ 357 $ 70
Pension assets (Note 12(b)) 241 210
Long-term receivables 120 51
Long-term deposits 25 20
Derivative assets (net of current portion of
$174 million (2007 - $nil)) (Note 21(c)) 21 -
Cajamarquilla contingent receivable (net of
current portion of $17 million (2007 -
$37 million))(Note 21(b)) 3 42
Restricted cash pledged as security (Note 11(c)) - 151
Other 86 48
---------------------------------------------------------------------------
$ 853 $ 592
===========================================================================
9. GOODWILL
===========================================================================
(Cdn$ in millions)
---------------------------------------------------------------------------
Balance at beginning of year $ 663
Finalization of Aur purchase price (Note 4(d)) 44
Foreign exchange translation 171
Impairment (Note 16(b)) (345)
---------------------------------------------------------------------------
533
Fording - previously equity accounted (Note 4(a)) 308
Fording - arising in current year acquisition (Note 4(a)) 883
---------------------------------------------------------------------------
Balance at end of year $1,724
===========================================================================
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIEs
===========================================================================
(Cdn$ in millions) 2008 2007
---------------------------------------------------------------------------
Trade payables $670 $506
Current derivative liabilities 252 21
Payroll related liabilities 176 93
Capital project accruals 82 25
Commercial and government royalties 78 251
Resource taxes payable 69 -
Accrued interest 68 22
Current portion of asset retirement obligations
(Note 12(a)) 16 28
Dividends payable - 221
Other 95 71
---------------------------------------------------------------------------
$ 1,506 $ 1,238
===========================================================================
- -------------------------------------------------------------------------------
22
11. DEBT
==================================================================================================================
(Cdn$ in millions) 2008 2007
------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
value value value value
------------------------------------------------------------------------------------------------------------------
Bridge facility (US$ 5.35 billion) (a) $ 6,436 $ 6,378 $ - $ -
Term facility (US$4.0 billion) (a) 4,794 4,714 - -
6.125% debentures due October 2035 (US$700 million) (b) 835 408 675 637
5.375% debentures due October 2015 (US$300 million) (b) 363 194 293 287
7.0% debentures due September 2012 (US$200 million) (b) 242 164 196 212
6.75% debentures due March 2010 (US$94 million) (c) - - 94 96
Revolving credit facility (c) - - 148 148
Antamina senior revolving credit facility due August 2012 (d) 113 113 92 92
Other 91 91 25 25
------------------------------------------------------------------------------------------------------------------
12,874 12,062 1,523 1,497
Less short-term debt and current portion of long-term debt (7,772) (7,700) (31) (31)
------------------------------------------------------------------------------------------------------------------
$ 5,102 $ 4,362 $ 1,492 $ 1,466
==================================================================================================================
The fair values of debt are determined using market values where available
and discounted cash flows based on our expected cost of borrowing on other
items.
a) The bridge facility and the term facility are unsecured and rank pari
passu with our other senior unsecured debt. The bridge facility is due on
October 29, 2009 and the term facility is repayable in 11 equal quarterly
instalments commencing April 30, 2009. Both facilities are guaranteed by
our wholly owned subsidiary, TCML and bear interest at LIBOR, US Prime
Rate or US Base Rate, plus a margin that varies based on our credit
rating.
b) The 6.125%, 5.375% and 7.0% debentures are unsecured and can be called at
any time by repaying the greater of the principal amount plus accrued
interest and the present value of the principal and interest amounts
discounted at a comparable treasury yield plus a stipulated spread.
c) Upon our acquisition of Aur in 2007, we assumed $94 million of 6.75%
debentures due in March 2010 and a revolving credit facility permitting
borrowings of up to US$150 million. The terms of the revolving credit
facility required a subsidiary to provide cash collateral to the lender
equal to any amount outstanding under the facility plus US$3 million. The
outstanding amounts under both facilities were repaid in 2008 and the cash
collateral held as security for the revolving credit facility was
released.
d) The Antamina senior revolving credit facility is our proportionate share
of a syndicated five-year revolving term bank facility with a bullet
repayment due at maturity and is the obligation of Compania Minera
Antamina (Note 3(a)). The facility is non-recourse to Teck and the other
Antamina project sponsors and may be renewed and extended annually with
the concurrence of the participating banks. The outstanding amount under
the facility bears interest at LIBOR plus a margin.
e) At December 31, 2008, we had revolving credit facilities aggregating $1.3
billion, of which $1.2 billion is available until 2013. Net of $191
million of letters of credit the unused portion of the credit facilities
is $1,120 million as at December 31, 2008. In addition, we have issued
stand alone letters of credit for $258 million in respect of environmental
bonding requirements.
f) Our bank credit facilities require the maintenance of a defined debt to
capitalization ratio (Note 22). As at December 31, 2008, we are in
compliance with all debt covenants and default provisions.
- -------------------------------------------------------------------------------
23
11. DEBT, CONTINUED
g) Excluding financing fees and discounts, we have scheduled principal
repayments on our debt of $7,845 million due in 2009, $1,772 million in
2010, $1,776 million in 2011, $357 million in 2012, nil in 2013 and $1,218
million thereafter.
h) We incurred interest expense and financing fees on short-term debt and
long-term debt as follows:
===========================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------
Interest expense on short-term debt $ 58 $ - $ -
Interest expense on long-term debt 118 95 102
---------------------------------------------------------------------------
Total interest expense 176 95 102
Amortization of financing fees 20 - -
Less amounts capitalized (14) (10) (5)
---------------------------------------------------------------------------
$ 182 $ 85 $ 97
===========================================================================
i) Debt payments made during the year:
===========================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------
Bridge facility $ 573 $ - $ -
Fording revolving bank credit facility 307 - -
6.75% debentures 98 - -
Revolving credit facility 183 - 141
6.875% debentures - - 172
Teck Coal facility 67 - 20
---------------------------------------------------------------------------
$ 1,228 $ - $ 333
===========================================================================
12. OTHER LIABILITIES
===========================================================================
(Cdn$ in millions) 2008 2007
---------------------------------------------------------------------------
Asset retirement obligations (a) $ 653 $ 492
Other environmental and post-closure costs 108 88
Pension and other employee future benefits (b)
Defined benefit pension plans 51 35
Non-pension post-retirement benefits 254 209
Long-term contractual obligations 76 -
Derivative liabilities (net of current portion of
$252 million (2007 - $37 million)) (Note 21(c)) - 78
Other 42 92
---------------------------------------------------------------------------
$ 1,184 $ 994
===========================================================================
a) Asset Retirement Obligations
We have recorded an asset retirement obligation for each of our operating
mines and closed properties. Our Trail refining and smelting facilities
are considered to be indefinite life operations and neither the amounts
that may be required to retire these facilities nor the timing of required
expenditures can be reasonably estimated at this time. For the Trail
operation, our recorded liability is limited to components of the facility
where costs and expected dates of existing retirement and remediation
requirements can be estimated.
- -------------------------------------------------------------------------------
24
12. OTHER LIABILITIES, CONTINUED
The following table summarizes the movements in the asset retirement
obligation for the years ended December 31, 2008 and 2007:
===========================================================================
(Cdn$ in millions) 2008 2007
---------------------------------------------------------------------------
At January 1 $ 520 $ 449
Changes in cash flow estimates
Operating mines (1) 42
Closed properties 17 22
Expenditures and settlements (25) (20)
Accretion expense 34 26
Obligations assumed on acquisition (Note 4(a) and (d)) 76 36
Foreign currency translation adjustments 48 (35)
---------------------------------------------------------------------------
At December 31 669 520
Less current portion (16) (28)
---------------------------------------------------------------------------
$ 653 $ 492
===========================================================================
Asset retirement obligations are initially recorded as a liability at fair
value, assuming credit adjusted risk-free discount rates between 5.75% and
16.50%, and inflation factors between 2.00% and 2.75%. The liability on an
undiscounted basis before inflation is estimated to be approximately
$1,833 million.
The change in cash flow estimates and accretion relating to asset
retirement obligations at closed properties are recognized in other income
(expense) (Note 17).
Our operations are affected by federal, provincial, state and local laws
and regulations concerning environmental protection. Provisions for future
reclamation and site restoration are based on known requirements. It is
not possible to estimate the effect on operating results, if any, of
future legislative or regulatory developments.
b) Pension and Other Employee Future Benefits
DEFINED CONTRIBUTION PLANS
We have defined contribution pension plans for certain groups of
employees. Our share of contributions to these plans is expensed in the
year it is earned by the employee.
DEFINED BENEFIT PLANS AND NON-PENSION POST-RETIREMENT BENEFITS
We have various defined benefit pension plans that provide benefits based
principally on employees' years of service. These plans are only available
to certain qualifying employees. The plans are "flat-benefit" or
"final-pay" plans which are not indexed. Annual contributions to these
plans are actuarially determined and made at or in excess of minimum
requirements prescribed by legislation.
All of our defined benefit pension plans are actuarially evaluated for
funding purposes on a three-year cycle. The most significant plan, which
accounts for 49% of our accrued benefit obligation at December 31, 2008,
was last actuarially evaluated on December 31, 2007. The measurement date
used to determine all of the accrued benefit obligation and plan assets
for accounting information was December 31, 2008. We also have several
post-retirement plans, which provide post-retirement medical and life
insurance benefits to certain qualifying employees.
- -------------------------------------------------------------------------------
25
12. OTHER LIABILITIES, CONTINUED
i. Actuarial Valuation of Plans:
===============================================================================================================================
(Cdn$ in millions) 2008 2007
-------------------------------------------------------------------------------------------------------------------------------
Defined Non-pension Defined Non-pension
benefit post- benefit post-
pension retirement pension retirement
plans benefit plans plans benefit plans
-------------------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation
Balance at beginning of year $ 1,260 $ 272 $ 1,270 $ 316
Current service cost 26 8 25 6
Benefits paid (85) (10) (77) (8)
Interest cost 69 15 63 16
Actuarial revaluation 11 (3) (2) (46)
Past service costs arising from plan improvements 33 - 7 -
Foreign currency exchange rate changes 18 8 (13) (7)
Changes in methodology and assumptions 9 6 4 3
Assumed on acquisitions 140 17 14 -
Effect of new discount rate at year end (257) (65) (36) (9)
Other - - 5 1
------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,224 248 1,260 272
Plan assets
Fair value at beginning of year 1,257 - 1,275 -
Actual return on plan assets (153) - 21 -
Benefits paid (85) (10) (77) (8)
Foreign currency exchange rate changes 15 - (10) -
Contributions 48 10 32 8
Assumed on acquisitions 131 - 17 -
Other - - (1) -
------------------------------------------------------------------------------------------------------------------------------
Fair value at end of year 1,213 - 1,257 -
------------------------------------------------------------------------------------------------------------------------------
Funding surplus (deficit) (11) (248) (3) (272)
Unamortized actuarial costs 108 (28) 110 33
Unamortized past service costs 93 22 68 30
------------------------------------------------------------------------------------------------------------------------------
Net accrued benefit asset (liability) $ 190 $ (254) $ 175 $ (209)
------------------------------------------------------------------------------------------------------------------------------
Represented by
Pension assets (Note 8) $ 241 $ - 210 $ -
Accrued benefit liability (a) (51) (254) (35) (209)
------------------------------------------------------------------------------------------------------------------------------
Net accrued benefit asset (liability) $ 190 $ (254) $ 175 $ (209)
==============================================================================================================================
- -------------------------------------------------------------------------------
26
12. OTHER LIABILITIES, CONTINUED
ii. Funded Status
The funded status of our defined benefit pension plans is as follows:
===============================================================================================================================
(Cdn$ in millions) 2008 2007
-------------------------------------------------------------------------------------------------------------------------------
Plans where Plans where Plans where Plans where
assets benefit assets benefit
exceed obligations exceed obligations
benefit exceed benefit exceed
obligations assets Total obligations assets Total
-------------------------------------------------------------------------------------------------------------------------------
Plan assets $ 746 $ 467 $ 1,213 $ 1,007 $ 250 $ 1,257
Benefit obligations (658) (566) (1,224) (928) (332) (1,260)
-------------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan assets
over benefit obligations $ 88 $ (99) $ (11) $ 79 $ (82) $ (3)
===============================================================================================================================
Our total cash payments for pension and other employee future benefits for
2008, including cash contributed to defined benefit and defined
contribution pension plans and cash payments made directly to
beneficiaries, were $71 million (2007 - $52 million). We expect to
contribute $78 million to our defined contribution and defined benefit
pension plans in 2009 based on minimum funding requirements.
