All dollar amounts expressed in this news release are in Canadian dollars unless
otherwise noted.
Teck Cominco Limited (TSX: TCK.A and TCK.B, NYSE: TCK) today announced that in
the fourth quarter, despite challenging global economic conditions, the company
generated $598 million of cash from operating activities. However, fourth
quarter earnings were negatively affected by after-tax, non-cash asset and
goodwill impairment charges of $844 million and negative pricing adjustments of
$270 million brought about by the sharp decline in commodity prices. The net
loss for the quarter was $607 million, or $1.28 loss per share.
"Even in these difficult times, all of our major operations continued to perform
in the fourth quarter, generating $808 million in operating profits before
depreciation and negative pricing adjustments and $598 million of cash from
operating activities," said Don Lindsay, President and CEO. "For 2008, our net
earnings after non-recurring items and negative pricing adjustments was $659
million and our cash flow of $2.1 billion was higher than last year's $1.8
billion."
Highlights and Significant Items
- Our earnings before non-recurring items and negative pricing adjustments were
$406 million, or $55 million higher than the $351 million reported for the
fourth quarter of 2007. For the year, our earnings before non-recurring items
and negative pricing adjustments were $1.70 billion compared with $1.74 billion
in 2007. Our net loss for the quarter after such items and adjustments was $607
million compared with net earnings of $280 million in 2007. Net earnings for
2008 were $659 million compared with $1.6 billion in 2007.
- In the fourth quarter of 2008 general conditions in credit markets
deteriorated substantially, which had a serious impact on the global economy and
contributed to a significant and rapid decline in the demand for and selling
price of our products. Average base metal prices were down significantly from
average prices in the fourth quarter of 2007, with two of our major products,
copper and zinc, down 45% and 55% respectively. The decline in prices was most
pronounced in the fourth quarter, and resulted in negative pricing adjustments
of $474 million ($270 million after-tax).
- Cash flow from operating activities was $598 million in the quarter, similar
to a year ago. For the year 2008, cash flow from operating activities was $2.1
billion compared with $1.8 billion in 2007.
- Total debt payments in the fourth quarter amounted to $1.1 billion.
- We completed the acquisition of the coal assets of Fording Canadian Coal Trust
("Fording") for cash and shares totalling $13.6 billion. The transaction results
in a 100% direct ownership of Teck Coal (formerly "Elk Valley Coal Partnership")
the world's second largest producer of seaborne, high quality coking coal.
- In January 2009 we sold our Lobo-Marte gold property to Kinross Gold
Corporation for US$40 million and approximately 5.6 million Kinross shares
resulting in an estimated pre-tax gain of $160 million in the first quarter of
2009. We are also pursuing further asset sales.
- In February 2009, Moody's Investor Services lowered our credit rating to Ba3
with a negative outlook.
- To date we have received approximately $950 million of our expected tax
refunds of $1.1 billion arising from our acquisition of the coal assets from
Fording. Our cash balance as of February 16, is approximately $1.4 billion.
This News Release is dated February 16, 2009. Unless the context otherwise
dictates, a reference to "the company" or "us," "we," or "our" refers to Teck
and its subsidiaries. All of the financial information contained in this News
Release is unaudited. Additional information, including our annual information
form and management's discussion and analysis for the year ended December 31,
2007, is available on SEDAR at www.sedar.com.
This document contains forward-looking statements. Please refer to the
cautionary language under the heading "CAUTIONARY STATEMENT ON FORWARD-LOOKING
INFORMATION" below.
Earnings and Adjusted Earnings(i)
Our earnings before non-recurring items and negative pricing adjustments were
$406 million, $55 million higher than the fourth quarter of 2007. Our net loss,
which included $844 million of impairment losses, was $607 million in the fourth
quarter. Pricing adjustments generally increase earnings in a rising commodity
price environment and decrease earnings in a declining price environment. They
are a normal part of our business but we exclude them from comparative earnings
in the table below to provide a better understanding of how our company
performed.
The table below provides a summary of non-recurring items included in our results.
Three months Year ended
ended December 31 December 31
(in millions of dollars) 2008 2007 2008 2007
------------------------------------------------------------------------
Net earnings (loss) as reported $ (607) $ 280 $ 659 $ 1,615
Add (deduct):
Derivative (gains) losses, including
discontinued operations (156) (13) (167) 32
Asset impairment and equity losses 254 84 266 84
Goodwill impairment 345 - 345 -
Impairment of marketable securities 245 - 245 -
Asset sales and other 94 (25) 73 (36)
Realization of cumulative translation
adjustment loss - - - 59
Tax items (39) (69) (50) (80)
-----------------------------------
Adjusted net earnings 136 257 1,371 1,674
Negative pricing adjustments (note 1) 270 94 329 66
-----------------------------------
Comparative net earnings $ 406 $ 351 $ 1,700 $ 1,740
-----------------------------------
(1) See FINANCIAL INSTRUMENTS AND DERIVATIVES section for further
information.
(i) Our financial results are prepared in accordance with Canadian GAAP (GAAP).
This news release refers to adjusted net earnings, comparative net earnings,
operating profit and operating profit before depreciation and pricing
adjustments, which are not measures recognized under GAAP in Canada or the
United States and do not have a standardized meaning prescribed by GAAP. For
adjusted net earnings and comparative net earnings, we adjust net earnings as
reported to remove the effect of unusual and/or non-recurring transactions in
these measures. Operating profit is revenues less operating expenses and
depreciation and amortization. Operating profit before depreciation and pricing
adjustments is operating profit with depreciation, amortization and pricing
adjustments added or deducted as appropriate. Pricing adjustments are described
under the heading "Average Commodity Prices and Exchange Rates" below. These
measures may differ from those used by, and may not be comparable to such
measures as reported by, other issuers. We disclose these measures, which have
been derived from our financial statements and applied on a consistent basis,
because we believe they are of assistance in understanding the results of our
operations and financial position and are meant to provide further information
about our financial results to shareholders.
During the quarter we completed a review of the carrying value of all of our
operations, development projects and investments and recorded after-tax charges
of $844 million in respect of these assets. These included:
- $345 million of goodwill arising out of the acquisition of Aur Resources,
- $90 million in write-offs arising from the deferral of the upgrader portion of
our Fort Hills oil sands project, these charges were recorded as an equity loss,
- $104 million in respect of our Duck Pond and Pend Oreille mines,
- $19 million to write-off our investment in the Petaquilla copper project in
Panama, $35 million on the Santa Fe nickel project in Brazil, and $6 million for
other exploration properties, and
- $245 million in respect of marketable securities that we own in various
development stage companies, whose decline in value is considered
other-than-temporary. These investments are marked to market each period through
other comprehensive income and this charge represents a transfer from other
comprehensive income to regular earnings and does not affect their carrying
value or our shareholders' equity.
While these items have a significant effect on our earnings, they are non-cash
and do not affect our cash flows from operations.
In addition to these items, we also recorded negative pricing adjustments of
$474 million or $270 million after royalties, non-controlling interests and
taxes due to sharp declines in copper and zinc prices in the fourth quarter.
Partially offsetting these losses were after-tax gains of $161 million ($248
million pre-tax) on our copper and zinc forward sales positions. Our copper
forward positions, entered into in October to protect against copper price
declines for the balance of 2008 and the first quarter of 2009, accounted for
$199 million (pre-tax) of these gains.
Prior to our recent acquisition, we owned a 52% effective interest in Teck Coal
comprised of a 40% direct interest in Teck Coal and a 19.6% interest in the
outstanding units of Fording. These prior investments were acquired at a cost of
approximately $1.5 billion. Upon acquisition of the additional 48%, we retained
independent valuation experts from a large international accounting firm to
assist us in the allocation of our investments to individual assets and
liabilities. This allocation resulted in $883 million of goodwill. This goodwill
arose primarily as a result of the accounting requirement to record the net
future income and resource tax liabilities associated with the Fording purchase
on an undiscounted basis as well as 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. We subsequently tested goodwill relating to Teck Coal for impairment. This
test compared the fair value of 100% of these operations to our carrying value
as a whole and takes into account the lower cost base for our pre-existing
interest. Based on expected future cash flows from 100% of the coal operations,
the estimated fair value of the coal assets exceeds the carrying amount,
therefore, we have determined that goodwill relating to Teck Coal is not
impaired.
Debt Reduction Plan
In order to finance the acquisition of the Fording assets we entered into bridge
and term financing facilities with a consortium of banks for a total of US$9.8
billion. As at December 31, 2008, US$9.4 billion was outstanding, of which
US$6.4 billion was current. It was our plan to repay the current portion of the
debt through operating cash flows, sale of non-core assets, receipt of
substantial tax refunds and by accessing bond markets for longer term financing.
In the fourth quarter of 2008, general global economic conditions deteriorated
substantially effectively closing the credit markets to us. We saw a sharp
decline in the selling price of our products as well as reduced coal sales
volumes. As a result of these conditions, which have continued into 2009, our
credit ratings were lowered and our ability to carry out the original repayment
plan was compromised.
In these conditions we have taken a number of steps to assist us in meeting our
obligations.
- We have placed operations that have become unprofitable in the new commodity
price environment on care and maintenance.
- We reduced production at Trail and Teck Coal to better match supply to demand.
- We have implemented workforce reductions totalling 1,400 positions and cut
administrative overhead.
- We have reduced our capital expenditure budgets, placed development projects
on hold, and have entered into equipment leasing programs where appropriate to
conserve cash.
- We have reduced costs at our operations.
- We have suspended our semi-annual dividend.
- We have entered into processes to sell non-core assets. We have concluded a
number of sales and are in advanced negotiations or discussions on others.
- We have expedited the filing of tax returns to accelerate the receipt of cash
refunds expected to total approximately $1.1 billion. To date we have received
approximately $950 million.
We have also begun discussions with our lenders to negotiate amendments to the
bridge facility that would provide us with additional time to generate cash
and/or access appropriate sources of long-term financing to repay the bridge
facility.
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. There is no assurance that our
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.
Business Unit Results
Our fourth quarter business unit results are presented in the table below:
Operating profit
before Operating
depreciation and profit
(in millions of dollars) Revenues pricing adjustments (loss)
---------------------------------------------------------------------------
2008 2007 2008 2007 2008 2007
---------------------------------------------------------------------------
Copper $ 145 $ 544 $ 205 $ 367 $ (214) $ 235
Coal 1,063 218 516 41 486 30
Zinc 392 716 62 283 (82) 187
Gold 63 60 25 19 12 8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total $ 1,663 $ 1,538 $ 808 $ 710 $ 202 $ 460
---------------------------------------------------------------------------
Revenues from operations were $1.7 billion in the fourth quarter of 2008, $125
million higher than the comparable period in 2007. Revenues from coal operations
increased by $845 million, with $561 million attributable to our increased
ownership interest in Teck Coal and the balance due to significantly higher coal
prices compared with a year ago. This was offset by significantly lower copper
and zinc prices and negative pricing adjustments of $474 million (before $38
million of royalty charge recoveries) recorded by our copper and zinc
operations.
Revenues in the fourth quarter were $2.1 billion before pricing adjustments
compared to $1.7 billion in the same period last year.
Our copper business unit generated an operating profit before depreciation and
negative pricing adjustments of $205 million in the fourth quarter compared with
$367 million in 2007. Copper prices declined sharply by approximately 50% since
the end of the third quarter, resulting in $335 million (2007 - $90 million) of
negative copper pricing adjustments. After depreciation and negative pricing
adjustments, the copper business unit incurred an operating loss of $214 million
compared with a $235 million operating profit in the fourth quarter of 2007.
