Debt Reduction Begins at Teck – by Marilyn Scales

Marilyn Scales is a field editor for the Canadian Mining Journal, Canada’s first mining publication. She is one of Canada’s most senior mining commentators.

Teck Cominco of Vancouver has announced the first steps of its debt reduction plans by suspending the 2009 dividend on its Class A common shares and Class B subordinate voting shares. The move is expected to result in annual savings of $486 million.

“Current global economic and financial market conditions dictate that we take all prudent steps available to us to significantly reduce spending,” said Don Lindsay, president and CEO. “The measures announced today, combined with previously announced tax savings, amount to $2.4 billion and should significantly enhance our ability to address our near-term debt obligations and better position Teck to refinance the bridge loan when conditions improve.”

The large number of cuts Teck is making is a measure of just how deep current global economic woes are. But management has a plan to conserve cash and prepare for better conditions in the future. From its news release dated Nov. 20, 2008, here are the details of its plan.

Sustaining Capital: Company-wide spending will be reduced to approximately $250 million for 2009, down from a forecast of $580 million for 2008. Teck’s operations have been well capitalized in recent years, creating an opportunity to defer sustaining capital costs while ensuring operations are maintained to a high standard.

Development Project Capital: Excluding the Fort Hills project, spending will be reduced to approximately $250 million for 2009, down from $650 million forecast for 2008. The budget for 2009 will allow the company to complete projects key to Teck’s long-term strategy, including the Andacollo copper concentrator project in Chile. Capital costs at Andacollo for 2009 are estimated at $160 million and, when completed in late 2009 or early 2010, the mine is expected to quadruple its current copper production and add significant gold byproduct credits. The company will devote only nominal funding to studies on its other existing growth projects.

Fort Hills: The announcement earlier this week by the Fort Hills partnership to defer a decision on the mine-only project and put the planned Sturgeon upgrader on hold will significantly reduce Teck’s capital spending for 2009.

Petaquilla: Teck has elected to withdraw from the Petaquilla copper project in Panama and therefore has no funding obligations in respect to this project. The company will record a pre-tax, non-cash charge to earnings of $26 million in the fourth quarter.

Tax Recoveries: As a result of the Fording transaction, Teck expects to recover approximately $1.1 billion of cash taxes previously paid. Of this total, $165 million has been recovered to date and the balance is expected by the end of the second quarter of 2009. In addition, the tax deductions arising as a result of Teck’s acquisition of Fording’s assets are expected to exceed the company’s Canadian sourced taxable income for several years and, accordingly, Teck will not be required to make Canadian income tax instalments during that period.

Trail Zinc Operations: The Trail metallurgical complex is reducing its refined zinc production by approximately 4,000 to 5,000 t/m effective immediately in response to changing market conditions. This 20% reduction in production will still leave us with sufficient metal to meet customer needs. The duration of this curtailment depends on market conditions, but will likely continue for at least six months. This production curtailment will also reduce the operation’s need for zinc concentrates.

Lead production at Trail’s smelter will not be affected. Power sales are anticipated to increase by about 15 GWh per month during this period and this will improve Trail’s profitability.

Operating Costs: Teck is also targeting significant reductions in its general and administrative, exploration and research and development expenses. All operations will be pursuing opportunities to reduce costs and improve margins.

Coal Sales: Global steel production is falling and, as a consequence, Teck expects that coal sales volumes for the balance of 2008 and in 2009 will be affected. As expected with these market conditions, Teck has now received notification from a small number of customers indicating their desire to defer some of their contracted volumes for the 2008 coal year. Teck will be discussing the implications of these requests with customers, relative to their legal obligations under the contracts in place, in order to optimize its ability to balance production with demand. Accordingly, Teck now expects that coal sales for 2008 will be near the lower end of the range of its guidance of 23 million to 25 million tonnes.

Asset Sales: Teck has reached an agreement to sell its 60% interest in the Lobo-Marte gold project in Chile to Kinross Gold for US$40 million in cash and US$70 million in Kinross common shares. Teck will also receive a 1.75% net smelter return (NSR) royalty in respect of 60% of production from Lobo-Marte, payable at gold prices over US$760 per ounce. Lobo-Marte is owned indirectly as to 60% by an affiliate of Teck and as to 40% by an affiliate of Anglo American. Kinross today announced that it is also acquiring the Anglo American interest in Lobo-Marte. Completion of the transaction is subject to a number of conditions, including completion of definitive documentation. The transaction is expected to close by year-end. Teck expects to record a pre-tax gain of approximately $135 million on the transaction.

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