The estimated future benefit payments to pensioners for the next five
years and the five years thereafter are as follows:
===============================================================================================================================
(Cdn$ in millions) 2009 2010 2011 2012 2013 2014 - 2018
-------------------------------------------------------------------------------------------------------------------------------
$ 92 $ 97 $ 101 $ 107 $ 114 $ 665
===============================================================================================================================
- -------------------------------------------------------------------------------
27
12. OTHER LIABILITIES, CONTINUED
iii. Significant Assumptions
The assumptions used to calculate annual expenses are those used to
calculate the accrued benefit obligation at the end of the previous year.
Weighted average assumptions used to calculate the accrued benefit
obligation at the end of each year are as follows:
===============================================================================================================================
2008 2007 2006
-------------------------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
benefit retirement benefit retirement benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
-------------------------------------------------------------------------------------------------------------------------------
Discount rate 7.22% 7.09% 5.27% 5.36% 5.02% 5.13%
Assumed long-term
rate of return on assets 7% - 7% - 7% -
Rate of increase in
future compensation 4% 4% 4% 4% 4% 4%
Initial medical trend rate - 8% - 9% - 10%
Ultimate medical trend rate - 5% - 5% - 5%
Years to reach ultimate
medical trend rate - 7 - 4 - 5
Dental trend rates - 5% - 5% - 5%
===============================================================================================================================
The expected long-term rate of return on plan assets is developed based on
the historical and projected returns for each asset class, as well as the
target asset allocation for the pension portfolio. Projected rates of
return for fixed income securities and equities are developed using a
model that factors in long-term government debt rates, real bond yield
trend, inflation and equity premiums, based on a combination of historical
experience and future long-term expectations.
The discount rate used to determine the accrued benefit obligation is
determined by reference to the market interest rates of high quality debt
instruments at the measurement date.
- -------------------------------------------------------------------------------
28
12. OTHER LIABILITIES, CONTINUED
iv. Employee Future Benefits Expense:
===============================================================================================================================
(Cdn$ in millions) 2008 2007 2006
-------------------------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
benefit retirement benefit retirement benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
-------------------------------------------------------------------------------------------------------------------------------
Current service cost $ 26 $ 8 $ 25 $ 6 $ 25 $ 5
Interest cost 69 15 63 16 62 15
Expected gain on assets (87) - (86) - (77) -
Actuarial loss recognized 7 3 3 7 10 7
Past service cost recognized 17 6 14 6 9 1
Other - - 7 - 3 -
-------------------------------------------------------------------------------------------------------------------------------
$ 32 $ 32 $ 26 $ 35 $ 32 $ 28
===============================================================================================================================
The defined contribution expense for 2008 was $12 million (2007 - $11
million; 2006 - $8 million).
Certain employee future benefit costs incurred in the year and the actual
return on plan assets in excess of or short of the actuarially assumed
return are not taken into income in the year but are amortized over the
expected average remaining service life of employees. Employee future
benefit expenses recognized in the year are reconciled to employee future
benefit costs incurred as follows:
===============================================================================================================================
(Cdn$ in millions) 2008 2007 2006
-------------------------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
benefit retirement benefit retirement benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
-------------------------------------------------------------------------------------------------------------------------------
Expense recognized $32 $ 32 $ 26 $ 35 $32 $ 28
Difference between
expected and actual
return on plan assets 240 - 66 - (66) -
Difference between
actuarial losses (gains)
amortized and actuarial
losses (gains) arising (264) (59) (36) (59) 1 1
Difference between past
service costs amortized
and past service costs
arising 16 (6) (7) (6) 34 21
Other - - (4) - (3) -
-------------------------------------------------------------------------------------------------------------------------------
$ 24 $ (33) $ 45 $(30) $(2) $ 50
===============================================================================================================================
- -------------------------------------------------------------------------------
29
12. OTHER LIABILITIES, CONTINUED
v. Health Care Sensitivity
A one percent change in the initial and ultimate medical trend rates
assumptions would have the following effect on our post-retirement health
care obligations and expense:
===========================================================================
Increase (decrease)
in service and Increase (decrease)
(Cdn$ in millions) interest cost in obligation
---------------------------------------------------------------------------
Effect of 1% increase in
medical trend rate $ 3 $ 29
Effect of 1% decrease in
medical trend rate (3) (24)
===========================================================================
vi. Investment of Plan Assets
The assets of our defined benefit pension plans are managed by pension
asset fund managers under the oversight of the Teck Cominco Limited
Executive Pension committee.
Our pension plan investment strategies support the objectives of each
defined benefit plan and are related to the plan demographics and timing
of expected benefit payments to plan members. The objective for the plan
asset portfolios is to achieve an annual portfolio return over a four-year
period equal to at least the annual percentage change in the Consumer
Price Index plus 4%. To achieve this objective, a strategic asset
allocation policy has been developed for each defined benefit plan. The
asset allocation is monitored quarterly and rebalanced if the funds in an
asset class exceed their allowable allocation ranges. We review the
investment guidelines for each plan at least annually and the portfolio
and investment managers' performance is monitored quarterly.
The composition of the defined benefit pension plan assets at December 31,
2008 and 2007, and the target composition for 2009 are as follows:
===========================================================================
2009 TARGET 2008 ACTUAL 2007 ACTUAL
---------------------------------------------------------------------------
Equity securities 50% 43% 55%
Debt securities 40% 44% 36%
Real estate and other 10% 13% 9%
---------------------------------------------------------------------------
100% 100% 100%
===========================================================================
- -------------------------------------------------------------------------------
30
13. INCOME AND RESOURCE TAXES
a) Provision for Income and Resource Taxes from Continuing Operations:
===========================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------
Current
Canadian income tax $(1,235) $ 388 $ $ 483
Foreign income and resource tax 220 398 499
Canadian resource tax 185 106 172
---------------------------------------------------------------------------
(830) 892 1,154
Future
Canadian income tax 1,483 (101) 34
Foreign income and resource tax (25) (12) 19
Canadian resource tax 30 16 6
---------------------------------------------------------------------------
1,488 (97) 59
---------------------------------------------------------------------------
$ 658 $ 795 $ 1,213
===========================================================================
b) Reconciliation of income and resource taxes calculated at the statutory
rates to the actual tax provision:
===========================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------
Tax expense at the statutory income tax
rate of 31.2% $ 435 $ 857 $ 1,244
(2007 - 34.1%; 2006 - 34.6%)
Tax effect of
Resource taxes, net of resource and
depletion allowances 130 (18) (7)
Non-temporary differences, including
one-half of capital gains and
losses and goodwill impairment 185 (19) (41)
Benefit of current tax losses not
recognized (recognition of
previously unrecognized losses) (2) 21 14
Benefit of tax rate reduction (38) (81) (21)
Difference in tax rates in foreign
jurisdictions (4) (13) 32
Other (48) 48 (8)
---------------------------------------------------------------------------
$ 658 $ 795 $ 1,213
===========================================================================
- -------------------------------------------------------------------------------
31
13. INCOME AND RESOURCE TAXES, CONTINUED
c) Temporary differences giving rise to future income and resource tax assets
and liabilities:
===========================================================================
(Cdn$ in millions) 2008 2007
---------------------------------------------------------------------------
Future income and resource tax assets
Net operating loss carry forwards $ 310 $ 111
Property, plant and equipment 459 (98)
Asset retirement obligations 49 57
Amounts relating to partnership year ends (347) -
Other 14 80
Valuation allowance (128) (77)
---------------------------------------------------------------------------
$ 357 $ 73
Future income and resource tax liabilities
Property, plant and equipment $ 5,051 $ 1,895
Asset retirement obligations (170) (132)
Amounts relating to partnership year ends 94 305
Other (10) (61)
---------------------------------------------------------------------------
$ 4,965 $ 2,007
===========================================================================
d) Earnings by Jurisdiction
Our earnings before income and resource taxes, non-controlling interests
and equity earnings (losses) from continuing operations are earned in the
following tax jurisdictions:
===========================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------
Canada $ 1,192 $ 1,181 $ 1,404
Foreign 203 1,327 2,191
---------------------------------------------------------------------------
$ 1,395 $ 2,508 $ 3,595
===========================================================================
e) Non-Resident Subsidiaries
We have non-resident subsidiaries that have undistributed earnings. For
certain non-resident subsidiaries, undistributed earnings are not expected
to be repatriated in the foreseeable future and therefore, taxes have not
been provided.
f) Loss Carry Forwards
At December 31, 2008, we had $579 million of Canadian federal net
operating loss carry forwards. These loss carry forwards expire at various
dates between 2010 and 2028. At December 31, 2008, we had United States
federal net operating loss carry forwards of $95 million (2007 - $103
million). These loss carry forwards expire at various dates between 2009
and 2027.
- -------------------------------------------------------------------------------
32
13. INCOME AND RESOURCE TAXES, CONTINUED
g) Valuation Allowance
We have provided a valuation allowance of $128 million (2007 - $77
million) relating to tax assets in jurisdictions that do not have
established sources of taxable income.
h) Taxation Assessments
In the normal course of business, we are subject to audit by taxation
authorities. These audits may alter the timing or amount of taxable income
or deductions. The amount ultimately reassessed upon resolution of issues
raised may differ from the amounts accrued.
For our primary Canadian entities, audits by various Canadian taxation
authorities for years after 2002 have not been completed. For US federal,
state and local tax purposes, our principal US entities are subject to
examination by US tax authorities for the years 1991 to the present. We
are subject to audit by Peruvian taxation authorities for the years 2006
to the present. For Chilean tax purposes, we are subject to examination by
tax authorities for years 2006 to the present.
14. NON-CONTROLLING INTERESTS
===========================================================================
(Cdn$ in millions) 2008 2007
--------------------------------------------------------------------------
Highland Valley Copper (3%) $ 10 $ 56
Carmen de Andacollo (10%) 34 21
Quebrada Blanca (23.5%) 41 10
Elkview Mine Partnership (5%) 19 5
--------------------------------------------------------------------------
$ 104 $ 92
===========================================================================
15. SHAREHOLDERS' EQUITY
a) Authorized Share Capital
Our authorized share capital consists of an unlimited number of Class A
common shares without par value, an unlimited number of Class B
subordinate voting shares without par value and an unlimited number of
preferred shares without par value issuable in series.
Class A common shares carry the right to 100 votes per share. Class B
subordinate voting shares carry the right to one vote per share. Each
Class A common share is convertible, at the option of the holder, into one
Class B subordinate voting share. In all other respects, the Class A
common shares and Class B subordinate voting shares rank equally.
The attributes of the Class B subordinate voting shares contain so called
"coattail provisions," which provide that, in the event that an offer (an
"Exclusionary Offer") to purchase Class A common shares, which is required
to be made to all or substantially all holders thereof, is not made
concurrently with an offer to purchase Class B subordinate voting shares
on identical terms, then each Class B subordinate voting share will be
convertible into one Class A common share.