This does not include gains totalling $199 million on our copper derivative
contracts, which are included in other income and expenses.
Operating profit from our coal business unit was $516 million before
depreciation in the fourth quarter, which included one month of earnings
reflecting our 40% interest in Teck Coal and two months reflecting our 100%
interest starting from October 30, 2008, our acquisition date of the Fording
assets. Deducted from operating profits in the fourth quarter was $188 million
as a one-time fair value adjustment made to coal inventories on the acquisition
of Fording. The revaluation established a higher value for coal inventories,
based on current contract prices at the date of acquisition. The adjustment did
not affect cash flows. On a 100% basis, coal sales volumes were 4.7 million
tonnes in the fourth quarter representing a 22% decline from the same period a
year ago, as our customers significantly reduced their coal deliveries in late
2008 in response to lower steel production. Coal prices averaged US$247 per
tonne which was significantly higher than US$93 per tonne realized in the fourth
quarter of 2007, but lower than our settled 2008 coal year average price of
US$275 per tonne. This resulted from the sale of approximately 500,000 tonnes of
lower priced thermal and residual 2007 coal year tonnages sold in the quarter at
lower prices.
The operating profit before depreciation and pricing adjustments from our zinc
business unit was $62 million in the quarter compared with $283 million in the
fourth quarter of 2007, mainly as a result of significantly lower zinc and lead
prices and lower zinc sales volumes. Our $82 million operating loss in the
fourth quarter included $101 million of negative pricing adjustments compared
with $52 million in the fourth quarter of 2007. The Trail metallurgical complex
reduced its refined zinc production by approximately 4,000 to 5,000 tonnes per
month effective in late November in response to poor market conditions. The
duration of this curtailment will depend on market conditions, but will likely
continue for at least six months. In addition, we announced in mid-December that
due to reduced metal demand and persistent weakness in zinc prices, the Pend
Oreille mine will be placed on care and maintenance by the end of February,
2009. Gains totalling $45 million on our zinc derivative contracts are included
in other income and expense.
Our gold business unit performed well in the fourth quarter and provided an
operating profit of $12 million in the quarter compared with $8 million in the
same period a year ago. The increase in operating profit was due to higher
realized gold prices.
Our year-to-date business unit results are presented in the table below.
Operating profit
before Operating
depreciation and profit
(in millions of dollars) Revenues pricing adjustments (loss)
--------------------------------------------------------------------------
2008 2007 2008 2007 2008 2007
--------------------------------------------------------------------------
Copper $ 2,156 $ 2,186 $ 1,552 $ 1,463 $ 882 $ 1,354
Coal 2,428 951 1,226 249 1,160 209
Zinc 2,071 3,052 565 1,418 301 1,180
Gold 249 182 84 35 39 (5)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total $ 6,904 $ 6,371 $ 3,427 $ 3,165 $ 2,382 $ 2,738
--------------------------------------------------------------------------
Average Commodity Prices and Exchange Rates(i)
Three months Year ended
ended December 31 December 31
% %
2008 2007 Change 2008 2007 Change
--------------------------------------------------------------------------
Copper (LME Cash - US$/pound) 1.79 3.26 -45% 3.17 3.23 -2%
Coal (realized - US$/tonne) 247 93 +166% 205 98 +109%
Zinc (LME Cash - US$/pound) 0.54 1.19 -55% 0.85 1.47 -42%
Gold (LME PM fix - US$/ounce) 795 789 +1% 872 697 +25%
Molybdenum (published price -
US$/pound) 17 32 -47% 29 30 -3%
Lead (LME Cash - US$/pound) 0.56 1.46 -62% 0.95 1.17 -19%
Cdn/U.S. exchange rate (Bank of
Canada) 1.21 0.98 +23% 1.07 1.07 -
(i) The average commodity prices disclosed above are provided for
information only. Our actual revenues are determined using commodity
prices and other terms and conditions specified in our various sales
contracts with our customers. The molybdenum price is the major
supplier selling price published in Platts Metals Week.
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, often in the following
quarter. Accordingly, revenue in a quarter is based on current prices for sales
occurring in the quarter 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. The extent of the pricing adjustments also takes into account
the actual price participation terms as provided in the concentrate sales
agreements. In the fourth quarter of 2008, we had negative pricing adjustments
of $474 million ($270 million after royalties, non-controlling interests and
income taxes) compared with $142 million ($94 million after royalties,
non-controlling interests and income taxes) of negative pricing adjustments in
2007. The amount is comprised of $255 million of pricing adjustments on sales
from the previous quarter, and $219 million on current quarter sales that were
initially recorded at the average price for the month of shipment and
subsequently revalued to quarter end forward curve prices.
At September 30, 2008, outstanding receivables included 157 million pounds of
copper provisionally valued at an average of US$2.90 per pound, 296 million
pounds of zinc valued at an average of US$0.76 per pound and 96 million pounds
of lead provisionally valued at an average of US$0.83 per pound. During the
fourth quarter of 2008, 148 million pounds of copper included in the September
30, 2008 receivables were settled at an average final price of US$1.82 per
pound, 266 million pounds of zinc were settled at an average final price of
US$0.55 per pound and 84 million pounds of lead were settled at an average final
price of US$0.60 per pound, resulting in negative after-tax pricing adjustments
of $145 million in the quarter. Negative after-tax pricing adjustments on
current quarter sales were $125 million.
At December 31, 2008, outstanding receivables included 164 million pounds of
copper provisionally valued at an average of US$1.40 per pound, 195 million
pounds of zinc valued at an average of US$0.54 per pound and 45 million pounds
of lead valued at an average of US$0.42 per pound.
BUSINESS UNIT RESULTS
The table below shows our share of production and sales of our major commodities.
Units
(000's) Production Sales
---------------------------------------------------------------------------
Fourth Year Fourth Year-
Quarter to-date Quarter to-date
---------- ----------- ---------- ------------
2008 2007 2008 2007 2008 2007 2008 2007
----------------------------------- ----------- ---------- ------------
Principal
products
Copper
contained in
concentrate tonnes 56 58 206 215 60 58 208 216
Copper
cathodes tonnes 28 26 107 37 27 27 106 39
---------------------------------------------------
84 84 313 252 87 85 314 255
---------------------------------------------------
Metallurgical
coal
Direct share tonnes 4,172 2,214 11,282 9,024 3,726 2,396 11,042 9,071
Indirect
share tonnes 212 663 2,345 1,552 192 717 2,387 1,589
---------------------------------------------------
4,384 2,877 13,627 10,576 3,918 3,113 13,429 10,660
---------------------------------------------------
Refined zinc tonnes 65 72 270 292 60 78 266 292
Zinc contained
in concentrate tonnes 149 165 663 699 199 225 678 696
Gold ounces 75 85 279 285 69 81 278 271
Major by-products
Molybdenum
contained
in concentrate pounds 2,092 2,204 7,119 7,133 1,842 2,063 7,208 7,349
Refined lead tonnes 21 16 85 76 20 16 85 76
Lead contained
in concentrate tonnes 28 39 133 146 60 51 149 154
---------------------------------------------------------------------------
(1) In August 2007, we acquired the Quebrada Blanca, Andacollo and Duck
Pond mines as a result of our acquisition of Aur Resources Inc.
Quebrada Blanca and Andacollo produce cathode copper. Duck Pond
produces copper and zinc concentrates.
(2) In April 2007, our Lennard Shelf zinc mine and Pogo gold mine achieved
commercial production. The Lennard Shelf zinc mine ceased production in
August 2008.
(3) The direct share of coal production includes our 40% proportionate
share of production from Teck Coal until October 30, 2008 prior to
our acquisition of Fording and 100% thereafter. The indirect
share of coal production was the pro rata share of production
represented by our previous investment in units of Fording. We owned
approximately 9% of Fording from February 28, 2003 to September 27,
2007 and on September 27, 2007 increased our interest in Fording to
19.95%.
(4) We include 100% of production and sales from our Highland Valley
Copper, Quebrada Blanca and Andacollo mines in our production and sales
volumes, even though we own 97.5%, 76.5% and 90%, respectively, of
these operations, because we fully consolidate their results in our
financial statements. These figures include only our proportionate
share of production and sales from Antamina, Lennard Shelf and our gold
operations.
REVENUES AND OPERATING PROFIT
QUARTER ENDED DECEMBER 31
Our revenue, operating profit before depreciation and pricing adjustments and
operating profit by business unit is summarized in the table below:
Operating
profit (loss)
before
depreciation Operating
and pricing profit (loss)
($ in millions) Revenues adjustments (note 4)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2008 2007 2008 2007 2008 2007
--------------------------------------------------------------------------
Copper
Highland Valley Copper $ 67 $ 212 $ 114 $ 150 $ (58) $ 114
Antamina 2 155 74 149 (47) 105
Quebrada Blanca (note 1) 64 133 22 58 (51) 26
Carmen de Andacollo
(note 1) 16 29 3 4 (22) (4)
Duck Pond (note 1) (4) 15 (8) 6 (36) (6)
--------------------------------------------------------------------------
145 544 205 367 (214) 235
Coal (note 2) 1,063 218 516 41 486 30
Zinc
Trail
(including power sales) 282 382 17 40 4 24
Red Dog 119 358 47 243 (71) 174
Pend Oreille 6 13 (11) 1 (17) (6)
Lennard Shelf (note 3) (4) 20 - (3) (7) (7)
Other 13 13 2 3 2 3
Inter-segment sales (24) (70) 7 (1) 7 (1)
--------------------------------------------------------------------------
392 716 62 283 (82) 187
Gold
Pogo (note 3) 34 23 14 9 5 2
Hemlo 29 37 11 10 7 6
--------------------------------------------------------------------------
63 60 25 19 12 8
--------------------------------------------------------------------------
TOTAL $ 1,663 $ 1,538 $ 808 $ 710 $ 202 $ 460
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) In August 2007, we acquired the Quebrada Blanca, Andacollo and Duck
Pond mines as a result of our acquisition of Aur Resources Inc.
Results from these operations are effective from August 22, 2007.
(2) On October 30, 2008, we completed the acquisition of Fording's assets
which increased our direct ownership interest in Teck Coal from 40%
to 100%. The results summarized in the above table reflect our
increased ownership from October 30, 2008.
(3) Lennard Shelf and Pogo operations began commercial production starting
April 1, 2007 and results from operations are included in earnings from
that date. The Lennard Shelf zinc mine ceased production in August
2008.
(4) After depreciation, amortization and pricing adjustments.
