Teck Cominco - Q2 2007 update

This report lays out some of the reasons I (dis)like and have (not/sold) bought this stock. It does not constitute personalized financial advice. Please do your own due diligence or hire a financial adviser, if you're so inclined before making any investment decisions.

Report by Davy Bui

2007, April 13: Diversified miner: Value, Patience, Leadership

I realized that I didn't have any performance measurements in my Teck investment report. These reports have evolved over the last few months and TCK was an earlier report.

I'm a little disappointed by the Teck results. Revenue went up 1%, net income fell 20% and operating cash flow before non-cash working capital changes came down 3.7%. Their results across the board were down but that isn't what bothers me. After all, the company doesn't control pricing and they had given good visibility on the fact that copper production was going to be lower this year due to the Highland Valley mine extension and a drop-off from Antamina.

Here are the factors that did concern me:

operating expenses up 20+%
mining costs at Hemlo gold mine now close to actual spot price of gold
2nd straight quarter of substantial decrease in operating cash flow due to tax and royalty payments

It seems my hunch about the Aur Resources deal was correct: Teck's copper resources did need bolstering. Fortunately, the Aur and Galore Creek transactions should do exactly that (though Aur Resources quarter results weren't stellar either).

We didn't get an update on what Teck plans to do with their gold assets. They don't seem to be extracting maximum value and that needs to be addressed. Hemlo mining costs rose to $612 per oz. Additionally, they ran into community resistance at their Morelos mine located in Mexico. At this point, I wouldn't mind if they got out of the gold mining business.

Finally, cash flow from operations is down markedly this year. The last two quarters, changes in non-cash working capital have reduced OCF by C$675M, ostensibly due to tax and royalty payments. Year to date, operating cash flow is down ~65%, C$345M from C$971M a year ago. This may not be anything to worry about but I'd like to see these numbers improve.

lower costs @ Pogo & Hemlo
update on Morelos
hit production target @ Lennard Shelf
rein in operating costs
hit Red Dog production numbers
consolidate Aur Resources numbers
improve operating cash flow results

DISCLOSURE: Author is long this stock.

The Enlightened American

Teck Cominco - Q2 2007 update