- -------------------------------------------------------------------------------
33
15. SHAREHOLDERS' EQUITY, CONTINUED
The Class B subordinate voting shares will not be convertible in the event
that an Exclusionary Offer is not accepted by holders of a majority of the
Class A common shares (excluding those shares held by the person making
the Exclusionary Offer). If an offer to purchase Class A common shares
does not, under applicable securities legislation or the requirements of
any stock exchange having jurisdiction, constitute a "take-over bid," or
is otherwise exempt from any requirement that such offer be made to all or
substantively all holders of Class A common shares, the coattail
provisions do not apply.
b) Class A Common Shares and Class B Subordinate Voting Shares:
===============================================================================================================================
Class A Class B subordinate
Shares (in 000's) common shares voting shares
-------------------------------------------------------------------------------------------------------------------------------
At December 31, 2005 4,674 199,127
Options exercised (e) - 907
Issued in settlement of exchangeable debentures due 2024 (d) - 11,489
-------------------------------------------------------------------------------------------------------------------------------
At December 31, 2006 4,674 211,523
Share split (c) 4,674 211,523
Issued on acquisition of Aur (Note 4(d)) - 21,972
Options exercised (e) - 1,373
Share repurchase program (j) - (13,100)
Other 5 7
-------------------------------------------------------------------------------------------------------------------------------
At December 31, 2007 9,353 433,298
Issued for business acquisitions (Note 4(a)) - 36,829
Issued for asset acquisition (Note 4(b)) - 6,918
Options exercised (e) - 578
Other - (111)
-------------------------------------------------------------------------------------------------------------------------------
At December 31, 2008 9,353 477,512
===============================================================================================================================
c) Share Split
On April 25, 2007, shareholders approved a two-for-one share split of our
Class A common shares and Class B subordinate voting shares effective as
of the close of business on May 7, 2007. All share, per share, share
option and DSU and RSU information included in the consolidated financial
statements and accompanying notes (other than information in Note 15(b))
for the period prior to the share spilt has been adjusted to reflect this
share split for all periods presented.
d) Exchangeable Debentures Due 2024
On June 1, 2006, we completed a series of transactions culminating in the
redemption of our exchangeable debentures issued in 1999. In the course of
these transactions, all outstanding debentures were exchanged and we
issued 11.5 million Class B subordinate voting shares. By virtue of our
option to deliver a fixed number of Class B subordinate voting shares to
satisfy the principal payments, the debentures net of issue costs and
taxes were classified as a component of shareholders' equity and the
interest, net of taxes, was charged directly to retained earnings. This
interest, net of taxes, totalled $3 million in 2006.The exchange was a
non-monetary transaction and did not affect our cash flow or earnings. In
2006, current tax benefits of $124 million on these transactions were
recorded directly to shareholders' equity.
- -------------------------------------------------------------------------------
34
15. SHAREHOLDERS' EQUITY, CONTINUED
e) Share Options
Under our share option plan, 6 million Class B subordinate voting shares
have been set aside for the grant of share options to full-time employees
and directors. The exercise price for each option is the closing price for
our Class B subordinate voting shares on the last trading day before the
date of grant. We issue new shares upon exercise of share options.
During the year ended December 31, 2008, we granted 1,655,000 Class B
subordinate voting share options at market price to employees. These share
options have a weighted average exercise price of $34.43, vest in equal
amounts over three years and have a term of 8 years.
The weighted average fair value of Class B subordinate voting share
options granted in the year was estimated at $10 per option (2007 - $16;
2006 - $12) at the grant date based on the Black-Scholes option-pricing
model using the following assumptions:
===========================================================================
2008 2007 2006
--------------------------------------------------------------------------
Dividend yield 2.94% 0.95% 1.04%
Risk free interest rate 6.35% 5.15% 4.11%
Expected life 4.2 years 4.2 years 5.0 years
Expected volatility 31% 35% 35%
===========================================================================
Outstanding share options:
==========================================================================================================
2008 2007
----------------------------------------------------------------------------------------------------------
Weighted Weighted
average average
Shares exercise Shares exercise
(in 000's) price (in 000's) price
----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 3,670 $ 22.86 4,274 $ 14.40
Granted 1,655 34.43 839 3.74
Exercised (578) 9.39 (1,373) 9.44
Forfeited (215) 33.86 (70) 19.52
Expired - - - -
----------------------------------------------------------------------------------------------------------
Outstanding at end of year 4,532 $ 28.28 3,670 $ 22.86
----------------------------------------------------------------------------------------------------------
Vested and exercisable at end of year 2,265 $ 20.09 2,141 $ 12.58
==========================================================================================================
- -------------------------------------------------------------------------------
35
15. SHAREHOLDERS' EQUITY, CONTINUED
Information relating to share options outstanding at December 31, 2008:
==============================================================================================================================
Weighted average
Outstanding share Vested share Weighted average Weighted average remaining life of
options options exercise price on exercise price on outstanding options
(in 000's) (in 000's) Price Range outstanding options vested options (months)
------------------------------------------------------------------------------------------------------------------------------
658 658 $ 4.48 - $10.10 $ 5.54 $ 5.54 8
438 438 $10.11 - $15.16 12.55 12.55 14
490 490 $15.17 - $22.75 22.64 22.64 26
2,120 421 $22.76 - $34.14 33.73 33.20 78
826 258 $34.15 - $49.17 44.07 43.74 75
------------------------------------------------------------------------------------------------------------------------------
4,532 2,265 $ 28.28 $ 20.09 55
==============================================================================================================================
The weighted average remaining life of vested options at December 31, 2008
was 30 months. The intrinsic value of a share option is the difference
between the current market price for our Class B subordinate voting share
and the exercise price of the option. At December 31, 2008, the aggregate
intrinsic value of vested and unvested options, based on the December 31,
2008 closing price of $6.02 for the Class B subordinate voting shares, was
nominal for outstanding and vested options.
Further information about our share options:
=============================================================================================================================
(Cdn$ in millions) 2008 2007 2006
-----------------------------------------------------------------------------------------------------------------------------
Total compensation cost recognized $ 13 $ 11 $ 7
Total fair value of share options vested 9 8 5
Total intrinsic value of share options exercised 19 46 54
=============================================================================================================================
The unrecognized compensation cost for non-vested share options at
December 31, 2008 was $9 million. The weighted average period over which
it is expected to be recognized is 1.5 years.
f) Deferred Share Units and Restricted Share Units
Under our Deferred Share Unit ("DSU") or Restricted Share Unit ("RSU")
plan, directors and employees may receive either DSUs or RSUs, each of
which entitle the holder to a cash payment equal to the market value of
one Class B subordinate voting share at the time they are redeemed for
employees. These units vest immediately for directors and after three
years for employees. Upon normal retirement the units vest immediately and
when early retirement occurs, units vest on a pro-rata basis. Should
employees be terminated without cause, units vest on a pro-rata basis.
Should employees resign or be terminated with cause, units are forfeited.
DSUs may only be redeemed within twelve months from the date a holder
ceases to be an employee or director while RSUs must be redeemed at the
end of a three-year period measured from the end of the year immediately
preceding the grant.
Additional units are issued to holders of DSU's and RSU's to reflect
dividends paid on Class B subordinate voting shares and other adjustments
to Class B subordinate voting shares.
- -------------------------------------------------------------------------------
36
15. SHAREHOLDERS' EQUITY, CONTINUED
At December 31, 2008, 1,101,200 DSUs and RSUs were outstanding (2007 -
1,044,198).
Non-vested DSU and RSU activity:
===============================================================================================================================
2008 2007
-------------------------------------------------------------------------------------------------------------------------------
DSUs and RSUs Weighted Weighted
average DSUs average grant
grant date and RSUs date
(in 000's) fair value (in 000's) fair value
------------------------------------------------------------------------------------------------------------------------------
Non-vested at beginning of year 692 $ 39.06 718 $ 29.36
Granted 495 35.66 359 42.98
Forfeited (244) 38.33 (19) 26.00
Vested (290) 35.28 (366) 24.58
------------------------------------------------------------------------------------------------------------------------------
Non-vested at end of year 653 $ 38.24 692 $ 39.06
==============================================================================================================================
Further information about our DSUs and RSUs:
===============================================================================================================================
(Cdn$ in millions, except weighted average) 2008 2007 2006
-------------------------------------------------------------------------------------------------------------------------------
Weighted average grant date fair value of the units granted $ 35.74 $ 44.02 $ 35.63
Total fair value of units vested 4 13 8
Total compensation cost recognized (19) 10 17
Tax benefits realized - 4 2
Cash used to settle DSUs and RSUs 1 12 6
===============================================================================================================================
The unrecognized compensation cost for non-vested DSUs and RSUs at
December 31, 2008 was $14 million. The weighted average period over which
it is expected to be recognized is 1.7 years.
- -------------------------------------------------------------------------------
37
15. SHAREHOLDERS' EQUITY, CONTINUED
g) Accumulated Comprehensive Income:
===============================================================================================================================
(Cdn$ in millions) 2008 2007 2006
-------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss - beginning of year $ (671) $ (145) $ (168)
Adoption of new accounting standards - 50 -
-------------------------------------------------------------------------------------------------------------------------------
(671) (95) (168)
Other comprehensive income (loss) in the year
Currency translation adjustment
Unrealized gains (losses) 1,260 (665) 20
Foreign exchange differences on debt designated as a hedge of
self-sustaining foreign subsidiaries (257) 56 1
Losses reclassified to net earnings on realization - 59 2
-------------------------------------------------------------------------------------------------------------------------------
1,003 (550) 23
Available-for-sale instruments
Unrealized losses (net of tax of $48 for 2008 and $9 for 2007) (298) (47) -
Losses reclassified to net earnings (net of tax of $40 for 2008
and $2 for 2007) 250 11 -
-------------------------------------------------------------------------------------------------------------------------------
(48)
(36) -
Derivatives designated as cash flow hedges
Unrealized losses (net of taxes of $47 for 2008 and nil for 2007) (72) - -
Losses reclassified to net earnings on realization
(net of tax of $33 for 2008 and $7 for 2007) 51 10 -
-------------------------------------------------------------------------------------------------------------------------------
(21) 10 -
-------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 934 (576) 23
-------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) - end of year 263 (671) (145)
Retained earnings - end of year 5,476 5,038 4,225
-------------------------------------------------------------------------------------------------------------------------------
Accumulated comprehensive income $ 5,739 $ 4,367 $ 4,080
===============================================================================================================================
The components of accumulated other comprehensive income (loss) are:
===============================================================================================================================
(Cdn$ in millions) 2008 2007
-------------------------------------------------------------------------------------------------------------------------------
Currency translation adjustment $ 308 $ (695)
Unrealized gains (losses) on investments (net of tax of ($1) in 2008 and ($9) in 2007) (6) 42
Unrealized losses on cash flow hedges (net of tax of $28 in 2008 and $14 in 2007) (39) (18)
-------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ 263 $ (671)
===============================================================================================================================
- -------------------------------------------------------------------------------
38
15. SHAREHOLDERS' EQUITY, CONTINUED
h) Earnings Per Share
The following table reconciles our basic and diluted earnings per share:
===============================================================================================================================
(Cdn$ in millions, except per share data) 2008 2007 2006
-------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS
Earnings from continuing operations $ 677 $ 1,661 $ 2,395
Less interest on exchangeable debentures, net of taxes - - (3)
-------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations, less interest on exchangeable
debentures, net of taxes 677 1,661 2,392
Earnings (loss) from discontinued operations (18) (46) 36
-------------------------------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders $ 659 $ 1,615 $ 2,428
-------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS
Earnings from continuing operations $ $677 $ 1,661 $ 2,395
Earnings (loss) from discontinued operations (18) (46) 36
-------------------------------------------------------------------------------------------------------------------------------
Net diluted earnings available to common shareholders $ 659 $ 1,615 $ 2,431
-------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000's) 452,124 432,236 421,902
Effect of dilutive securities
Incremental shares from share options 1,119 2,229 3,318
Shares issuable on conversion of exchangeable debentures - - 9,574
-------------------------------------------------------------------------------------------------------------------------------
Weighted average diluted shares outstanding 453,243 434,465 434,794
-------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.46 $ 3.74 $ 5.77
Basic earnings per share from continuing operations $ 1.50 $ 3.85 $ 5.68
Diluted earnings per share $ 1.45 $ 3.72 $ 5.60
Diluted earnings per share from continuing operations $ 1.49 $ 3.83 $ 5.52
===============================================================================================================================
At December 31, 2008 there were 2,295,933 (2007 - 828,000, 2006 - nil)
potentially dilutive shares that have not been included in the diluted
earnings per share calculation for the periods presented because their
effect is anti-dilutive.