REVENUES AND OPERATING PROFIT
TWELVE MONTHS ENDED DECEMBER 31
Operating
profit (loss)
before
depreciation Operating
and pricing profit (loss)
($ in millions) Revenues adjustments (note 4)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2008 2007 2008 2007 2008 2007
--------------------------------------------------------------------------
Copper
Highland Valley Copper $ 789 $ 1,115 $ 611 $ 758 $ 378 $ 737
Antamina 569 775 505 592 336 565
Quebrada Blanca (note 1) 574 215 317 91 161 55
Carmen de Andacollo (note 1) 142 46 86 11 37 1
Duck Pond (note 1) 82 35 33 11 (30) (4)
--------------------------------------------------------------------------
2,156 2,186 1,552 1,463 882 1,354
Coal (note 2) 2,428 951 1,226 249 1,160 209
Zinc
Trail
(including power sales) 1,442 1,839 208 396 157 345
Red Dog 703 1,434 350 966 171 819
Pend Oreille 41 70 (10) 21 (27) (6)
Lennard Shelf (note 3) 26 47 (7) 8 (23) (4)
Other 50 49 7 11 6 10
Inter-segment sales (191) (387) 17 16 17 16
--------------------------------------------------------------------------
2,071 3,052 565 1,418 301 1,180
Gold
Pogo (note 3) 130 59 55 16 23 (1)
Hemlo 119 123 29 19 16 (4)
--------------------------------------------------------------------------
249 182 84 35 39 (5)
--------------------------------------------------------------------------
TOTAL $ 6,904 $ 6,371 $ 3,427 $ 3,165 $ 2,382 $ 2,738
--------------------------------------------------------------------------
(1) In August 2007, we acquired the Quebrada Blanca, Andacollo and Duck
Pond mines as a result of our acquisition of Aur Resources Inc. Results
from these operations are effective from August 22, 2007.
(2) On October 30, 2008, we completed the acquisition of Fording's assets
which increased our direct ownership interest in Teck Coal from 40% to
100%. The results summarized in the above table reflect our increased
ownership from October 30, 2008.
(3) Lennard Shelf and Pogo operations began commercial production starting
April 1, 2007 and results from operations are included in earnings from
that date. The Lennard Shelf zinc mine ceased production in August
2008.
(4) After depreciation, amortization and pricing adjustments.
COPPER
Highland Valley Copper (97%)
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Tonnes milled (000's) 11,871 11,798 44,888 42,593
Copper
Grade (%) 0.34 0.36 0.32 0.37
Recovery (%) 84.1 82.0 83.6 87.9
Production (000's tonnes) 34.1 34.6 119.3 139.5
Sales (000's tonnes) 37.7 32.9 122.3 140.2
Molybdenum
Production (million pounds) 1.6 1.3 4.2 4.1
Sales (million pounds) 1.3 1.2 4.0 4.0
Cost of sales ($ millions)
Operating costs $ 101 $ 81 $ 331 $ 308
Distribution costs $ 10 $ 7 $ 32 $ 31
Depreciation and amortization $ 14 $ 10 $ 48 $ 39
Operating Profit (loss) ($ millions)
Before depreciation $ (44) $ 124 $ 426 $ 776
After depreciation $ (58) $ 114 $ 378 $ 737
-------------------------------------------------------------------------
Highland Valley Copper's operating profit, before pricing adjustments, was $100
million in the fourth quarter, compared with $140 million a year ago. Negative
pricing adjustments of $158 million were recorded in the quarter compared with
$26 million in the fourth quarter of 2007.
Copper production in the fourth quarter was similar to last year as lower ore
grades were offset by improved mill recoveries. Copper recoveries are expected
to remain similar to current levels for the first half of 2009 while a high
percentage of ore is drawn from the clay bearing Lornex pit, but these
recoveries are forecast to improve to between 86% and 88% by the end of 2009.
Lornex ore accounted for 52% of mill throughput compared with 43% in the fourth
quarter of 2007.
Two geotechnical failures in the Valley pit in the latter part of 2008 are
expected to be fully remediated by the end of the first quarter of 2009. As a
result of these failures, pre-production stripping of the east wall in the
Valley pit is now scheduled for completion in the third quarter of 2009. After
this stripping is complete, work will commence on the construction of a 3.5
million tonne buttress to provide long term stability of the east wall.
Pre-production stripping of the west wall in the Valley pit will start in late
2009, although the majority of west wall stripping activity has been deferred to
2010. West wall stripping is scheduled for completion in 2013. It is anticipated
that the mine permit amendment for this next phase of mine life extension will
be received by mid 2009.
Antamina (22.5%)
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Tonnes milled (000's)
Copper-only ore 4,866 5,757 18,578 20,326
Copper-zinc ore 3,192 1,199 11,860 10,848
-------------------------------------------------------------------------
8,058 6,956 30,438 31,174
Copper (note 1)
Grade (%) 1.25 1.47 1.25 1.21
Recovery (%) 88.6 94.1 89.1 89.1
Production (000's tonnes) 87.9 90.0 343.7 329.9
Sales (000's tonnes) 90.5 100.1 338.2 326.9
Zinc (note 1)
Grade (%) 3.13 3.52 3.51 3.03
Recovery (%) 83.0 88.4 85.3 87.3
Production (000's tonnes) 83.0 43.0 347.8 291.7
Sales (000's tonnes) 94.6 43.4 347.4 292.5
Molybdenum
Production (million pounds) 2.4 4.5 13.4 14.1
Sales (million pounds) 2.6 4.0 14.7 15.3
Cost of sales (US$ millions)
Operating costs $ 151 $ 107 $ 474 $ 395
Distribution costs $ 32 $ 25 $ 149 $ 99
Royalties and other costs (note 2) $ (22) $ 18 $ 138 $ 141
Depreciation and amortization $ 36 $ 37 $ 141 $ 140
Our 22.5% share of operating
profit (loss) ($ millions)
Before depreciation $ (37) $ 112 $ 368 $ 597
After depreciation $ (47) $ 105 $ 336 $ 565
-------------------------------------------------------------------------
(1) Copper ore grades and recoveries apply to all of the processed ores.
Zinc ore grades and recoveries apply to copper-zinc ores only.
(2) In addition to royalties paid by Antamina, we also pay a royalty to the
vendor of our interest in Antamina equivalent to 7.4% of our share of
cash flow distributed by the mine.
Our 22.5% share of Antamina's operating profit, before pricing adjustments,
declined to $64 million in the fourth quarter compared with $142 million in the
same period last year. The decline in operating profit was due to significantly
lower copper and zinc prices. Our share of negative pricing adjustments in the
fourth quarter was $111 million compared with negative pricing adjustments of
$37 million in the same period a year ago.
Operating costs increased by US$44 million (100% basis) in the fourth quarter
compared with the same period last year due mainly to a US$30 million
electricity rate adjustment provided for in the quarter.
Copper production in the fourth quarter was slightly lower than a year ago at
87,900 tonnes, while zinc production almost doubled to 83,000 tonnes due mainly
to the processing of a significantly greater amount of copper-zinc ores in the
quarter compared with last year.
Quebrada Blanca (76.5%)
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Tonnes placed (000's)
Heap leach ore 1,799 1,778 7,506 2,608
Dump leach ore 2,351 3,138 10,120 3,769
-------------------------------------------------------------------------
4,150 4,916 17,626 6,377
Grade (TCu%) (note 1)
Heap leach ore 1.20 1.14 1.26 1.23
Dump leach ore 0.53 0.52 0.56 0.53
Production (000's tonnes)
Heap leach ore 16.8 15.9 65.0 22.9
Dump leach ore 4.9 5.4 20.4 7.5
-------------------------------------------------------------------------
21.7 21.3 85.4 30.4
Sales (000's tonnes) 21.4 22.4 84.8 32.1
Cost of sales (US$ million)
Operating costs $ 60 $ 52 $ 239 $ 72
Inventory adjustments (note 2) $ 4 $ 43 $ 41 $ 71
Distribution costs $ 2 $ - $ 9 $ 1
Depreciation and amortization $ 29 $ 12 $ 99 $ 16
Operating profit (loss) ($ millions)
Before depreciation $ (17) $ 38 $ 267 $ 71
After depreciation $ (51) $ 26 $ 161 $ 55
-------------------------------------------------------------------------
(1) TCu% is the percent assayed total copper grade.
(2) Inventory adjustments consist of mark-to-market adjustments of work in
process inventory at the time of the acquisition of the mine, which are
being charged to earnings as the inventory is sold.
(3) Results do not include a provision for the minority interests' 23.5%
share of Quebrada Blanca.
(4) In August 2007, we acquired the Quebrada Blanca mine as a result of our
acquisition of Aur Resources Inc.
Quebrada Blanca incurred an operating loss of $12 million before $39 million of
negative pricing adjustments in the fourth quarter. This compares with an
operating profit of $89 million in the fourth quarter of 2007, before negative
pricing adjustments of $20 million and $43 million in respect of inventory
revaluations to fair value on the acquisition of the mine from Aur Resources.
Copper production and sales volumes in the fourth quarter were similar to last
year at 21,700 tonnes and 21,400 tonnes, respectively.
As part of our capital spending reductions for 2009, we have deferred the study
for the potential Quebrada Blanca hypogene project.
Carmen de Andacollo (90%)
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Tonnes placed (000's)
Heap leach ore 1,040 869 3,828 1,289
Dump leach ore 267 173 711 344
-------------------------------------------------------------------------
1,307 1,042 4,539 1,633
Grade (TCu%) (note 1)
Heap leach ore 0.61 0.55 0.64 0.54
Dump leach ore 0.27 0.23 0.27 0.23
Production (000's tonnes)
Heap leach ore 4.6 4.0 16.5 5.5
Dump leach ore 0.9 0.6 4.6 0.9
-------------------------------------------------------------------------
5.5 4.6 21.1 6.4
Sales (000's tonnes) 5.3 4.6 20.9 6.6
Cost of sales (US$ million)
Operating costs $ 19 $ 10 $ 54 $ 13
Inventory adjustments (note 2) $ - $ 17 $ 8 $ 24
Distribution costs $ 1 $ - $ 3 $ -
Depreciation and amortization $ 11 $ 6 $ 32 $ 8
Operating profit (loss) ($ millions)
Before depreciation $ (8) $ 2 $ 72 $ 9
After depreciation $ (22) $ (4) $ 37 $ 1
-------------------------------------------------------------------------
(1) TCu% is the percent assayed total copper grade.
(2) Inventory adjustments consist of mark-to-market adjustments of work in
process inventory at the time of the acquisition of the mine, which are
being charged to earnings as the inventory is sold.
(3) Results do not include a provision for the minority interests' 10%
share of Andacollo.
(4) In August 2007, we acquired the Carmen de Andacollo mine as a result of
our acquisition of Aur Resources Inc.
Andacollo incurred an operating loss of $11 million in the fourth quarter before
negative price adjustments of $11 million. Operating profit in the fourth
quarter of 2008 was also negatively affected by a $6 million inventory
write-down as in-process and finished goods inventories were written-down to
their net realizable value. This charge was included in operating costs.
Operating profit was $15 million in the fourth quarter of 2007, before negative
price adjustments of $2 million and $17 million in respect of inventory
revaluations to fair value on the acquisition of the mine from Aur Resources.
Copper production was 5,500 tonnes in the fourth quarter compared with 4,600
tonnes in the same period last year due to improved copper recoveries.
The development of Andacollo's concentrate project is progressing according to
plan. The development consists of the construction of a 55,000 tonne per day
concentrator and tailings facility and is expected to produce 76,000 tonnes (168
million pounds) of copper and 53,000 ounces of gold in concentrate annually over
the first 10 years of the project. The capital cost forecast for the project is
US$410 million using a US$1 equals 535 Chilean pesos exchange rate, of which
US$249 million has been spent from inception to December 31, 2008. The project
is expected to be commissioned in the fourth quarter of 2009 and achieve
commercial production in the first half of 2010.
Duck Pond (100%)
Duck Pond incurred a $36 million operating loss in the fourth quarter, after
recording $16 million of negative pricing adjustments and an inventory
write-down of $10 million. Copper and zinc production in the fourth quarter
improved from the previous quarter at 3,500 tonnes and 5,500 tonnes,
respectively. Sales volumes in the fourth quarter were lower than production
volumes at 3,000 tonnes respectively each for copper and zinc due to the timing
of shipments.