- -------------------------------------------------------------------------------
39
15. SHAREHOLDERS' EQUITY, CONTINUED
i) Dividends
Dividends declared in 2008, 2007 and 2006 totalled $0.50 per share, $1.00
per share, and $1.00 per share respectively. Dividends paid on or after
January 1, 2007 are eligible for the enhanced federal and provincial
dividend tax credits.
j) Share Purchase Program
We have a share purchase program that allows us to purchase up to 40
million of our outstanding Class B subordinate voting shares by way of a
normal course issuer bid until March 10, 2009. Purchases, if any, are made
at the prevailing market price of the Class B subordinate voting shares as
traded on the Toronto Stock Exchange and any shares purchased are
cancelled. We have not purchased any Class B subordinate voting shares
under this program during 2008.
During 2007, we purchased 13.1 million Class B subordinate voting shares
at a cost of $577 million pursuant to a normal course issuer bid that
expired on February 21, 2008.
16. ASSET IMPAIRMENT CHARGES
===========================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------
Property, plant and equipment (a) $ 179 $43 $-
Goodwill (b) (Note 9) 345 - -
Exploration and development properties and other (c) 65 26 -
---------------------------------------------------------------------------
$ 589 $69 $-
===========================================================================
a) We review the carrying value of our property, plant and equipment whenever
events or changes in circumstances indicate that the carrying amounts of
the related assets or groups of assets may not be recoverable. When we no
longer expect to recover the full carrying value of a mine or property
over its expected life, we write down its carrying value to its fair value
based on internal estimates of discounted future cash flows or our
estimate of its salvage values.
During 2008, we recorded an impairment charge of $116 million against our
Duck Pond copper-zinc mine, an additional impairment charge of $51 million
(2007 - $31 million) against our Pend Oreille zinc mine and an asset
impairment charge of $12 million (2007 - $12 million) against our Lennard
Shelf zinc mine in Western Australia. These impairment charges were taken
as a result of low commodity prices, short mine lives and operating
losses. Lennard Shelf was closed in August 2008 and Pend Oreille was
placed on care and maintenance in February 2009.
b) The carrying value of goodwill is reviewed at least annually and when
impairment indicators exist. Asset valuations and impairment charges are
based on management estimates and assumptions.
During the fourth quarter of 2008, we evaluated the carrying amount of
goodwill assigned to reporting units for potential impairment. This
assessment involves estimating the fair value of each reporting unit that
has been assigned goodwill.
- -------------------------------------------------------------------------------
40
16. ASSET IMPAIRMENT CHARGES, CONTINUED
As a result of our goodwill impairment testing, we recorded total goodwill
impairment charges of $345 million, representing impairment charges of $10
million at our Duck Pond mine, $149 million at our Quebrada Blanca copper
mine and $186 million at our Carmen de Andacollo copper mine. The goodwill
balance of $10 million for Duck Pond was written off primarily a result of
lower commodity prices and the short remaining life of the mine. The
goodwill impairment charges for Quebrada Blanca and Carmen de Andacollo
were due to declines in near term commodity prices and unfavourable
capital market conditions that reduced the fair value of these operations
at year end. Also contributing to this was an increase in the estimated
future capital for development of the hypogene resource for Quebrada
Blanca. The extent of these write-downs was mitigated by the program of
mine expansion at Carmen de Andacollo and the establishment of significant
additional reserves at Quebrada Blanca.
c) During 2008, we elected to withdraw from the Petaquilla copper project in
Panama and therefore, have recorded an impairment charge of $22 million on
our investment in Minera Petaquilla S.A. During 2008, we also recorded an
impairment charge of $35 million for capitalized exploration costs
relating to a nickel property in Brazil and $8 million in respect of other
exploration properties as these costs are no longer expected to be
recoverable.
During 2007, we recorded an impairment charge of $26 million on our
investment in Tahera Diamond Corporation ("Tahera"). Tahera announced the
suspension of operations at its primary asset, the Jericho mine, and
subsequently filed for creditor protection, indicating an
other-than-temporary decline in market value.
17. OTHER INCOME (EXPENSE)
===========================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------
Interest income $ 56 $ 177 $ 186
Derivative gains on forward copper and zinc sales 291 53 -
Other derivative losses (6) (25) -
Foreign exchange gains (loss) 69 6 (7)
Gain on sale of investments and assets,
net of losses (a) 16 55 201
Realization of cumulative translation losses - (59) -
Reclamation expense for closed properties (22) (26) (17)
Provision for marketable securities (b) (292) - -
Other (81) (11) (47)
---------------------------------------------------------------------------
$ 31 $ 170 $ 316
===========================================================================
a) The gain on sale of investments and assets in 2006 included $120 million
from the sale of Inco shares and redemption of Inco exchange debentures.
In 2006, we sold our common shares of Inco Limited ("Inco"), some of which
were pledged as security for $248 million of debentures we issued in 1996.
The debentures were exchangeable at the option of the holder for common
shares of Inco, subject to adjustment in certain circumstances.
b) At December 31, 2008, we determined that the mark-to-market loss on our
available-for-sale marketable securities recorded through other
comprehensive income was an other-than-temporary decline and transferred
the loss to other income (expense).
- -------------------------------------------------------------------------------
41
18. PARTNERSHIPS AND JOINT VENTURES
Our operations that are accounted for using the proportionate
consolidation method are the Antamina, Pogo, Hemlo and Lennard Shelf
mines. The Lennard Shelf mine was permanently closed in August of 2008. We
proportionately consolidated our 40% interest in Teck Coal, prior to the
acquisition of Fording's assets on October 30, 2008 (Note 4(a)). Our share
of the assets and liabilities, revenues and expenses and cash flows of
these operations is as follows:
====================================================================================
(Cdn$ in millions) 2008 2007 2006
------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 113 $ 108 $ 88
Other current assets 142 316 347
Mineral properties, plant and equipment 741 1,101 1,252
------------------------------------------------------------------------------------
$ 996 $ 1,525 $ 1,687
------------------------------------------------------------------------------------
Liabilities and equity
Current liabilities 103 194 274
Long-term debt 113 114 123
Other long-term liabilities 134 278 245
Equity 646 939 1,045
------------------------------------------------------------------------------------
996 1,525 1,687
------------------------------------------------------------------------------------
Earnings
Revenues $ 2,410 $ 1,955 $ 2,127
Operating and other expenses (1,289) (1,232) (1,077)
Provision for income and resource taxes (124) (205) (222)
------------------------------------------------------------------------------------
Net earnings $ 997 $ 518 $ 828
------------------------------------------------------------------------------------
Cash flow
Operating activities $ 1,107 $ 652 $ 981
Financing activities 40 11 (38)
Investing activities (183) (71) (76)
Distributions (979) (559) (945)
Effect of exchange rates on cash 20 (13) -
------------------------------------------------------------------------------------
Increase (decrease) in cash $ 5 $ 20 $ (78)
====================================================================================
Income and resource taxes relate only to incorporated joint ventures. The
liability for income taxes for partnerships and unincorporated joint
ventures rests at the parent entity level and is not included in this
table.
- -------------------------------------------------------------------------------
42
19. SUPPLEMENTAL CASH FLOW INFORMATION
===============================================================================================================
(Cdn$ in millions) 2008 2007 2006
---------------------------------------------------------------------------------------------------------------
(a) Cash and cash equivalents
Cash $ 294 $ 695 $ 156
Money market investments with maturities from the date of
acquisition of 3 months or less 556 713 4,898
---------------------------------------------------------------------------------------------------------------
$ 850 $ 1,408 $ 5,054
---------------------------------------------------------------------------------------------------------------
(b) Net change in non-cash working capital items
Accounts and settlements receivable $ 118 $ 178 $ (192)
Inventories 113 (94) (118)
Accounts payable and accrued liabilities (276) 99 321
Current income and resource taxes payable (1,519) (465) 288
---------------------------------------------------------------------------------------------------------------
$ (1,564) $ (282) $ 299
---------------------------------------------------------------------------------------------------------------
(c) Interest and taxes paid
Interest paid $ 135 $ 90 $ 111
Income and resource taxes paid $ 645 $ 1,283 $ 846
(d) Non-cash financing transaction
Shares issued on conversion of debt (Note 15(d)) $ - $ - $ 107
Shares issued for acquisitions (Note 4) $ 1,791 $ 952 $ -
===============================================================================================================
20. COMMITMENTS AND CONTINGENCIES
We consider provisions for all our outstanding and pending legal claims to
be adequate. The final outcome with respect to actions outstanding or
pending as at December 31, 2008, or with respect to future claims, cannot
be predicted with certainty. Significant commitments and contingencies not
disclosed elsewhere in the notes to our financial statements are as
follows:
a) Restructuring
On January 8, 2009 we announced a workforce reduction of approximately
1,400 positions as part of our broader strategy to reduce costs. In total,
about 1,000 employee and 400 contractor positions will be eliminated by
the end of 2009, with the majority of the reductions to be completed in
the first quarter. Severance and other related costs associated with this
reduction will be charged to net earnings in the first quarter of 2009.
b) Upper Columbia River Basin (Lake Roosevelt)
Prior to our acquisition in 2000 of a majority interest in Cominco Ltd.
("TCML"), the Trail smelter discharged smelter slag into the Columbia
River. These discharges commenced prior to TCML's acquisition of the Trail
smelter in 1906 and continued until 1996. Slag was discharged pursuant to
permits issued in British Columbia subsequent to the enactment of relevant
environmental legislation in 1967. Slag and other non-slag materials
released from the Trail smelter in British Columbia have travelled down
river, as have substances discharged from many other smelting and
industrial facilities located along the length of the Upper Columbia River
system in Canada and the United States.
- -------------------------------------------------------------------------------
43
20. COMMITMENTS AND CONTINGENCIES, CONTINUED
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, TCAI, entered into a Settlement
Agreement (the "EPA Agreement") with the US Environmental Protection
Agency ("EPA") and the United States under which TCAI is paying for and
conducting a remedial investigation and feasibility study ("RI/FS") of
contamination in the Upper Columbia River (the "Studies") under the
oversight of the EPA. This multi-year study will use the latest science
developed by the EPA and other researchers to determine the true risks in
the reservoir system. The RI/FS is scheduled for completion in 2011 and is
being prepared by independent consultants approved by the EPA and retained
by TCAI. TCAI is paying the EPA's oversight costs and providing funding
for the participation of other governmental parties, the State of
Washington and two native tribes, the Confederated Tribes of the Colville
Nation (the "Colville Tribe") and the Spokane Tribe. TCML has guaranteed
TCAI's performance of the Agreement. TCAI has also placed US$20 million in
escrow as financial assurance of its obligations under the Agreement and
we have accrued our estimate of the costs of the Studies.
Contemporaneously with the execution of the Agreement, the EPA withdrew a
unilateral administrative order ("UAO") purporting to compel TCML to
conduct the Studies.
The RI/FS process requires TCAI to submit a work plan for the assessment
of site conditions to the EPA which, when approved, will lead to the
development of a set of sampling and other plans and actual field work.
Data from field work will be used to determine whether further studies are
required. When sufficient data have been compiled to adequately assess
risk, a baseline human health and environmental risk assessment ("RA")
will be produced to identify risks, if any, that may exist to humans and
to various environmental receptors. The RA will form the basis for the
RI/FS. The remedial investigation will identify potential remedial options
available to mitigate any unacceptable risks; the feasibility study will
consider engineering, procedural and practical constraints to these
remedial options. Based on the RI/FS, the EPA will determine whether and
what remedial actions are appropriate in accordance with criteria that
take into account, among other factors, technical feasibility,
effectiveness, cost, effects on the environment resulting from the
remediation action, and acceptability of the relevant remedial option to
the community. Each work product and plan in this process is subject to
EPA approval. Internal consultation processes of the EPA will include
consultation with state and other federal agencies and the two Indian
Tribes bordering the site.
While the UAO was outstanding, two citizens of Washington State and
members of the Colville Tribe commenced an enforcement proceeding under
Section 310(a)(i) of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") to enforce the UAO and to seek
fines and penalties against TCML for non-compliance. TCML sought to have
all claims dismissed on the basis that the court lacked jurisdiction
because the CERCLA statute, in TCML's view was not intended to govern the
discharges of a facility occurring in another country. That case proceeded
through US Federal District Court and the Federal Court of Appeals for the
9th Circuit. The 9th Circuit affirmed the District Court decision denying
TCML's motion to dismiss the case on jurisdictional grounds and found that
CERCLA could be applied to TCML's disposal practices in British Columbia
because they may have had an effect in Washington State. The 9th Circuit
issued a stay of its decision pending the resolution of a further appeal
by TCML to the US Supreme Court.
- -------------------------------------------------------------------------------
44
20. COMMITMENTS AND CONTINGENCIES, CONTINUED
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 defence, but rather
reflects the US Supreme Court's decision not to take up the case at this
particular time.
Following the denial of our petition for review by the U.S. Supreme Court
in January 2008, the Lake Roosevelt litigation reverted to the Federal
District Court for Eastern Washington. Judgment on the first phase of the
litigation dealing with issues associated with an EPA order issued in
December, 2003 and withdrawn in June 2008 was delivered on September 19,
2008. All of the claims associated with the order were dismissed including
the plaintiffs' claims for costs and attorneys' fees. On October 3, 2008,
the plaintiffs filed a joint motion for partial reconsideration of the
decision and asked that it be entered as a final judgment.
In November, 2008, TCML filed a motion to stay the plaintiffs' CERCLA cost
recovery declaratory relief claim. On December 30, 2008, the Court denied
the motion and discovery and briefing of the liability phase of the
litigation will occur in 2009.
The hearing of the plaintiffs' claims for natural resource damages and
costs has been deferred until the remedial investigation and feasibility
study being conducted by TCML's affiliate Teck Cominco American
Incorporated under the EPA Agreement have been substantially advanced or
completed. Natural resource damages ("NRD") are assessed for injury to,
destruction of, or loss of natural resources including the reasonable cost
of a damage assessment. Teck American commissioned a study by recognized
experts in NRD assessment in 2008. Based on the assessment performed, Teck
Cominco estimates that the compensable value of such damage will not be
material.
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.
There can be no assurance that TCML will ultimately be successful in its
defence 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 and additional damage assessments are
completed, it is not possible to estimate the extent and cost, if any, of
remediation or restoration that may be required or to assess the company's
potential liability for damages. 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 and damage to resources
found, the cost of remediation and/or the damage assessment may be
material.
c) Red Dog Commitments
In 2008, Teck Alaska (Red Dog) entered into a settlement with plaintiffs
from the Village of Kivalina who filed a complaint alleging violations of
the Clean Water Act. A consent decree constituting a full and complete
settlement of the claims has been entered with the Court.
In 2006, in accordance with the operating agreement governing the Red Dog
mine, the royalty to the North Alaska Nature Association ("NANA")
increased to 25% of net proceeds of production. Previously, we paid an
advance royalty of 4.5% of net smelter returns. The increase in royalty
rate is partially offset by a decline in the base on which royalties are
calculated, as operating, distribution, selling and management fees, an
allowance for future reclamation and closure costs, capital costs and
deemed interest are deductible in the calculation of the royalty. The 25%
royalty became payable in the third quarter of 2007 after we had recovered
the cumulative advance royalties previously paid to NANA. 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.
- -------------------------------------------------------------------------------
45
20. COMMITMENTS AND CONTINGENCIES, CONTINUED
TCAK leases, road and port facilities from the Alaska Industrial
Development and Export Authority though which it ships all concentrates
produced at the Red Dog mine. The lease requires TCAK to pay a minimum
annual user fee of US$18 million, but has no minimum tonnage requirements.
There are also fee escalation provisions based on zinc price and annual
budgets.
TCAK has also entered into agreements for the transportation and handling
of concentrates from the mill site. These agreements have varying terms
expiring at various dates through 2015 and include provisions for
extensions. There are minimum tonnage requirements and the minimum annual
fees amount to approximately US$15 million in 2009, US$7 million in 2010,
US$5 million in 2011 and US$4 million thereafter with adjustment
provisions based on variable cost factors.
d) Antamina Royalty
Our interest in the Antamina mine is subject to a net profits royalty
equivalent to 7.4% of our share of the project's required free cash flow
after recovery of capital costs and an interest factor on approximately
60% of project costs. The recovery of accumulated capital costs together
with interest was completed in 2006 and an expense of $20 million was
recorded in 2008 (2007 - $22 million) in respect of this royalty.
e) Operating Leases
Amounts payable under operating leases are $155 million, with annual
payments of $38 million in 2009, $33 million in 2010, $23 million in 2011,
$14 million in 2012, $8 million in 2013, and $39 million thereafter. The
leases are primarily for office premises, mobile equipment and rail cars.
f) Forward Purchase Commitments
We have a number of forward purchase commitments for the purchase of
concentrates and power and for shipping and distribution of products,
which are incurred in the normal course of business. The majority of these
contracts are subject to force majeure provisions.
21. ACCOUNTING FOR FINANCIAL INSTRUMENTS
a) Financial Risk Management
Our activities expose us to a variety of financial risks, which include
foreign exchange risk, interest rate risk, commodity price risk, credit
risk and liquidity risk. From time-to-time, we may use foreign exchange
forward contracts, commodity price contracts and interest rate swaps to
manage exposure to fluctuations in foreign exchange, metal prices and
interest rates. We do not have a practice of trading derivatives. Our use
of derivatives is based on established practices and parameters, which are
subject to the oversight of our Hedging Committee and our Board of
Directors.
LIQUIDITY RISK
Liquidity risk arises from our general and capital funding needs. Further
discussion on liquidity risk is included in Note 2.
- -------------------------------------------------------------------------------
46
21. ACCOUNTING FOR FINANCIAL INSTRUMENTS, CONTINUED
Contractual undiscounted cash flow requirements for financial liabilities
as at December 31, 2008:
===============================================================================================================================
Less than More than
(Cdn$ in millions) Total 1 year 1-3 years 4-5 years 5 years
-------------------------------------------------------------------------------------------------------------------------------
Short-term debt (Note 11(g)) $ 6,516 $ 6,516 $ - $ - $ -
Long-term debt (Note 11(g)) 6,452 1,329 3,905 - 1,218
Estimated interest payments on debt 2,107 436 411 144 1,116
Derivative liabilities 252 252 - - -
===============================================================================================================================
FOREIGN EXCHANGE RISK
We operate on an international basis and therefore, foreign exchange risk
exposures arise from transactions denominated in a foreign currency. Our
foreign exchange risk arises primarily with respect to the US dollar. Our
cash flows from Canadian operations are exposed to foreign exchange risk
as commodity sales are denominated in US dollars, and the majority of
operating expenses are denominated in Canadian dollars.
We have hedged a portion of our future cash flows from US dollar coal
sales until April 2009 with US dollar forward sales contracts. We have
elected not to actively manage other foreign exchange exposures at this
time.
We also have various investments in US dollar self-sustaining operations,
whose net assets are exposed to foreign currency translation risk. This
currency exposure is managed in part through our US dollar denominated
debt as a hedge against these self-sustaining operations. As at December
31, 2008, $5.3 billion of debt was designated in this manner. Foreign
exchange fluctuations on the remaining balance of US dollar denominated
debt will affect the statement of earnings in the period of change.
Changes in the US dollar exchange rate may result in significant
fluctuations in our net earnings. This exposure is expected to be reduced
as we pay down the debt, generate US dollar cash balances or generate and
retain profits in US dollar self-sustaining operations.
US dollar financial instruments subject to foreign exchange risk:
==============================================================================================================================
(US$ in millions) 2008 2007
------------------------------------------------------------------------------------------------------------------------------
Net working capital $ 293 $ 235
US dollar forward sales contracts (183) -
Short-term debt (5,350) -
Long-term debt (5,293) (1,457)
Net investment in foreign self-sustaining operations 5,273 5,335
==============================================================================================================================
As at December 31, 2008, with other variables unchanged, a $0.01
strengthening (weakening) of the Canadian dollar against the US dollar
would have a $50 million effect (2007 - nominal) on net earnings resulting
from our financial instruments. There would also be a $11 million (2007 -
nil) decrease (increase) in other comprehensive income from our US dollar
forward sales contracts designated as cash flow hedges, and there would be
no significant (2007 - $41 million) decrease (increase) in other
comprehensive income resulting from our net US dollar investment in
self-sustaining operations.
- -------------------------------------------------------------------------------
47
21. ACCOUNTING FOR FINANCIAL INSTRUMENTS, CONTINUED
INTEREST RATE RISK
Our interest rate risk mainly arises from our cash and cash equivalents,
floating rate debt and interest rate swaps. Our interest rate management
policy is generally to borrow at fixed rates to match the duration of our
long lived assets. However, floating rate funding may be used, as in the
case of our acquisition of Fording. The fair value of fixed-rate debt
fluctuates with changes in market interest rates, but unless we make a
prepayment, the cash flows in US dollars do not.
Cash flows related to floating rate debt fluctuate with changes in market
interest rates, but the fair value in US dollars does not. Cash and cash
equivalents have short terms to maturity and receive interest based on
market interest rates. Interest rate risk associated with cash and cash
equivalents is not significant.
The fair value of our derivative interest rate swap changes with
fluctuations in market interest rates. Unless we settle the contract
early, the future cash outflows do not change.
As at December 31, 2008, with other variables unchanged, a 1% change in
the LIBOR rate would have a $75 million effect (2007 - nil) on net
earnings. There would be no effect on other comprehensive income.
COMMODITY PRICE RISK
We are subject to price risk from fluctuations in market prices of the
commodities that we produce. From time-to-time, we may use commodity price
contracts to manage our exposure to fluctuations in commodity prices. At
the balance sheet date, we had copper, gold and zinc forward sales
contracts outstanding.
Our commodity price risk associated with financial instruments primarily
relates to changes in fair value caused by settlement adjustments to
receivables and payables, the Cajamarquilla contingent receivable and
forward contracts for copper, gold and zinc.
Sales of metals in concentrate are recognized in revenue on a provisional
pricing basis when title transfers and the rights and obligations of
ownership pass to the customer, which usually occurs upon shipment.
However, final pricing is typically not determined until a subsequent
date. Accordingly, revenue in any period is based on current prices for
sales occurring in the period and ongoing pricing adjustments from sales
that are still subject to final pricing. These pricing adjustments result
in additional revenues in a rising price environment and reductions to
revenue in a declining price environment, taking into account the actual
price participation terms in the concentrate sales agreements. The effect
of these adjustments on earnings is mitigated by the effect that changing
commodity prices have on price participation clauses in the concentrate
sales agreements, royalties, taxes and non-controlling interests.
The following represents the effect of financial instruments on after-tax
net earnings from a 10% increase to commodity prices, based on the
December 31, 2008 prices. There is no effect on other comprehensive
income.