Underground ramp development to the lower part of the orebody is expected to be
complete in the second quarter of 2009 which will allow access to new production
areas.
Development Projects
We have reduced our planned capital spending for 2009. These reductions include
the deferral of study and planning costs at both the Quebrada Blanca hypogene
project and the Relincho project in Chile, our withdrawal from the Petaquilla
copper project in Panama and reduced spending for our Galore Creek project in
British Columbia. As a result of our withdrawal from the Petaquilla project we
have no further funding obligations in respect to this project and we recorded a
$22 million pre-tax, non-cash charge to earnings in the fourth quarter.
Galore Creek
During the fourth quarter the optimization study for the Galore Creek project
was completed. The final configuration resulted in the permanent facilities
associated with the concentrator and tailings disposal located outside the
Galore Valley. The site would be linked to the concentrator through a realigned
11 kilometre tunnel. With the relocation of the operating facilities outside of
the Galore Valley and the new tunnel, the access to the site from Highway 37 has
been shortened from a 137 kilometre road with a 4 kilometre tunnel to an
approximate 90 kilometre road with an 11 kilometre tunnel. The concentrate will
be pipelined the entire way to the Port of Stewart, rather than pipelined to a
location near Highway 37 and trucked the remaining distance. This will require
the relocation of the filter plant to the Port of Stewart. 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 site on care and maintenance.
In February 2009, we amended certain provisions of the partnership agreement
relating to the Galore Creek Project. Under the amended agreement, our remaining
committed funding on Galore Creek has been reduced to approximately $36 million,
which must be contributed by December 31, 2012. 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 new funding arrangements replace
the arrangements agreed by us and NovaGold in November 2007, pursuant to which
we had committed to spend an additional $72 million on studies to reassess the
Galore Creek Project, of which $15.8 million had been spent to December 31,
2008, in addition to our share of other project costs.
COAL
Teck Coal (100% (note 1))
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Production (000's tonnes) 5,235 5,535 23,009 22,561
Sales (000's tonnes) 4,688 5,990 22,978 22,677
Average sale price
US$/tonne $ 247 $ 93 $ 205 $ 98
C$/tonne $ 285 $ 91 $ 220 $ 105
Operating expenses (C$/tonne)
Cost of product sold $ 58 $ 41 $ 53 $ 42
Inventory adjustments $ 50 $ - $ 17 $ -
Transportation $ 39 $ 33 $ 39 $ 35
Depreciation and amortization $ 8 $ 5 $ 6 $ 5
Our share of operating profit
($ millions) (note 1)
Before depreciation $ 516 $ 41 $ 1,226 $ 249
After depreciation $ 486 $ 30 $ 1,160 $ 209
-------------------------------------------------------------------------
(1) Results of Teck Coal represent our 100% direct interest commencing
October 30, 2008 and 40% prior to that date.
On October 30, 2008, we acquired all the assets of Fording, which primarily
consisted of Fording's 60% interest in Teck Coal (formerly Elk Valley Coal
Partnership). In aggregate, we paid a net $11.8 billion in cash and issued 36.8
million Class B subordinate voting shares in consideration for the Fording
assets. The acquisition of Fording's assets added substantially to our operating
profits and cash flows. The transaction increased our interest in the
partnership from our effective 52% to a 100% direct interest.
We began to fully consolidate the results of Teck Coal from October 30, 2008.
Upon acquisition, we allocated the acquisition cost of Fording, which required
us to revalue production inventories to their fair value based on current coal
contract prices. This adjustment totalled $188 million at October 30, all of
which was charged to earnings in the fourth quarter as all of the corresponding
inventories were sold by December 31, 2008. This adjustment reduced our
operating profit in the quarter, but did not reduce cash flows.
Our share of Teck Coal's operating profit in the fourth quarter increased
significantly to $486 million compared with $30 million in 2007, despite the
acquisition inventory adjustment. The increase was due to our increased
ownership and a substantial increase in 2008 coal year contract prices,
partially offset by an increase in operating costs and higher transportation
costs, which are partly tied to the coal price. Approximately 300,000 tonnes of
thermal coal and 190,000 tonnes of carryover tonnage from the 2007 coal year
were sold in the quarter, which reduced the average price by US$24 per tonne to
US$247 per tonne in the fourth quarter.
Coal sales of 4.7 million tonnes in the fourth quarter were 22% lower than a
year ago as our customers significantly reduced their coal deliveries in late
2008 in response to lower steel production.
Coal production in the fourth quarter of 2008 decreased by 5% to 5.2 million
tonnes compared with the same period last year. Production levels were reduced
in the latter part of the fourth quarter in response to lower customer demand.
In addition, production at the Elkview and Cardinal River mines was disrupted
during the fourth quarter by unexpected mechanical breakdowns. These mechanical
problems were resolved before year end.
The unit cost of product sold increased to $58 per tonne compared with $41 per
tonne for the fourth quarter of 2007. Lower production volumes, higher strip
ratios and input costs contributed to the increase. Our mine plans, which are
designed to maximize the value of the reserves over the long-term, require
higher strip ratios in 2009 and for the next several years. Labour costs
increased as a result of new compensation programs implemented during the third
quarter of 2008 that are intended to help us compete for skilled labour. The new
compensation programs include an employee profit sharing plan that will pay in
accordance with the coal division's overall profitability levels.
Unit transportation costs increased by 18% to $39 per tonne from the fourth
quarter of 2007 due primarily to the coal price participation provisions
contained in certain port loading contracts with Westshore Terminals and higher
contractual rail rates for eastbound shipments, partially offset by lower vessel
demurrage charges in the fourth quarter of 2008.
As at December 31 2008, there was approximately 500,000 tonnes of carryover
remaining under lower priced 2007 coal year contracts, substantially all of
which is expected to be delivered in the first quarter of 2009.
ZINC
Trail (100%)
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Metal production
Zinc (000's tonnes) 65.4 72.2 269.9 291.9
Lead (000's tonnes) 20.7 16.9 85.0 76.4
Metal sales
Zinc (000's tonnes) 60.7 78.5 266.4 292.1
Lead (000's tonnes) 19.9 16.0 85.0 76.3
Power
Surplus power sold (GW.h) 196 208 1,007 1,130
Power price (US$/MW.h) $ 57 $ 64 $ 62 $ 51
Cost of sales ($ millions)
Concentrates $ 149 $ 229 $ 785 $ 1,010
Operating costs $ 94 $ 94 $ 352 $ 348
Distribution costs $ 22 $ 19 $ 97 $ 85
Depreciation and amortization $ 13 $ 16 $ 51 $ 51
Operating profit ($ millions)
before depreciation
Metal operations $ 5 $ 27 $ 146 $ 336
Power sales $ 12 $ 13 $ 62 $ 60
-------------------------------------------------------------------------
$ 17 $ 40 $ 208 $ 396
Operating profit (loss)
($ millions) after depreciation
Metal operations $ (5) $ 15 $ 107 $ 297
Power sales $ 9 $ 9 $ 50 $ 48
-------------------------------------------------------------------------
$ 4 $ 24 $ 157 $ 345
-------------------------------------------------------------------------
The Trail metallurgical complex reduced its refined zinc production by
approximately 4,000 to 5,000 tonnes per month effective in late November in
response to changing market conditions. The duration of this curtailment will
depend on market conditions, but will likely continue for at least six months.
Refined lead production will not be affected and power sales are anticipated to
increase by about 15 gigawatt hours per month during this period, which will
improve Trail's profitability.
Trail metal operations incurred an operating loss of $5 million in the fourth
quarter compared with an operating profit of $15 million in the same period last
year due to the significant decline in the prices of zinc, lead and silver. In
addition, refined zinc sales volumes decreased 23% compared with the same period
a year ago as a result of implementing the production curtailments in late
November.
Refined lead production and sales volumes were higher in the fourth quarter
compared with a year ago, as the lead smelter and refinery facilities were
shutdown for approximately one month last year to allow for scheduled
maintenance of the KIVCET furnace.
Operating profit from surplus power sales in the fourth quarter was $9 million,
the same as a year ago. Power prices remained strong in the fourth quarter and
averaged US$57 per megawatt hour compared with US$64 per megawatt hour in the
same period last year.
Upper Columbia River Basin (Lake Roosevelt)
The litigation concerning historic discharges by Teck Cominco Metals Ltd.
("TCML") of smelter slag into the Upper Columbia River continued in the quarter.
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. 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 liability phase of the litigation is scheduled for October 2010.
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 American Incorporated ("TCI") under the EPA
Agreement ("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. TCI
commissioned a study by recognized experts in NRD assessment in 2008. Based on
the assessment performed, TCML does not expect that the compensable value of
such damage will be material.
TCI will continue to fulfill its obligations under the settlement agreement
reached with the United States and the EPA in June 2006 and complete the
remedial investigation and feasibility study. A comprehensive work plan for the
site was approved by the EPA late in 2008, and, subject to acquiring required
permits, TCI expects to commence field work on the RI/FS in the second quarter
of 2009. The settlement agreement is not affected by the litigation.
There can be no assurance that TCML will ultimately be successful in its defense
of the litigation or that TCML or its affiliates will not be faced with further
liability in relation to this matter. Until the studies contemplated by the
Agreement 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 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.
Red Dog (100%)
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Tonnes milled (000's) 742 810 3,050 3,381
Zinc
Grade (%) 18.8 20.1 20.1 20.2
Recovery (%) 82.3 82.0 84.1 84.2
Production (000's tonnes) 115.2 134.3 515.2 575.4
Sales (000's tonnes) 164.7 191.9 528.4 575.7
Lead
Grade (%) 4.9 6.6 6.0 6.1
Recovery (%) 60.7 60.9 67.0 65.9
Production (000's tonnes) 26.1 36.1 122.6 136.2
Sales (000's tonnes) 58.7 46.3 138.9 144.3
Cost of sales (US$ millions)
Operating costs $ 71 $ 57 $ 194 $ 193
Distribution costs $ 43 $ 37 $ 122 $ 104
Royalties (NANA and State) $ 22 $ 75 $ 111 $ 230
Depreciation and amortization $ 22 $ 20 $ 63 $ 60
Operating profit (loss)
(US$ millions)
Before depreciation $ (45) $ 194 $ 240 $ 885
After depreciation $ (71) $ 174 $ 171 $ 819
-------------------------------------------------------------------------
Red Dog's operating profit, before pricing adjustments, declined to $21 million
in the fourth quarter compared with $223 million in the same period last year.
The decline in operating profit was due to significantly lower zinc and lead
prices and to a 14% decrease in zinc sales volumes due to deferred timing of
certain consignment sales. Negative pricing adjustments of $92 million were
recorded in the fourth quarter compared with $49 million in the fourth quarter
of 2007.
Zinc production in the fourth quarter decreased by 14% to 115,200 tonnes
compared with the same period last year as a result of reduced mill throughput
and lower ore grades. In October, the shaft in the main crusher failed at the
same time the secondary crusher was down for a maintenance overhaul. As a result
of the lack of crushed ore, the mill shut down for 5 days and then ran at
approximately 65% of capacity for another 6 days in the latter part of October.
Red Dog's 2008 shipping season began on July 11, 2008 and was completed on
October 27, 2008 with a total of 916,000 tonnes of zinc concentrate and 245,000
tonnes of lead concentrate shipped from the mine. Metals in concentrate
available for sale at January 1, 2009 are approximately 221,000 tonnes of zinc
in concentrate. All offsite lead inventories had been depleted as at December
31, 2008. We expect to sell 85,000 tonnes of the zinc in the first quarter of
2009, 80,000 tonnes in the second quarter and the balance in the third quarter.
We continue to work towards the approval of a Supplemental Environmental Impact
Statement ("SEIS") for the Aqqaluk deposit, the next ore body scheduled to be
developed by Red Dog. The renewal of the mine's effluent discharge permit will
be addressed in conjunction with the SEIS. The period for public comment on the
draft SEIS expired in February 2009 and several parties provided extensive
comments. EPA's decision is expected in the third quarter and the parties who
have commented have the right to appeal. If an appeal is filed, the issuance of
the permit may be delayed, which may affect our mining plans. In the interim, we
are working with NANA and the EPA to ensure that the mine can discharge
sufficient water to maintain a reasonable water balance in the tailings
impoundment under its existing water discharge permit.
In September 2008, we entered into a settlement with the plaintiffs from the
Village of Kivalina who had 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. The cost of the settlement was not
material.
Other Zinc Mines
In mid-December, we announced that due to reduced metal demand and persistent
weakness in zinc prices, the Pend Oreille mine will be temporarily shut down by
the end of February, 2009. As a result, we wrote down the mine assets by $51
million in the fourth quarter.
Pend Oreille recorded an operating loss of $17 million in the fourth quarter as
a result of significantly lower zinc prices, $2 million of negative pricing
adjustments and $8 million for closure and severance costs. This compares with a
$6 million operating loss in the same period a year ago.
GOLD
Pogo (40%)
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Tonnes milled (000's) 187 182 742 649
Grade (grams/tonne) 18.2 15.7 17.2 14.7
Mill recovery (%) 81.0 87.6 83.8 84.4
Production (000's ounces) 89 81 347 260
Sales (000's ounces) 87 74 351 233
Cash operating cost per ounce (US$) $ 464 $ 514 $ 500 $ 515(1)
Our share of operating profit
(loss) (US$ millions)
Before depreciation $ 14 $ 9 $ 55 $ 16
After depreciation $ 5 $ 2 $ 23 $ (1)
-------------------------------------------------------------------------
(1) Operating results prior to April 1, 2007, the date the operation
achieved commercial production, were capitalized as start-up costs.
Pogo's gold production in the fourth quarter was 89,000 ounces compared with
81,000 ounces in the same period a year ago. Higher ore grades in the quarter
were partly offset by lower mill recoveries primarily in the sulphide floatation
circuit. Metallurgical test work is ongoing to identify the problem.
Gold sales were 87,000 ounces in the fourth quarter at an average realized price
of US$798 per ounce compared with 74,000 ounces and a realized price of US$796
per ounce in the fourth quarter of 2007. Our 40% share of Pogo's operating
profit was $5 million in the fourth quarter compared with $2 million in the same
period last year due mainly to higher gold prices and improved production
levels.
Hemlo Mines (50%)
Operating results at the 100% level are summarized in the following table:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Tonnes milled (000's) 759 812 2,775 3,036
Grade (grams/tonne) 3.2 4.0 3.1 3.7
Mill recovery (%) 94.3 94.5 94.4 94.1
Production (000's ounces) 74 100 260 337
Sales (000's ounces) 62 97 255 330
Cash operating cost per ounce (US$) $ 483 $ 541 $ 640 $ 568
Our 50% share of operating profit
(loss) ($ millions)
Before depreciation $ 11 $ 10 $ 29 $ 19
After depreciation $ 7 $ 6 $ 16 $ (4)
-------------------------------------------------------------------------
Hemlo's gold production of 74,000 ounces in the fourth quarter was consistent
with the current mining plan, but represents a decrease of 26% compared with the
same period last year due to lower ore grades. Most high grade sections of the
mine have now been depleted, and a greater percentage of mill feed is expected
to come from the lower grade open pit. Cash operating costs increased to $584
(US$483) per ounce compared with $531 (US$541) per ounce in the fourth quarter
of 2007 due to the effect of lower production levels. The decrease in the US
dollar unit operating costs was due to the effect of a stronger US dollar.
Gold sales of 62,000 ounces in the fourth quarter were lower than production due
to the timing of shipments and the average realized price was US$797 per ounce.
This compares with sales of 97,000 ounces and a realized price of US$789 per
ounce in the same period last year.
Hemlo's operating profit was $7 million in the fourth quarter compared with $6
million last year.
ENERGY
Fort Hills Project
In November 2008, together with our partners in the Fort Hills project, we
announced that we will defer the final investment decision in the mining portion
of the project until a cost estimate consistent with the current market
environment can be established. The partners now anticipate making a final
investment decision in 2009. The upgrader portion of the project has been put on
hold and a decision on whether to proceed with the upgrader will be made at a
later date. As a result of the decision to defer the upgrader portion of the
project, we have recorded a $90 million after-tax impairment charge against our
investment in Fort Hills.
The partners remain committed to the retention of the oil sands leases and are
holding discussions with the Government of Alberta on the current lease term.
Proceeding with the project is also subject to certain regulatory approvals. In
October 2008, the Alberta Energy Resources Conservation Board (the "ERCB")
released its decision regarding the proposed mine amendment requested by
Petro-Canada on behalf of the Fort Hills Partnership. The decision, which is
subject to Order in Council, provides for the required revision to the mine
footprint to enable construction to proceed for the first phase of the mine and
extraction portion of the Fort Hills project. The ERCB have requested a revised
assessment of the cumulative effects and mine plan by December 31, 2009 to
facilitate the request to increase the total recoverable resource. The
regulatory hearing on the Sturgeon County upgrader was convened in the second
half of 2008 and the ERCB decision report was released in January 2009. The
decision, which is subject to Order in Council, found the upgrader to be in the
public interest and approved the project subject to conditions and the
commitments made by Petro-Canada.
At December 31, 2008, our 20% interest in the Fort Hills project represents 776
million barrels of recoverable bitumen based on Sproule Unconventional Limited's
("Sproule") best estimate of the contingent bitumen resource of 3.88 billion
barrels of recoverable bitumen, with a low estimate of 2.1 billion barrels and a
high estimate of 4.35 billion barrels, on a 100% basis.
We remain committed to our diversification strategy including our relatively
recent addition of oil sands and the formation of the Energy business unit. We
continue to regard Fort Hills as an attractive, long term asset. However, in
light of the significant cost of participation in a near-term oil sands project
at this stage of the business and commodity cycle, we are exploring strategic
alternatives.
Frontier and Equinox Projects
The Teck/UTS Joint Venture completed 353 core holes in the first quarter of
2008, of which 325 holes were in the Frontier Project area. Full assay and test
results have been completed on the cores from the 2007/2008 winter exploration
program, the geological model has been updated and a contingent resource
estimate has been prepared by Sproule for the southern portion of the Frontier
project. As at December 31, 2008, Sproule, as independent reserve evaluators,
presented a contingent resource estimate for the southern portion of the
Frontier project. Our 50% interest in the Frontier project represents 774
million barrels of recoverable bitumen based on Sproule's best estimate of the
contingent bitumen resource of 1.55 billion barrels of recoverable bitumen, with
a low estimate of 980 million barrels and a high estimate of 2.55 billion
barrels, on a 100% basis.
Engineering studies continue on the Equinox Project, which included running a
1,500 tonne bulk sample through a pilot plant in the second half of 2008 to
develop process design parameters for both the Equinox and Frontier Projects. A
Design Basis Memorandum ("DBM") study is expected to be completed on Equinox in
the first quarter of 2009. The joint venture continues to advance the project
through the permitting process. Engineering studies are expected to start on the
Frontier Project in 2009. At December 31, 2008, our 50% interest in the Equinox
project represents 166 million barrels of recoverable bitumen based on Sproule's
best estimate of the contingent bitumen resource of 333 million barrels of
recoverable bitumen, with a low estimate of 230 million barrels and a high
estimate of 380 million barrels, on a 100% basis.
Contingent Resource Estimates
Volumes of contingent bitumen resources are calculated at the outlet of the
proposed extraction plant. There is no certainty that it will be commercially
viable to produce any portion of the contingent bitumen resources.
Contingent resources are defined in the Canadian Oil and Gas Evaluation Handbook
as published by the Canadian Section of the Society of Petroleum Evaluation
Engineers as those quantities of petroleum estimated, as of a given date, to be
potentially recoverable from known accumulations using established technology or
technology under development, but which are not currently considered to be
commercially recoverable due to one or more contingencies. Contingencies may
include factors such as economic, legal, environmental, political and regulatory
matters or a lack of markets. It is also appropriate to classify as ''contingent
resources'' the estimated discovered recoverable quantities associated with a
project in the early project stage.
There is no certainty that any of the Fort Hills Project, the Equinox Project or
the Frontier Project will produce any portion of the volumes currently
classified as "contingent resources". The primary contingencies which currently
prevent the classification of the contingent resources disclosed above as
reserves consist of: current uncertainties around the specific scope and timing
of the development of each of the Fort Hills Project, the Equinox Project or the
Frontier Project; lack of regulatory approvals for certain aspects of such
projects; the uncertainty regarding marketing plans for production from the
subject areas; improved estimation of project costs; commodity price
fluctuations; in the case of the Fort Hills Project, the acceptance within the
Fort Hills partnership of the updates to the Fort Hills Project scope, timing,
costs estimates and final Board of Directors approval of each of the Fort Hills
partnership general and limited partners; and those other risks and
contingencies described below under "Cautionary Statement on Forward-Looking
Information" and in the public filings described there. Contingent resources do
not constitute, and should not be confused with, reserves. There is no certainty
that it will be commercially viable to produce any portion of the contingent
bitumen resources.
Regulatory Developments
In January of 2008, the Government of Alberta announced a plan to reduce carbon
emissions intensity to 50% below 1990 levels by 2020. Major emitters (those over
100,000 tonnes per year) are required to reduce their emissions intensity by 12%
as compared to their established baseline. For new construction projects, the
plan is applicable three years after start up. We are reviewing the effect of
this legislation on our oil sands projects.
COSTS AND EXPENSES
Administration and general expenses were $4 million in the fourth quarter, $16
million less than the same period last year. The decrease is due to a decline in
our share price, which resulted in a reduction of our stock based compensation
expense recorded in earlier periods.
Interest and financing expense was $128 million in the fourth quarter compared
with $21 million a year earlier. The increase in interest expense is a result of
the additional debt incurred to finance the acquisition of Fording. In addition,
the value of pre-existing debt and the related interest charges were adversely
affected by the strengthening of the US dollar in the period. Our average
interest rate in the period was approximately 4% as interest on the new debt is
based on LIBOR rates which are at historically low levels.
Other expenses of $27 million in the fourth quarter included a number of items
which were one-time gains or losses related to the re-pricing of our assets and
liabilities due to changes in commodity prices. Expenses in the quarter included
a $292 million charge in respect of marketable securities we own in development
stage companies, whose decline in value is considered other-than-temporary.
These investments are marked to market each period through other comprehensive
income and this charge represents a transfer from other comprehensive income to
regular earnings and did not affect their carrying values or our shareholders'
equity. While these items have a significant effect on our earnings, they are
non-cash and do not affect our cash flows from operations. In addition, we also
recorded environmental provisions in respect of legacy matters totalling $58
million.