===========================================================================
Increase (decrease) on
Price on December 31, after-tax net earnings
(Cdn$ in millions) 2008 2007 2008 2007
---------------------------------------------------------------------------
Copper US$1.40/lb US$3.03/lb $15 $ 29
Zinc US$0.51/lb US$1.04/lb 1 (3)
Lead US$0.43/lb US$1.15/lb 1 4
Gold US$865/oz US$837/oz (3) (4)
===========================================================================
- -------------------------------------------------------------------------------
48
21. ACCOUNTING FOR FINANCIAL INSTRUMENTS, CONTINUED
CREDIT RISK
Credit risk arises from the non-performance by counterparties of
contractual financial obligations. Our primary counterparties related to
our money market investments and derivative contracts carry investment
grade ratings as assessed by external rating agencies. There is ongoing
review to evaluate the creditworthiness of these counterparties. We manage
credit risk for trade and other receivables through established credit
monitoring activities. We do not have a significant concentration of
credit risk with any single counterparty or group of counterparties. Our
maximum exposure to credit risk at the reporting date is the carrying
value of our cash and cash equivalents, receivables and derivative assets.
While we are exposed to credit losses due to the non-performance of our
counterparties, we consider any material risk of this to be unlikely
despite the current market conditions.
b) Derivative Financial Instruments and Hedges
SALES AND PURCHASES CONTRACTS
The majority of our metal concentrates are sold under pricing arrangements
where final prices are determined by quoted market prices in a period
subsequent to the date of sale. In these circumstances, revenues are
recorded at the time of sale based on forward prices for the expected date
of the final settlement. Metal concentrates for smelting and refining
operations are purchased under similar arrangements. Adjustments to the
balance of our concentrate receivables and payables from changes in
underlying market prices affect revenue or operating costs as appropriate.
CONTINGENT RECEIVABLE RELATED TO SALE OF DISCONTINUED OPERATIONS
As a result of the sale of our Cajamarquilla zinc refinery in 2004, we are
entitled to additional consideration linked to the price of zinc.
Accordingly, we recorded the fair value of this additional consideration
at the time of the sale and revalued it each period. This zinc price
participation expires in 2009 and is considered an embedded derivative.
This instrument is valued based on discounted cash flows using a zinc
forward price curve, US dollar forward price and our credit adjusted
risk-free interest rate. We recorded an after-tax loss of $18 million in
respect of these items for the year in our earnings as discontinued
operations (2007 - $46 million loss, 2006 - $36 million gain). These
amounts are net of taxes of $3 million, $9 million and $7 million
respectively. The pre-tax price participation due for 2008 is US$14
million (2007 - US$38 million).
CASH FLOW HEDGES
US DOLLAR FORWARD SALES CONTRACTS
At December 31, 2008, US dollar forward sales contracts with a notional
amount of $1.1 billion remained outstanding. This amount includes
contracts that were assumed as part of our purchase of Fording's assets.
The contracts mature at varying dates from January to April 2009. These
contracts have been designated as cash flow hedges of a portion of our
future cash flows from anticipated US dollar coal sales. We have
determined they are highly effective hedges from inception to December 31,
2008.
Unrealized gains and losses on our US dollar forward sales contracts are
recorded in other comprehensive income. Realized gains and losses on
settled contracts are recorded in revenue.
ECONOMIC HEDGE CONTRACTS
COPPER, ZINC AND GOLD FORWARD SALES CONTRACTS
We enter into commodity forward sales contracts to mitigate the risk of
price changes for a portion of our sales. These contracts economically
lock in prices for a portion of our copper, zinc and gold sales. We do not
apply hedge accounting to the commodity forward sales contracts.
- -------------------------------------------------------------------------------
49
21. ACCOUNTING FOR FINANCIAL INSTRUMENTS, CONTINUED
ZINC FORWARD PURCHASE CONTRACTS
Certain customers purchase refined metal products at fixed forward prices
from our smelter and refinery operations. The forward purchase commitments
for these metal products are matched to these fixed price sales
commitments to customers.
c) The fair value of our fixed forward sale and purchase contracts is
calculated using a discounted cash flow method based on forward metal
prices. A summary of our fixed forward sales contracts as at December 31,
2008 is as follows:
===============================================================================================================================
2009 2010 2011 Total Fair Value
-------------------------------------------------------------------------------------------------------------------------------
(Cdn$ in
millions)
ZINC (millions of lbs)
Fixed forward sales contracts 57 57 57 171
Average price (US$/lb) 0.72 0.67 0.63 0.68 19
ZINC (millions of lbs)
Fixed forward purchase contracts 3 - - 3
Average price (US$/lb) 0.84 - - 0.84 (2)
GOLD (thousands of ozs)
Forward sales contracts 43 - - 43
Average price (US$/oz) 350 - - 350 (28)
US DOLLARS (millions of US$)
Forward sales contracts 1,073 - - 1,073
Average rate (C$/US$) 1.01 - - 1.01 (223)
US DOLLARS (millions of $)
Forward purchase contracts 167 - - 167
Average rate (C$/US$) 1.22 - - 1.22 -
COPPER (millions of pounds)
Forward sales contracts 135 - - 135
Average price (US$/lb) 2.40 - - 2.40 163
=======
$ (71)
===============================================================================================================================
We have an interest rate swap on our long-term debt whereby we have
swapped a 7% interest rate on US$100 million to LIBOR plus 2.14%. The
interest rate swap matures in September 2012 and has a fair market value
of $13 million as at December 31, 2008.
- -------------------------------------------------------------------------------
50
22. CAPITAL RISK MANAGEMENT
Our objectives when managing capital are to safeguard our ability to
continue as a going concern, to provide an adequate return to
shareholders, and to meet external capital requirements on our debt and
credit facilities. We monitor capital based on the debt to capitalization
ratio.
COVENANT REQUIREMENTS
Our credit facilities and certain contracts establish a maximum total debt
to total capitalization ratio of 60% or lower before September 30, 2009,
and a ratio of 50% or lower on September 30, 2009 and thereafter.
Management actively monitors this ratio.
Total debt is generally defined as all interest bearing liabilities, plus
any guarantees of debt. Total capitalization is defined as total debt plus
accumulated other comprehensive income, share capital, contributed surplus
and retained earnings.
As at December 31, 2008, our total debt to total capitalization ratio was
54% (2007 - 17%). In order to meet our covenant requirements, we may
adjust our capital structure, by issuing new shares, issuing new debt with
different characteristics to replace existing debt, or selling assets to
reduce debt and reducing expenditure levels. As part of our capital
management plan, we suspended dividends for 2009, and announced the sale
of the Lobo-Marte gold project in Chile, the Hemlo gold mines in Canada
and our indirect interest in a Peruvian company, Sociedad Minera El Brocal
S.A.A., and are actively seeking buyers for certain other assets.
LONG-TERM CAPITAL MANAGEMENT
Our long-term strategy is to keep the total debt to total capitalization
ratio below 40%. However, the ratio may be higher for periods of time due
to certain transactions such as an acquisition. These transactions, while
causing the ratio to be out of range for a period of time, are intended to
help us meet our capital management objectives in the long run. The ratio
was significantly higher in 2008 due to our acquisition of Fording's
assets.
Our actions to meet our covenant requirements, such as suspension of
dividend payments and sale of assets, also help to ensure we meet our
long-term capital management goals.
- -------------------------------------------------------------------------------
51
23. SEGMENTED INFORMATION
We have six reportable segments: copper, coal, zinc, gold, energy and
corporate, based on the primary products we produce or are developing. The
corporate segment includes all of our initiatives in other commodities,
our corporate growth activities and groups that provide administrative,
technical, financial and other support to all of our business units. Other
income (expense) includes general and administrative costs, research and
development, and other income (expense). Prior year comparatives have been
restated to conform to current year presentation.
===============================================================================================================================
2008
-------------------------------------------------------------------------------------------------------------------------------
(Cdn$ in millions) Copper Coal Zinc Gold Energy Corporate Total
-------------------------------------------------------------------------------------------------------------------------------
Segment revenues $ 2,156 $ 2,428 $ 2,262 $ 249 $ - $ - $ 7,095
Less inter-segment revenues - - (191) - - - (191)
-------------------------------------------------------------------------------------------------------------------------------
Revenues 2,156 2,428 2,071 249 - - 6,904
Operating profit 882 1,160 301 39 - - 2,382
Interest and financing (12) (1) - - - (169) (182)
Exploration (94) - (16) (15) - (10) (135)
Asset impairment (483) - (71) - - (35) (589)
Other income (expense) 283 - - (25) - (339) (81)
-------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes,
non-controlling interests, equity
earnings and discontinued
operations 576 1,159 214 (1) - (553) 1,395
Capital expenditures 596 118 117 19 50 39 939
Goodwill 533 1,191 - - - - 1,724
Total assets 7,941 18,008 3,172 404 895 1,113 31,533
===============================================================================================================================
- -------------------------------------------------------------------------------
52
23. SEGMENTED INFORMATION, CONTINUED
===============================================================================================================================
2007
-------------------------------------------------------------------------------------------------------------------------------
(Cdn$ in millions) Copper Coal Zinc Gold Energy Corporate Total
-------------------------------------------------------------------------------------------------------------------------------
Segment revenues $ 2,186 $ 951 $ 3,439 $ 182 $ - $ - $ 6,758
Less inter-segment revenues - - (387) - - - (387)
-------------------------------------------------------------------------------------------------------------------------------
Revenues 2,186 951 3,052 182 - - 6,371
Operating profit (loss) 1,354 209 1,180 (5) - - 2,738
Interest and financing (13) (1) - - - (71) (85)
Exploration (46) - (20) (22) - (17) (105)
Asset impairment - - (43) - - (26) (69)
Other income (expense) - - - (28) - 57 29
-------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes,
non-controlling interests,
equity earnings and
discontinued operations 1,295 208 1,117 (55) - (57) 2,508
Capital expenditures 259 35 150 30 70 27 571
Goodwill 663 - - - - - 663
Total assets 6,524 1,359 2,865 357 529 1,939 13,573
===============================================================================================================================
===============================================================================================================================
2006
-------------------------------------------------------------------------------------------------------------------------------
(Cdn$ in millions) Copper Coal Zinc Gold Energy Corporate Total
-------------------------------------------------------------------------------------------------------------------------------
Segment revenues $ 2,220 $ 1,177 $ 3,467 $ 143 $ - $ - $ 7,007
Less inter-segment revenues - - (468) - - - (468)
-------------------------------------------------------------------------------------------------------------------------------
2,220 1,177 2,999 143 - - 6,539
Revenues
Operating profit 1,617 444 1,493 7 - - 3,561
Interest and financing (11) (2) - - - (84) (97)
Exploration (38) - (4) (24) - (6) (72)
Asset impairment - - - - - -
Other expense (10) - - - - 213 203
-------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes,
non-controlling interests,
equity earnings and
discontinued operations 1,558 442 1,489 (17) - 123 3,595
Capital expenditures 102 18 133 44 73 21 391
Goodwill - - - - - - -
Total assets 1,211 779 4,431 402 190 4,434 11,447
===============================================================================================================================
- -------------------------------------------------------------------------------
53
23. SEGMENTED INFORMATION, CONTINUED
The geographic distribution of our property, plant and equipment and
external sales revenue, with revenue attributed to regions based on the
location of the customer, is as follows:
===============================================================================================================================
PROPERTY, PLANT AND EQUIPMENT REVENUES
-------------------------------------------------------------------------------------------------------------------------------
(Cdn$ in millions) 2008 2007 2008 2007 2006
-------------------------------------------------------------------------------------------------------------------------------
Canada $ 16,936 $ 2,687 $ 614 $ 649 $ 724
United States 1,132 1,059 1,230 1,563 1,487
Latin America 5,810 4,020 479 361 251
Asia 4 5 3,204 2,673 2,770
Europe 6 3 1,317 993 1,201
Australia 21 33 45 126 106
Africa - - 15 6 -
-------------------------------------------------------------------------------------------------------------------------------
$ 23,909 $ 7,807 $ 6,904 $ 6,371 $ 6,539
===============================================================================================================================
- -------------------------------------------------------------------------------