Gains recorded in other expense included our copper and zinc derivatives
totalling $248 million and revaluation gains on our US dollar debt totalling $62
million. The commodity derivative gains related mainly to our copper positions
taken out in October of this year. Of this amount, realized gains totalled $77
million, while mark to market gains for open positions extending through the
first quarter of 2009 were $122 million. Debt revaluation net losses totalled
$112 million, of which gains of $62 million were recorded in other income and
$174 million of losses in other comprehensive income. The portion charged to
other comprehensive income relates to that portion of our US dollar debt which
is designated as a hedge against our investments in subsidiaries whose
functional currency is the US dollar.
We recorded a total of $577 million in asset impairment charges in the fourth
quarter comprised of a $345 million write-off of a portion of the goodwill
related to the acquisition of Aur Resources, leaving $533 million of goodwill
remaining at the end of 2008. We also recorded a $116 million charge against the
assets of Duck Pond mine, a $51 million charge against the assets of the Pend
Oreille mine, whose operations have been suspended, a $35 million charge against
our Santa Fe/Ipora nickel project in Brazil, a $22 million charge as a result of
our withdrawal from the Petaquilla project and an $8 million charge for
exploration properties.
Prior to our recent acquisition, we owned a 52% effective interest in Teck Coal
comprised of a 40% direct interest in Teck Coal and a 19.6% interest in the
outstanding units of Fording. These prior investments were acquired at a cost of
approximately $1.5 billion. Upon acquisition of the additional 48%, we retained
independent valuation experts to assist us in the allocation of our investments
to individual assets and liabilities. This allocation resulted in $883 million
of goodwill. This goodwill arose primarily as a result of the accounting
requirement to record the net future income and resource tax liabilities
associated with the Fording purchase on an undiscounted basis as well as 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. We subsequently tested goodwill relating to
Teck Coal for impairment. This test compared the fair value of 100% of these
operations to our carrying value as a whole and takes into account the lower
cost base for our pre-existing interest. Based on expected future cash flows
from 100% of the coal operations, the estimated fair value of the coal assets
exceeds the carrying amount, therefore, we have determined that goodwill
relating to Teck Coal is not impaired.
We recorded a recovery of income taxes of $78 million in the quarter or 13% of
our pre-tax loss. The recovery is less than the 31% statutory tax rate in Canada
as a significant portion of our loss related to goodwill write-downs which are
not taxed and investment impairments which are taxed at capital gains rates.
Offsetting these reductions were gains of $39 million on the resolution of
previously uncertain tax positions.
Non-controlling (minority) interest expense on a net basis was nil in the fourth
quarter compared with a $19 million expense in the same period last year. In the
fourth quarter of 2008, we had a recovery of non-controlling interest charges as
a result of losses at our Quebrada Blanca and Andacollo operations, in which
third parties hold a 23.5% and 10% interest in each property. These recoveries
were offset by increased non-controlling interest charges from our coal
operations, with third parties holding a 5% interest in the Elkview mine.
Equity Losses
We recorded an equity loss of $100 million in the fourth quarter comprised of a
$90 million loss from our Fort Hills Energy Limited Partnership and a $10
million loss from our investment in the Fording Canadian Coal Trust prior to our
acquisition of the Fording net assets on October 30. The underlying loss
recorded by the Trust related to foreign exchange losses on its US dollar
denominated debt and foreign exchange contracts as a result of the strengthening
US dollar, and these items more than offset income from coal operations during
the period. The equity loss from our Fort Hills investment related to asset
impairment charges as a result of the deferral of the project and contract
termination charges. In the fourth quarter of 2007, we had recorded an equity
loss of $19 million comprised of $14 million of equity earnings from Fording
offset by a $33 million equity loss from our Galore Creek Partnership.
Discontinued Operations
Our loss from discontinued operations relate to a price participation provision
in the agreement to sell the Cajamarquilla zinc refinery in 2004. We are
entitled to additional consideration of US$365,000 for each US$0.01 by which the
average annual price of zinc exceeds US$0.454 per pound. This zinc price
participation expires at the end of 2009. Accordingly, we have recorded a
receivable for outstanding amounts due under this agreement, which is valued
based on the zinc forward price curve in effect at the end of each quarter. In
the fourth quarter of 2008, the Canadian dollar zinc price decreased resulting
in a $6 million ($5 million after-tax) mark-to-market decrease in the
receivable, compared with a $19 million ($16 million after-tax) decrease in the
receivable in the fourth quarter of 2007.
FINANCIAL POSITION AND LIQUIDITY
Our primary sources of liquidity and capital resources are our cash and
temporary investments, cash flow provided from operations, including expected
tax refunds and the proceeds of potential asset sales, which must be used to pay
down our bridge facility.
Our cash position decreased during the fourth quarter by $397 million to $850
million at December 31, 2008. During the quarter, funds on hand and funds
generated from operations were reinvested in capital equipment and our oil sands
projects in the amount of $408 million. We also paid down debt of approximately
$1.1 billion, including $374 million as part of the Fording transaction. The
cash portion of the Fording transaction was fully funded by the new bridge and
term facilities.
Total debt balances were $12.9 billion at December 31, 2008, of which $11.2
billion (US$9.3 billion) relates to the financing incurred to acquire the
Fording assets. We also had bank credit facilities aggregating $1.3 billion, 97%
of which mature in 2012 and beyond. Our unused credit lines under these
facilities after drawn letters of credit amounted to $1.1 billion. Our senior
unsecured debt is currently rated Ba3 by Moody's Investor Services, BBB - by
Standard and Poor's and BBB (high) by Dominion Bond Rating Service, all with
negative outlooks.
Operating Cash Flow
Cash flow from operations was $598 million in the fourth quarter similar to the
$602 million in the same period last year. Factors which affected cash flow in
the quarter included the effect of sharp declines in commodity prices, which led
to pricing adjustments on our receivables of $255 million from September to
December inclusive. The majority of these pricing adjustments were settled in
the fourth quarter.
The acquisition of Fording's assets also added directly to our cash flows in
November and December. Operating profits from the acquired assets were $186
million in the quarter, which included a non-cash charge against income of $188
million related to acquisition accounting for inventories. These valuation
adjustments reduced our recorded earnings from sales of acquired inventories,
but not our cash flow. In addition, as part of acquisition of the Fording
assets, we assumed US$1.4 billion of US dollar forward sales contracts with an
average exchange rate of C$1.01 per US$1.00. Settlement of these contracts used
$123 million of cash in the fourth quarter of 2008.
Financing Activities
The major financing activity in the fourth quarter was the debt incurred to
partially finance our acquisition of Fording's assets in October 2008. The
acquisition financing included a US$5.81 billion 364-day bridge facility due
October 29, 2009 and a US$4 billion three year amortizing term loan facility
repayable in 11 equal quarterly instalments starting in April 2009. During the
last two months of 2008, we repaid US$460 million ($573 million) on the bridge
facility and we paid US$150 million ($183 million) to retire the revolving
credit facility that we assumed upon our acquisition of Aur Resources in 2007.
The repayment of the Aur revolving credit facility in the third quarter,
released US$153 million ($187 million) of cash collateral that was held as
security for that facility, which we previously included in other assets on our
balance sheet as this cash was not available for general corporate purposes. In
addition, we also repaid US$305 million ($374 million) of long-term debt we
assumed on the acquisition of Fording.
Investing Activities
Expenditures on property, plant and equipment were $212 million in the fourth
quarter and included $115 million on sustaining capital and $97 million on
development projects. The largest components of sustaining expenditures were at
Teck Coal, Antamina and Red Dog for equipment upgrades. Development expenditures
included $42 million for preparatory stripping and capital equipment for
Highland Valley Copper's mine life extension project and $46 million on the
development of the hypogene deposit at Andacollo. Investments in the fourth
quarter totalled $196 million and included $166 million of funding for the Fort
Hills oil sands project.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial
obligations as they become due.
As of the date of this report, US$5.3 billion of the bridge facility and US$4
billion of the term facility are outstanding. All of the bridge facility and
US$1.1 billion of the term facility is due on or before October 29, 2009.
On September 30, 2008, we entered into the definitive financing agreements
related to the bridge and term loan facilities and the conditions precedent to
our purchase of Fording's assets 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 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 require us to maintain a maximum
debt to debt plus equity 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 debt
plus equity ratio was 54%. To maintain our current production forecasts for
2009, we expect capital spending of approximately $500 million in 2009 and our
contributions to the Fort Hills Partnership are expected to be approximately
$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.
To address our near-term liquidity requirements, we have taken a number of 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, 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 we are pursuing further asset sales. There can be no
assurance that we will be able to complete further asset sales on a timely
basis. We have also begun discussions with our lenders to negotiate amendments
to the bridge facility that would 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.
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 debt levels 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.
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.
In a cyclical industry such as ours, history has shown that periodic spikes in
commodity prices can result in substantial increases in a company's cash flow.
Many of our major operations are long-lived assets with significant reserves and
resources, which have lives exceeding 20+ years based on current production
levels. 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 take steps to raise equity capital, which may have a material
adverse effect on our business and on the market prices of our equity and debt
securities.
COMPREHENSIVE INCOME
We recorded comprehensive income of $311 million in the fourth quarter,
comprising $607 million of a regular net loss and $918 million of other
comprehensive income. The most significant components of other comprehensive
earnings in the quarter was $719 million of currency translation adjustments and
the transfer of mark-to-market losses of $253 million on our portfolio of
available-for-sale marketable securities to regular earnings. The value of our
marketable securities suffered declines in value, which were recorded as an
other comprehensive loss in previous periods. As these declines are now
considered other-than-temporary, they are recorded as losses in regular earnings
and the provisional losses recorded in other comprehensive income are reversed.
This recognition does not affect comprehensive income as a whole or our
shareholders' equity. These marketable securities consist primarily of
investments in publicly traded companies with whom we partner in exploration or
development projects. Currency translation gains and losses are held in
accumulated other comprehensive income, net of taxes, until they are realized,
at which time they are included in net earnings.
OUTLOOK
The information below is in addition to the disclosure concerning specific
operations included above in the Operations and Corporate Development sections
of this document.
General Economic Conditions
Current problems in credit markets and deteriorating global economic conditions
have led to a significant weakening of exchange traded commodity prices in
recent months, including base metal prices. Volatility in these markets has also
been unusually high. It is difficult in these conditions to forecast commodity
prices or customer demand for our products. Credit market conditions have also
increased the cost of obtaining capital and limited the availability of funds.
Accordingly, management is reviewing the effects of the current conditions on
our business.
Commodity Prices and 2009 Production
Commodity prices are a key driver of our earnings and despite the sharp decline
in metal and commodity prices that occurred in the second half of 2008, current
prices are still above historic averages. On the supply side, the depleting
nature of ore reserves, difficulties in finding new ore bodies, progressing
through the permitting process, finding skilled resources to develop projects,
infrastructure constraints and significant cost inflation may continue to have a
moderating impact on the growth in future production. Although we are concerned
about current global economic conditions, particularly in the United States, we
believe that, over the longer term, as China and India continue to
industrialize, those two economies will continue to be major positive factors in
the future demand for commodities. We believe that the long-term price
environment for the products that we produce and sell remains favourable.
As a result of the Fording transaction our earnings are significantly more
sensitive to changes in the coal price. Based on post-acquisition rates of
production, current coal prices and current exchange rates, a 1%
increase/decrease in the US dollar coal price would increase/decrease our 2009
earnings by approximately $21 million.