54
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
The effect of the material measurement differences between generally
accepted accounting principles in Canada and the United States on our net
earnings is summarized as follows:
===============================================================================================================================
(Cdn$ in millions, except per share data) 2008 2007 2006
-------------------------------------------------------------------------------------------------------------------------------
Net earnings under Canadian GAAP $ 659 $ 1,615 $ 2,431
Add (deduct)
Exchangeable debentures due 2024 (b) - - (4)
Unrealized holding losses on investments (c) - - (14)
Deferred start-up costs (d) 5 3 (11)
Exploration expenses (e) (37) (32) (21)
Derivative instruments (f)
Embedded derivatives - - 94
Non-hedge derivatives 26 18 (53)
Asset retirement obligations (g) (3) (3) (3)
Deferred stripping (h) (84) (40) (17)
Cumulative translation adjustment on partial redemption of subsidiary (i) - 59 -
Other (j) - (3) (2)
Tax effect of adjustments noted above (l) 3 37 40
Tax benefit on redemption of exchangeable debentures (b) - - 124
-------------------------------------------------------------------------------------------------------------------------------
Net earnings under US GAAP before comprehensive income adjustments 569 1,654 2,564
-------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income under Canadian GAAP 934 (576) -
Add (deduct)
Unrealized gains (losses) on investments (c)
Arising during the period - - 104
Less: reclassification adjustments to net income - - 78)
-------------------------------------------------------------------------------------------------------------------------------
- - 26
Losses on derivatives designated as cash flow hedges (f)
Arising during the period - - -
Less: reclassification adjustments to net income (26) (18) (13)
-------------------------------------------------------------------------------------------------------------------------------
(26) (18) (13)
Cumulative translation adjustment (i)(k) 4 (63) 21
Additional pension liability (m) 50 42 8
Tax effect of adjustments (l) (15) (10) (2)
-------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income under US GAAP 947 (625) 40
-------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (k) $ 1,516 $ 1,029 $ 2,604
-------------------------------------------------------------------------------------------------------------------------------
Earnings per share under US GAAP before comprehensive income adjustments
Basic $ 1.26 $ 3.83 $ 6.09
Diluted $ 1.26 $ 3.81 $ 5.92
Basic from continuing operations $ 1.30 $ 3.94 $ 5.82
Diluted from continuing operations $ 1.30 $ 3.92 $ 5.65
===============================================================================================================================
- -------------------------------------------------------------------------------
55
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
Balance sheets under Canadian GAAP and US GAAP:
===============================================================================================================================
(Cdn$ in millions) 2008 2007
-------------------------------------------------------------------------------------------------------------------------------
Canadian US Canadian US
GAAP GAAP GAAP GAAP
-------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 850 $ 850 $ 1,408 $ 1,408
Temporary investments 11 11 - -
Income taxes receivable 1,130 1,130 33 33
Accounts and settlements receivable 769 769 560 560
Inventories 1,339 1,339 1,004 1,004
Deferred debt issuance costs (p) - 106 - -
-------------------------------------------------------------------------------------------------------------------------------
4,099 4,205 3,005 3,005
INVESTMENTS (j) 948 929 1,506 1,494
PROPERTY, PLANT AND EQUIPMENT (d)(e)(g)(h)(j) 23,909 23,574 7,807 7,576
OTHER ASSETS (m)(p) 853 734 592 435
GOODWILL 1,724 1,724 663 663
-------------------------------------------------------------------------------------------------------------------------------
$ 31,533 $ 31,166 $ 13,573 $ 13,173
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,506 $ 1,506 $ 1,238 $ 1,238
Current portion of long-term debt (p) 1,336 1,362 31 31
Short-term debt (p) 6,436 6,516 - -
-------------------------------------------------------------------------------------------------------------------------------
9,278 9,384 1,269 1,269
LONG-TERM DEBT (p) 5,102 5,164 1,492 1,492
OTHER LIABILITIES (g)(m) 1,184 1,098 994 974
FUTURE INCOME AND RESOURCE TAXES (l) 4,965 4,733 2,007 1,768
NON-CONTROLLING INTERESTS 104 105 92 92
SHAREHOLDERS' EQUITY 10,900 10,682 7,719 7,578
-------------------------------------------------------------------------------------------------------------------------------
$ 31,533 $ 31,166 $ 13,573 $ 13,173
===============================================================================================================================
- -------------------------------------------------------------------------------
56
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
Shareholders' equity under Canadian GAAP and US GAAP:
===============================================================================================================================
(Cdn$ in millions) 2008 2007
-------------------------------------------------------------------------------------------------------------------------------
Canadian US Canadian US
GAAP GAAP GAAP GAAP
-------------------------------------------------------------------------------------------------------------------------------
Capital stock $ 5,079 $ 4,955 $ 3,281 $ 3,157
Retained earnings 5,476 5,561 5,038 5,213
Contributed surplus 82 82 71 71
Accumulated other comprehensive income (loss) (k) 263 84 (671) (863)
-------------------------------------------------------------------------------------------------------------------------------
$ 10,900 $ 10,682 $ 7,719 $ 7,578
===============================================================================================================================
a) Adoption of New Accounting Standards
i. Fair Value Measurements
In September 2006, the Financial Accounting Standards Board ("FASB")
issued FASB Statement No. 157, "Fair Value Measurements." The standard
defines fair value, establishes a framework for measuring fair value in US
GAAP, and expands disclosure about fair value measurements. This standard
does not require any new fair value measurements. In February 2008, the
FASB issued FSP FAS 157-2, which delays the effective date of FAS 157 to
fiscal years beginning after November 15, 2008 for nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. In 2008, we
adopted FAS 157 for financial assets and liabilities recognized at fair
value on a recurring basis. The adoption did not have a material effect on
our financial results. The disclosures required by FAS 157 for financial
assets and liabilities measured at fair value on a recurring basis as at
December 31, 2008 are included in Note 24(n).
We will apply the requirements of FAS 157 for fair value measurements of
financial and nonfinancial assets and liabilities not valued on a
recurring basis in 2009. We are currently evaluating the effect of this
application on our financial reporting and disclosures.
On October 10, 2008, the FASB issued FSP FAS 157-3, which clarifies the
application of FAS 157 in determining the fair value of a financial asset
when the market for that asset is not active. FSP FAS 157-3 is effective
as of the issuance date and has not affected the valuation of our
financial assets.
ii. Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued FAS 159, "Fair Value Option for
Financial Assets and Financial Liabilities," which allows an irrevocable
option, the Fair Value Option, to carry eligible financial assets and
liabilities at fair value. The election is made on an
instrument-by-instrument basis. Changes in fair value for these
instruments are recorded in earnings. The objective of FAS 159 is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge
accounting provisions.
We applied FAS 159 prospectively in 2008. We have not adopted the Fair
Value Option for any of our eligible financial instruments, which
primarily include available-for-sale securities, equity-method investments
and long-term debt.
- -------------------------------------------------------------------------------
57
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
iii. The Hierarchy of Generally Accepted Accounting Principles
In May 2008, FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles," which identifies the sources of
accounting and the framework for selecting the principles to be used in
the preparation of financial statements of nongovernmental entities that
are presented in conformity with US GAAP. SFAS 162 became effective in
November 2008. The adoption of SFAS 162 did not result in any changes in
our financial statements.
iv. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and Consolidation of Variable Interest
Entities
In December 2008 the FASB issued Staff Position ("FSP") No. FAS 140-4 and
FIN 46(R)-8, which amends FASB Statement No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, to
require public entities to provide additional disclosures about transfers
of financial assets. It also amends FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, to require
public enterprises to provide additional disclosures about their
involvement with variable interest entities. The disclosures required by
this FSP are intended to provide greater transparency to financial
statement users about a transferor's continuing involvement with
transferred financial assets and an enterprise's involvement with variable
interest entities and qualifying SPEs. This FSP is effective for the first
reporting period (interim or annual) ending after December 15, 2008. The
adoption of the FSP in 2008 had no effect on our financial statement
disclosures.
b) Exchangeable Debentures Due 2024
Our exchangeable debentures due 2024, redeemed in 2006, were classified as
equity with related interest being charged directly to retained earnings.
Under US GAAP, we classified these instruments as liabilities and interest
was charged against current period earnings. The redemption of the
debentures in 2006 was treated as a non-monetary transaction and the
carrying value of the debentures was transferred to share capital. Tax
benefits arising on the settlement of the debt instrument were recorded in
earnings for US GAAP purposes.
c) Unrealized Holding Gains (Losses) on Investments
Under Canadian GAAP, prior to adopting the new financial instruments
accounting standards, we recorded investments in marketable securities at
cost. For US GAAP, our marketable securities are designated as
available-for-sale. Available-for-sale securities are carried at fair
value with unrealized gains or losses included in other comprehensive
income until realized, or until an other-than-temporary decline occurs.
With the adoption of the new Canadian financial instruments standards on
January 1, 2007, we recognize our marketable securities at fair value for
Canadian GAAP.
d) Deferred Start-up Costs
Prior to December 31, 2008, we deferred mine start-up costs under Canadian
GAAP until a mine reaches commercial levels of production and amortized
these amounts over the life of the project. Under US GAAP, we expensed
mine start-up costs as incurred.
e) Exploration Expense
Under Canadian GAAP, we capitalize exploration expenditures where
resources, as defined under National Instrument 43-101, exist and it is
expected that the expenditures can be recovered by future exploitation or
sale. For US GAAP, exploration expenditures are expensed unless proven and
probable reserves have been established by a feasibility study.
- -------------------------------------------------------------------------------
58
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
f) Derivative Instruments
Under Canadian GAAP, we adopted the financial instruments accounting
standards on January 1, 2007. Prior to adoption, derivative instruments,
to which hedge accounting was applied, were held off-balance sheet with
realized gains and losses recorded in net earnings. Non-hedge derivative
instruments were recorded on the balance sheet at fair value with changes
in fair value recorded in other income (expense).
For US GAAP purposes, all derivatives are recorded on the balance sheet as
either assets or liabilities at fair value.
i. The Inco exchangeable debentures, settled in 2006, included an option
to settle the debt with Inco shares. Under US GAAP, this option
constituted an embedded derivative which was accounted for as a
separate derivative instrument and recorded on the balance sheet at
fair value with changes in fair value included in net earnings.
ii. TCAK's agreement with the Northwest Arctic Borough includes an
escalation clause based on zinc price. This constitutes an embedded
derivative and the derivative instrument has been separately valued
and recorded at fair value on the balance sheet. Changes in fair
value are included in net earnings. With the adoption of the new
Canadian GAAP financial instruments standards on January 1, 2007, we
recognized this embedded derivative for Canadian GAAP.
iii. Our contingent consideration from the sale of Cajamarquilla based on
zinc prices (Note 21(b)) constitutes an embedded derivative under US
GAAP and the derivative instrument has been separately valued and
recorded at fair value on the balance sheet. Changes in fair value
are included in net earnings. With the adoption of the Canadian GAAP
financial instruments standards on January 1, 2007 we recognized this
embedded derivative for Canadian GAAP.
iv. With the adoption of the Canadian GAAP financial instruments
accounting standards on January 1, 2007, our unrealized losses on
cash flow hedges were charged, net of taxes, directly to opening
accumulated other comprehensive income. As these previously
designated cash flow hedges mature, losses are brought into net
earnings. Under US GAAP, these derivatives were not designated as
cash flow hedges, and accordingly, unrealized gains and losses were
recorded in net earnings.
g) Asset Retirement Obligations
For US GAAP purposes, we adopted FASB Statement No. 143, "Accounting for
Asset Retirement Obligations," effective January 1, 2003. We adopted the
provisions of CICA 3110, "Asset Retirement Obligations," for Canadian GAAP
purposes effective January 1, 2004.
The United States and Canadian standards for asset retirement obligations
are substantially the same, however, due to the difference in adoption
dates, different discount rate assumptions were used in initial liability
recognition. This resulted in differences in the asset and liability
balances on adoption and will result in different amortization and
accretion charges over time.
h) Deferred Stripping
Canadian GAAP differs from US GAAP in that it allows the capitalization of
deferred stripping costs when such costs are considered a betterment of
the asset. Under US GAAP, all stripping costs are treated as variable
production costs.
- -------------------------------------------------------------------------------
59
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
i) Cumulative Translation Losses
Under Canadian GAAP, when a foreign subsidiary pays a dividend to the
parent company and there has been a reduction in the net investment, a
gain or loss equivalent to a proportionate amount of cumulative
translation adjustment is recognized in net income.
Under US GAAP, a gain or loss from the cumulative translation adjustment
is only recognized when the foreign subsidiary is sold, or the parent
completely or substantially liquidates its investment.
j) Other
Other adjustments include differences in respect of equity earnings,
interest capitalization and other items.
k) Comprehensive Income
Under US GAAP, comprehensive income is recognized and measured in
accordance with FASB Statement No. 130, "Reporting Comprehensive Income."
Comprehensive income includes all changes in equity other than those
resulting from investments by owners and distributions to owners.
Comprehensive income includes two components, net income and other
comprehensive income. Other comprehensive income includes amounts that are
recorded as an element of shareholders' equity, but are excluded from net
income as these transactions or events were attributable to changes from
non-owner sources. These items include pension liability adjustments,
holding gains and losses on certain investments, gains and losses on
certain derivative instruments and foreign currency gains and losses
related to self-sustaining foreign operations (cumulative translation
adjustment). We adopted the Canadian GAAP standard for comprehensive
income and other comprehensive income on January 1, 2007.
l) Income taxes
The adjustment to tax expense is the tax effect of adjustments under US
GAAP. The computation of income taxes related to adjustments is based on
the nature of the adjustment and the jurisdiction in which the adjustment
originated. The company operates in various jurisdictions which are
subject to local tax legislation, resulting in varying rates for each
reconciling item.
The model for recognition and measurement of uncertain tax positions is
different under US GAAP. For US GAAP purposes, our unrecognized tax
benefits on January 1, 2007 and 2008 were $11 million. There were
additions, reductions and settlements to unrecognized tax benefits
throughout the year and, as a result, the unrecognized tax benefits on
December 31, 2008 increased to $27 million.
Our unrecognized tax benefits, if recognized, would not significantly
affect our effective tax rate. We recognize interest and penalties related
to unrecognized tax benefits in other income and expenses. During the
years ended December 31, 2008, 2007 and 2006, we did not recognize any
significant tax related interest or penalties. We also did not accrue
significant amounts of tax related interest and penalties at December 31,
2008 and 2007. The balance of the adjustment to tax expense is the tax
effect of adjustments to net earnings under US GAAP.
m) Pension Liability
For US GAAP purposes, we are required to report the overfunded asset or
underfunded liability of our defined benefit pension and other
post-retirement plans on the balance sheet. Since the adoption of SFAS No.
158 on December 31, 2006, changes in the funded status are recorded
through other comprehensive income. The information set out below should
be read in conjunction with the information disclosed under Canadian GAAP
requirements for pension and other employee future benefits provided in
Note 12(b).
- -------------------------------------------------------------------------------
60
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
The funded status at the end of the year and the related amounts
recognized on the statement of financial position for US GAAP purposes are
as follows:
===============================================================================================================================
2008 2007
-------------------------------------------------------------------------------------------------------------------------------
Other post- Other post-
Pension retirement Pension retirement
(Cdn$ in millions) benefits benefits benefits benefits
------------------------------------------------------------------------------------------------------------------------------
Funded status at end of year
Fair value of plan assets $ 1,213 $ - $ 1,257 $ -
Benefit obligations 1,224 248 $ 1,260 $ 272
-------------------------------------------------------------------------------------------------------------------------------
Funded status $ (11) $ (248) $ (3) $ (272)
-------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the balance sheet
Non-current asset $ 88 $ - $ 79 $ -
Current liability (8) (10) (4) (10)
Non-current liability (91) (238) (78) (262)
-------------------------------------------------------------------------------------------------------------------------------
$ (11) $ (248) $ (3) $ (272)
-------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in accumulated
other comprehensive income
Net actuarial loss (gain) $ 108 $ (28) $ 110 $ 33
Prior service cost 93 22 68 30
-------------------------------------------------------------------------------------------------------------------------------
$ 201 $ (6) $ 178 $ 63
===============================================================================================================================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit
obligation in excess of plan assets at December 31, 2008 and 2007 were as
follows:
===============================================================================================================================
(Cdn$ in millions) 2008 2007
-------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation in excess of plan assets
Projected benefit obligation $ 297 $ 347
Accumulated benefit obligation 285 321
Fair value of plan assets 212 269
===============================================================================================================================
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61
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
The estimated amounts that will be amortized from accumulated other
comprehensive income into net periodic benefit cost in 2009 are as
follows:
==============================================================================================================================
Other post-
Pension retirement
(Cdn$ in millions) benefits benefits
------------------------------------------------------------------------------------------------------------------------------
Actuarial (gain) loss $ 6 $ (1)
Prior service cost 21 6
------------------------------------------------------------------------------------------------------------------------------
Total $ 27 $ 5
==============================================================================================================================
n) Fair Value Measurements
Our financial assets and liabilities are measured at fair value on a
recurring basis and classified in their entirety based on the lowest level
of input that is significant to the fair value measurement. There are
three levels of fair value hierarchy that prioritize the inputs to
valuation techniques used to measure fair value, with level 1 inputs
having the highest priority. The levels and the valuation techniques used
to value our financial assets and liabilities are described below:
Level 1 - Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical,
unrestricted assets or liabilities.
Cash equivalents, including demand deposits and money market
instruments, are valued using quoted market prices.
Marketable equity securities are valued using quoted market
prices in active markets, obtained from securities exchanges.
Accordingly, these items are included in level 1 of the fair
value hierarchy.
Level 2 - Quoted prices in markets that are not active, quoted prices
for similar assets or liabilities in active markets, or
inputs that are observable, either directly or indirectly,
for substantially the full term of the asset or liability.
Derivative instruments are included in level 2 of the fair
value hierarchy as they are valued using pricing models or
discounted cash flow models. These models require a variety
of inputs, including, but not limited to, contractual terms,
market prices, forward price curves, yield curves, and credit
spreads. These inputs are obtained from or corroborated with
the market where possible. Also included in level 2 are
settlements receivable and settlements payable from
provisional pricing on concentrate sales and purchases
because they are valued using quoted market prices for
similar assets and liabilities such as the forward price
curves for copper, zinc and lead.
Level 3 - Unobservable (supported by little or no market activity)
prices.
We include investments in debt securities in level 3 of the
fair value hierarchy because they trade infrequently and have
little price transparency. We review the fair value of these
instruments periodically and estimate an impairment charge
based on management's best estimates, which are unobservable
inputs.
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62
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
The fair values of our financial assets and liabilities at December 31,
2008 are summarized in the following table:
===============================================================================================================================
Quoted prices in Significant
active markets other Significant
for identical observable unobservable
assets inputs inputs
(Cdn$ in millions) (Level 1) (Level 2) (Level 3) Total
-------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 850 $ - $ - $ 850
Marketable equity securities 104 - - 104
Marketable debt securities - - 25 25
Settlements receivable - 184 - 184
Derivative instruments - 195 - 195
-------------------------------------------------------------------------------------------------------------------------------
954 379 25 1,358
-------------------------------------------------------------------------------------------------------------------------------
Liabilities
Derivative instruments 252 - 252
Settlements payable - 141 141
-------------------------------------------------------------------------------------------------------------------------------
$ - $ 393 $ - $ 393
===============================================================================================================================
o) Proportionate Consolidation
US GAAP requires investments in joint ventures to be accounted for under
the equity method, while under Canadian GAAP the accounts of joint
ventures are proportionately consolidated. All of our joint ventures
qualify for the Securities and Exchange Commission's accommodation, which
allows us to continue to follow proportionate consolidation. Additional
information concerning our interests in joint ventures is presented in
Note 18.
p) Debt Issuance Costs
Under Canadian GAAP, short-term and long-term debt are initially recorded
at total proceeds received less direct issuance costs. Under US GAAP,
direct issuance costs are recorded separately as an asset.
q) Recent US Accounting Pronouncements
i. Business Combinations
In December 2007 the FASB issued FAS 141(R), "Business Combinations,"
which replaces FAS 141 prospectively for business combinations consummated
in the fiscal year commencing after the effective date of December 15,
2008. Early adoption is not permitted. Under FAS 141(R), business
acquisitions are accounted for under the "acquisition method," compared to
the "purchase method" mandated by FAS 141.
The standard also presents revised guidance for a number of areas,
including the measurement of assets acquired, liabilities assumed, and
non-controlling interest in an acquisition of less than 100% of the
acquiree, the definition of a business for the purpose of acquisitions,
the measurement date for equity interests issued by the acquirer, the
adjustment of income tax estimates in the acquisition, the treatment of
acquisition-related costs of the acquirer, and the disclosure requirements
around the nature and financial effects of the business combination. This
statement will affect our financial statements for any business
combinations commencing in 2009.
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63
24. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
CONTINUED
ii. Non-controlling Interests in Consolidated Financial Statements
In December 2007 the FASB issued FAS 160, "Non-controlling Interests in
Consolidated Financial Statements," which is effective for fiscal year
2009. Under FAS 160, non-controlling interests are measured at 100% of the
fair value of assets acquired and liabilities assumed. Under current
standards, the non-controlling interest is measured at book value. For
presentation and disclosure purposes, non-controlling interests are
classified as a separate component of shareholders' equity.
In addition, FAS 160 revises how changes in ownership percentages are
accounted for, including when a parent company deconsolidates a subsidiary
but retains a non-controlling interest. As well, attribution of losses to
the non-controlling interests is no longer limited to the original
carrying amount.
The provisions of FAS 160 are to be applied prospectively with the
exception of the presentation and disclosure provisions, which are to be
applied for all prior periods presented in the financial statements. Early
adoption is not permitted. We are currently evaluating the potential
effect of adopting this statement on our financial statements.
iii. Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued FAS 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No.
133," which requires entities to provide enhanced disclosures about (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under FAS 133 and
its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity's financial position, financial
performance and cash flows. We are currently evaluating the potential
effect of adopting this standard on our note disclosures.
iv. Equity Method Investment Accounting
In November 2008, the FASB issued EITF Issue No. 08-6 "Equity-Method
Investment Accounting." EITF 08-6 concludes that the cost basis of a new
equity-method investment would be determined using a cost-accumulation
model, which would continue the practice of including transaction costs in
the cost of investment and would exclude the value or contingent
consideration. Equity method investments should be subject to
other-than-temporary impairment analysis. It also requires that a gain or
loss be recognized on the portion of the investor's ownership sold. EITF
08-6 is effective for fiscal years beginning after December 15, 2008. We
are currently evaluating the effect the adoption of this ETIF may have on
our financial statements.
v. Employers' Disclosures about Post-retirement Benefit Plan Assets
In December 2008, the FASB issued FSP FAS 132(R)-1, "Employers'
Disclosures about Post-retirement Benefit Plan Assets", which amends FAS
132 and provides guidance on an employer's disclosures about plan assets
of a defined benefit pension or other post-retirement plan. FSP FAS
132(R)-1 requires employers to consider certain overall objectives in
providing disclosures about plan assets including how investment
allocation decisions are made, the major categories of plan assets, the
inputs and valuation techniques used to measure the fair value of plan
assets, the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period and
significant concentrations of risk within plan assets. FSP FAS 132(R)-1 is
effective for disclosures about plan assets provided for fiscal years
ending after December 15, 2009. We are currently evaluating the potential
effect of adopting this standard on our note disclosures.
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64