Based on our expected 2009 production and prices prevailing at December 31, the
sensitivity of our annual earnings to a 1% change in the US dollar exchange rate
and commodity prices before pricing adjustments is as follows:
Effect of a 1%
2009 change on Annual
Production Plan After-Tax Earnings EPS
---------------------------------------------------------------------
Coal (tonnes) 20,000,000 $21 million 4.3 cents
Copper (tonnes) 330,000 $ 6 million 1.2 cents
Zinc (tonnes) 960,000 $ 4 million 0.8 cents
Lead (tonnes) 210,000 $ 1 million 0.2 cents
Gold (ounces) 290,000 $ 2 million 0.4 cents
Molybdenum (pounds) 8,500,000 $ 1 million 0.1 cents
Notes:
(1) The effect on our earnings of commodity price and exchange rate
movements will vary from quarter to quarter depending on sales
volumes.
(2) Zinc includes 270,000 tonnes of refined zinc and 690,000 tonnes of zinc
contained in concentrates.
(3) Lead includes 85,000 tonnes of refined lead and 125,000 tonnes of lead
contained in concentrates.
(4) Asset sales and financing transactions may affect our 2009 production
plans and earnings sensitivities.
(5) All production estimates are subject to change based on market
conditions.
In addition, as a result of the Fording transaction our earnings will be more
sensitive to changes in the Canadian/US dollar exchange rate. Based on prices
and the exchange rate prevailing at December 31, 2008, our current rates of
production and designation of approximately one-half of our US dollar debt as a
hedge of our US dollar denominated foreign operations, post-Fording acquisition,
a 1% weakening of the Canadian dollar against the US dollar would decrease 2009
earnings by approximately $50 million, after taking into account our US dollar
forward sales contracts.
At December 31, 2008, outstanding receivables included 164 million pounds of
copper provisionally valued at an average of US$1.40 per pound, 195 million
pounds of zinc valued at an average of US$0.54 per pound and 45 million pounds
of lead provisionally valued at an average of US$0.42 per pound. Final price
adjustments on these outstanding receivables will increase or decrease our
revenue in 2009 depending on metal prices at the time of settlement.
Copper and zinc prices are currently trading approximately 50% and 40% lower
than 2008 average prices, respectively. Molybdenum prices are approximately 65%
lower than 2008 average prices and lead prices are trading 50% lower than 2008
averages. Gold prices are approximately 10% higher than the 2008 average prices.
Partly offsetting the lower commodity prices is a weaker Canadian dollar, which
is currently trading at an exchange rate of $1.25 against the US dollar compared
with US$1 averaging C$1.07 in 2008.
Our copper production for 2009 is expected to increase by 5% from 2008 levels to
330,000 tonnes. Highland Valley's copper production is expected to increase by
approximately 10,000 tonnes from 2008, as grades and recoveries at the mine are
expected to improve during 2009.
Our zinc production in 2009 is expected to be 27,000 tonnes higher than in 2008.
Red Dog is expected to increase production by 58,000 tonnes as a result of
higher ore grades, while our share of zinc production from Antamina and Duck
Pond will increase by 19,000 tonnes due to ore body sequencing. These production
increases will be partly offset as a result of the closure of Lennard Shelf and
Pend Oreille mines in 2008 which result in production losses of 50,000 tonnes.
Due to sea ice conditions, Red Dog has a shipping window that normally starts in
early July and ends in late October. If ice or other weather conditions are such
that the shipping season is delayed, our quarterly sales patterns can vary
substantially. Sales and profits of the Red Dog mine follow a seasonal pattern,
with higher sales volumes of zinc and most of the lead sales occurring in the
last five months of the year following the commencement of the shipping season
in July.
Refined zinc production from our Trail metallurgical complex is expected to
remain similar in 2009 at 270,000 tonnes despite implementing production
curtailments in late 2008 in response to changing market conditions. Current
premiums for zinc metal and customer deliveries suggest ongoing weakness in the
zinc metal markets.
Coal marketing discussions are beginning for the 2009 coal year that commences
April 1, 2009. Integrated steel mills have curtailed production significantly,
reducing demand for raw material inputs including metallurgical coal. Current
market sentiment is that US dollar coal prices will decrease substantially from
the 2008 coal year. Our coal sales volumes are currently estimated at 20 million
tonnes in 2009. Coal sales volumes and price guidance for 2009 will be confirmed
after contracts for the 2009 coal year have been settled. Coal prices in the
first quarter of 2009 are expected to decline from the fourth quarter average
price of US$247 per tonne to approximately US$190 per tonne due to a higher
percentage of sales of lower priced thermal coal. At December 31, 2008 there was
approximately 500,000 tonnes of carryover remaining under lower priced 2007 coal
year contracts, substantially all of which is expected to be delivered in the
first quarter of 2009. Further, the winter months typically present challenging
shipping conditions for Teck Coal that could potentially impact first quarter
results and further increase the amount of carryover. Our westbound rail
contract with CP Rail for the movement of coal to the ports in greater Vancouver
expires at the end of March 2009.
Our share of gold production is expected to be 290,000 ounces in 2009. Our share
of gold production from Pogo is expected to be 135,000 to 145,000 ounces, while
our share of production from the Hemlo joint venture is expected to stay steady
at approximately 130,000 ounces. We are pursuing the potential sale of our gold
assets.
Capital Expenditures
Our 2009 capital expenditures, excluding the Fort Hills project, are expected to
be approximately $500 million, including $250 million of sustaining capital
expenditures and $250 million on development projects. Our development
expenditures estimate of $250 million includes $190 million for Andacollo's
hypogene project and $30 million for Highland Valley's mine expansion. We also
expect to spend approximately $330 million on our share of costs for the Fort
Hills oil sands project. We are reviewing our discretionary capital spending in
light of current market conditions and our debt reduction targets.
Asset Sales
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. We will also receive a 1.75%
net smelter return royalty, which shall not exceed US$40 million, in respect of
60% of production from Lobo-Marte, payable when gold prices exceed US$760 per
ounce. We expect to record a pre-tax gain in the first quarter of 2009 of
approximately $160 million on the transaction.
Financing and Exchange Rates
In order to finance the Fording transaction we arranged debt financing of US$9.8
billion, of which US$9.3 billion is outstanding. Interest charges on these
facilities are based on LIBOR or US prime rates and our credit rating. The
additional debt will result in a substantial increase to our existing interest
expense. To the extent that we refinance or otherwise amend these facilities, we
expect our interest expense to increase further.
Our US dollar denominated debt will be subject to revaluation based on changes
in the Canadian/US dollar exchange rate. We have designated approximately
one-half of our US dollar denominated debt as a hedge against our US dollar
denominated foreign operations. As a result, approximately 50% of any foreign
exchange gains or losses arising on our debt will be recorded in net earnings
with the remainder in other comprehensive income. The earnings impact of these
revaluations will be reduced as we pay down the debt, although exchange rate
fluctuations will also affect our debt to equity ratio and our interest expense.
FINANCIAL INSTRUMENTS AND DERIVATIVES
We hold a number of financial instruments and derivatives, the most significant
of which are marketable securities, foreign exchange forward sales contracts,
fixed price forward metal sales contracts, settlements receivable and price
participation payments on the sale of the Cajamarquilla zinc refinery. The
Cajamarquilla price participation payments are economically similar to a fixed
price forward purchase of zinc. The financial instruments and derivatives are
all recorded at fair values on our balance sheet with gains and losses in each
period included in other comprehensive income, net earnings from continuing
operations and net earnings from discontinued operations as appropriate. Some of
our gains and losses on metal-related financial instruments are affected by
smelter price participation and are taken into account in determining royalties
and other expenses. All are subject to varying rates of taxation depending on
their nature and jurisdiction.
The after-tax effect of financial instruments on our net earnings for the
following periods is set out in the table below:
Three months Year ended
ended December 31 December 31
2008 2007 2008 2007
-------------------------------------------------------------------------
Price adjustments
On prior quarter sales $ (145) $ (37) $ (130) $ (56)
On current quarter sales (125) (57) (199) (10)
-------------------------------------------------------------------------
(270) (94) (329) (66)
Other financial instruments
Derivatives gains 161 29 185 14
Cajamarquilla sale price
participation (discontinued
operations) (5) (16) (18) (46)
-------------------------------------------------------------------------
156 13 167 (32)
-------------------------------------------------------------------------
Total $ (114) $ (81) $ (162) $ (98)
-------------------------------------------------------------------------
QUARTERLY EARNINGS AND CASH FLOW
(in millions,
except for
share data) 2008 2007
---------------------------------------------------------------------------
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Revenues $ 1,663 $ 1,800 $ 1,870 $ 1,571 $ 1,538 $ 1,932 $ 1,561 $ 1,340
Operating
profit 202 687 879 614 460 894 764 620
EBITDA 520 808 963 633 427 834 770 584
Net earnings
(loss) (607) 424 497 345 280 490 485 360
Earnings
(loss) per
share $ (1.28) $ 0.95 $ 1.12 $ 0.78 $ 0.64 $ 1.15 $ 1.14 $ 0.83
Cash flow
from
operations 598 873 500 161 602 814 193 152
---------------------------------------------------------------------------
OUTSTANDING SHARE DATA
As at February 13, 2009 there were 477,512,086 Class B subordinate voting shares
and 9,353,470 Class A common shares outstanding. In addition, there were
4,531,612 director and employee stock options outstanding with exercise prices
ranging between $4.48 and $49.17 per share. More information on these
instruments and the terms of their conversion is set out in Note 16 of our 2007
year end financial statements.
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This news release contains certain forward-looking information and
forward-looking statements as defined in applicable securities laws. All
statements other than statements of historical fact are forward looking
statements. These forward-looking statements, principally under the heading
"Outlook," but also elsewhere in this document, include estimates, forecasts,
and statements as to management's expectations with respect to, among other
things, our future earnings and cash flow , our plans to reduce our outstanding
indebtedness and the expected impact of steps that we have taken to reduce
spending, potential sources of funds to repay indebtedness, our planned sales of
assets, proposed discussions with our lenders, the future availability of unused
credit lines, the possibility that we will breach our debt covenants, our
diversification strategy and our plans for our oil sands investments, forecast
recoveries and the resolution of geotechnical issues at Highland Valley Copper,
expected progress and costs of our Andacollo concentrate project, the financial
and accounting consequences of our acquisition of the assets of Fording Canadian
Coal Trust, the sensitivity of our earnings to changes in commodity prices and
exchange rates, the potential impact of transportation and other potential
production disruptions, the impact of currency exchange rates, future trends for
the company, progress in development of mineral properties, future production
and sales volumes, capital expenditures and mine production costs, demand and
market outlook for commodities, future commodity prices and treatment and
refining charges, the settlement of coal contracts with customers, the outcome
of mine permitting currently underway, our assessment of the quantum of
potential natural resource damages in connection with the Upper Columbia River
Basin and the outcome of legal proceedings involving the company. These
forward-looking statements involve numerous assumptions, risks and uncertainties
and actual results may vary materially.
These statements are based on a number of assumptions, including, but not
limited to, assumptions regarding general business and economic conditions,
interest rates, the supply and demand for, deliveries of, and the level and
volatility of prices of, zinc, copper, coal and gold and other primary metals
and minerals as well as oil, and related products, the timing of the receipt of
regulatory and governmental approvals for our development projects and other
operations, our costs of production and production and productivity levels, as
well as those of our competitors, power prices, market competition, the accuracy
of our reserve estimates (including with respect to size, grade and
recoverability) and the geological, operational and price assumptions on which
these are based, conditions in financial markets and the future financial
performance of the company. The foregoing list of assumptions is not exhaustive.
Events or circumstances could cause actual results to vary materially
Factors that may cause actual results to vary materially include, but are not
limited to, changes in commodity and power prices, changes in interest and
currency exchange rates, acts of foreign governments and the outcome of legal
proceedings, inaccurate geological and metallurgical assumptions (including with
respect to the size, grade and recoverability of mineral reserves and
resources), unanticipated operational difficulties (including failure of plant,
equipment or processes to operate in accordance with specifications or
expectations, cost escalation, unavailability of materials and equipment,
government action or delays in the receipt of government approvals, industrial
disturbances or other job action, adverse weather conditions and unanticipated
events related to health, safety and environmental matters), political risk,
social unrest, failure of customers or counterparties to perform their
contractual obligations, the outcome of our ongoing discussions with lenders
(including potential additional costs or covenants associated with the
refinancing of our existing indebtedness and the risk that we may not be able to
reach an appropriate accommodation with lenders), the results of our ongoing
efforts to sell assets, further changes in our credit ratings, and changes or
further deterioration in general economic conditions or continuation of current
severe disruptions in credit and financial markets.
Statements concerning future production costs or volumes, and the sensitivity of
the company's earnings to changes in commodity prices and exchange rates are
based on numerous assumptions of management regarding operating matters and on
assumptions that demand for products develops as anticipated, that customers and
other counterparties perform their contractual obligations, that operating and
capital plans will not be disrupted by issues such as mechanical failure,
unavailability of parts and supplies, labour disturbances, interruption in
transportation or utilities, adverse weather conditions, and that there are no
material unanticipated variations in the cost of energy or supplies.
We assume no obligation to update forward-looking statements except as required
under securities laws. Further information concerning risks and uncertainties
associated with these forward looking statements and our business can be found
in our Annual Information Form for the year ended December 31, 2007, filed on
SEDAR and on EDGAR under cover of Form 40F.
WEBCAST
Teck will host an Investor Conference Call to discuss its Q4/2008 financial
results at 11:00 AM Eastern time, 8:00 AM Pacific time, on Tuesday, February 17,
2009. A live audio webcast of the conference call, together with supporting
presentation slides, will be available at the company's website at www.teck.com.
The webcast is also available at www.earnings.com. The webcast will be archived
at www.teck.com.
Teck Cominco Limited
Consolidated Statements of Earnings
(Unaudited)
-------------------------------------------------------------------------
(Cdn $ in millions, Three months Year ended
except for ended December 31 December 31
share data) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues $ 1,663 $ 1,538 $ 6,904 $ 6,371
Operating expenses (1,291) (970) (4,009) (3,300)
-------------------------------------------------------------------------
372 568 2,895 3,071
Depreciation and
amortization (170) (108) (513) (333)
-------------------------------------------------------------------------
Operating profit 202 460 2,382 2,738
Other expenses
General and administration (4) (20) (89) (109)
Interest and financing (128) (21) (182) (85)
Exploration (45) (26) (135) (105)
Research and development (1) (11) (23) (32)
Asset impairment (577) (69) (589) (69)
Other income (expense) (27) 82 31 170
-------------------------------------------------------------------------
Earnings (loss) before the
undernoted items (580) 395 1,395 2,508
Recovery (provision) for
income and resource taxes 78 (61) (658) (795)
Non-controlling interests - (19) (82) (47)
Equity earnings (loss) (100) (19) 22 (5)
-------------------------------------------------------------------------
Net earnings (loss) from
continuing operations (602) 296 677 1,661
Net loss from
discontinued operations (5) (16) (18) (46)
-------------------------------------------------------------------------
Net earnings (loss) $ (607) $ 280 $ 659 $ 1,615
-------------------------------------------------------------------------
Earnings (loss) per share
Basic $ (1.28) $ 0.64 $ 1.46 $ 3.74
Basic from continuing
operations $ (1.27) $ 0.67 $ 1.50 $ 3.85
Diluted $ (1.28) $ 0.63 $ 1.45 $ 3.72
Diluted from continuing
operations $ (1.27) $ 0.67 $ 1.49 $ 3.83
Weighted average shares
outstanding (millions) 474.8 442.6 452.1 432.2
Shares outstanding at end
of period (millions) 486.9 442.7 486.9 442.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying note details our acquisition of the Fording Canadian Coal
Trust
Teck Cominco Limited
Consolidated Statements of Earnings
(Unaudited)
--------------------------------------------------------------------------
Three months ended Year ended
December 31 December 31
(Cdn $ in millions) 2008 2007 2008 2007
--------------------------------------------------------------------------
Operating activities
Net earnings (loss) from continuing
operations $ (602) $ 296 $ 677 $ 1,661
Items not affecting cash
Depreciation and amortization 170 108 513 333
Provision (recovery) for future
income and resource taxes 1,283 (95) 1,488 (97)
Equity (earnings) loss 100 19 (22) 5
Non-controlling interests - 19 82 47
Asset impairment 577 69 589 69
Provision for marketable
securities 292 - 292 -
Gain on sale of investments and
assets (4) (42) (16) (55)
Other 13 (35) 28 55
Distributions received from equity
accounted investments - 12 65 25
--------------------------------------------------------------------------
1,829 351 3,696 2,043
Net change in non-cash working
capital items (1,231) 251 (1,564) (282)
--------------------------------------------------------------------------
598 602 2,132 1,761
Financing activities
Issuance of short-term debt 7,022 - 7,022 -
Issuance of long-term debt 4,817 3 4,820 14
Repayment of short-term debt (573) - (573) -
Repayment of long-term debt (557) - (655) -
Capital lease payments (8) - (13) -
Issuance of Class B subordinate
voting shares 1 1 6 13
Purchase and cancellation of Class
B subordinate voting shares - - - (577)
Dividends paid - - (442) (426)
Distributions to non-controlling
interests (3) (42) (102) (42)
Redemption of exchangeable
debentures - - - (105)
--------------------------------------------------------------------------
10,699 (38) 10,063 (1,123)
Investing activities
Property, plant and equipment (212) (163) (939) (571)
Investments and other assets (196) (355) (659) (724)
Acquisition of Fording Canadian
Coal Trust (Note 1) (11,639) (599) (11,639) (599)
Acquisition of Aur Resources Inc. - - - (2,588)
Proceeds from the sale of
investments and assets 9 168 29 194
Proceeds from other assets 187 - 187 -
Decrease (increase) in temporary
investments (11) 33 (11) 194
Decrease in cash held in trust - - - 105
--------------------------------------------------------------------------
(11,862) (916) (13,032) (3,989)
Effect of exchange rate changes on
cash and cash equivalents held in
US dollars 168 (8) 241 (335)
--------------------------------------------------------------------------
Decrease in cash and cash
equivalents from continuing
operations (397) (360) (596) (3,686)
Cash received from discontinued
operations - - 38 40
--------------------------------------------------------------------------
Decrease in cash and cash
equivalents (397) (360) (558) (3,646)
Cash and cash equivalents at
beginning of period 1,247 1,768 1,408 5,054
--------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 850 $ 1,408 $ 850 $ 1,408
--------------------------------------------------------------------------
Teck Cominco Limited
Consolidated Statements of Cash Flows
(Unaudited)
--------------------------------------------------------------------------
December 31, December 31,
(Cdn $ in millions) 2008 2007
--------------------------------------------------------------------------
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 1,339 1,004
--------------------------------------------------------------------------
4,099 3,005
Investments 948 1,506
Property, plant and equipment 23,909 7,807
Other assets 853 592
Goodwill 1,724 663
--------------------------------------------------------------------------
$ 31,533 $ 13,573
--------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,506 $ 1,238
Short-term debt 6,436 -
Current portion of long-term debt 1,336 31
--------------------------------------------------------------------------
9,278 1,269
Long-term debt 5,102 1,492
Other liabilities 1,184 994
Future income and resource taxes 4,965 2,007
Non-controlling interests 104 92
Shareholders' equity $ 10,900 $ 7,719
--------------------------------------------------------------------------
31,533 13,573
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying note details our acquisition of the Fording Canadian Coal
Trust
Teck Cominco Limited
Consolidated Statements of Shareholders' Equity
(Unaudited)
-------------------------------------------------------------------------
Three months Year ended
ended December 31 December 31
(Cdn $ in millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Share capital
Class A common shares $ 7 $ 7 $ 7 $ 7
Class B subordinate
voting shares 5,072 3,274 5,072 3,274
-------------------------------------------------------------------------
5,079 3,281 5,079 3,281
Contributed Surplus 82 71 82 71
Accumulated comprehensive
income
Retained earnings at
beginning of period 6,083 4,979 5,038 4,225
Adoption of financial
instruments standards - - - 112
-------------------------------------------------------------------------
Retained earnings as
restated 6,083 4,979 5,038 4,337
Net earnings (loss) (607) 280 659 1,615
Dividends declared - (221) (221) (431)
Class B subordinate
voting shares
repurchased - - - (483)
-------------------------------------------------------------------------
Retained earnings at
end of period 5,476 5,038 5,476 5,038
Accumulated other
comprehensive
income (loss) 263 (671) 263 (671)
-------------------------------------------------------------------------
5,739 4,367 5,739 4,367
-------------------------------------------------------------------------
$ 10,900 $ 7,719 $ 10,900 $ 7,719
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
(Unaudited)
-------------------------------------------------------------------------
Three months Year ended
ended December 31 December 31
(Cdn $ in millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings (loss) $ (607) $ 280 $ 659 $ 1,615
Other comprehensive income
(loss) in the period
Changes in foreign
currency translation
adjustments 719 (244) 1,003 (550)
Changes in unrealized
gains and losses of
available-for-sale
instruments 211 (5) (48) (36)
Changes in unrealized
gains and losses of
derivatives designated
as cash flow hedges (12) 4 (21) 10
-------------------------------------------------------------------------
Total other comprehensive
income (loss) 918 (245) 934 (576)
-------------------------------------------------------------------------
Comprehensive income $ 311 $ 35 $ 1,593 $ 1,039
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying note details our acquisition of the Fording Canadian Coal
Trust
Teck Cominco Limited
Note to Consolidated Financial Statements
(Unaudited)
1. ACQUISITION OF FORDING CANADIAN COAL TRUST
In October 2008, we acquired all of the assets of the Fording Canadian Coal
Trust ("Fording"), which consist primarily of a royalty interest in respect of
Fording's 60% non-operating interest in Teck Coal Partnership ("Teck Coal"),
previously known as Elk Valley Coal Partnership. Teck Coal operates six
metallurgical coal mines located in south eastern British Columbia and 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 excess of the proceeds
from the disposition over our book value of the units has been offset against
the purchase price of Fording's assets. These transactions resulted in the
acquisition of an approximately 80% interest in the assets and liabilities of
Fording.
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 40
Taxes 335
-----------------------------------------------------------------
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.
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 debts (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 net cash cost of the acquisition was as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(Cdn $ in millions) 2008
--------------------------------------------------------------------------
Cash paid to Fording unitholders $ 14,635
Less cash proceeds on disposal of Fording units (2,870)
Less Fording's cash balance on acquisition date (126)
--------------------------------------------------------------------------
$ 11,639
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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