October 30, 2007
For investors in diversified miner Teck Cominco (NYSE: TCK ) , Halloween came a day early this year. The Canadian firm spooked shareholders with a very direct assertion in its quarterly review that future profitability will suffer as a result of the strengthening Canadian dollar. The results were decent enough, but this frightful forecast still faded the shares by 4%.
Sales rose by 18%, thanks primarily to a large inventory work-off at the massive Red Dog lead/zinc mine in Alaska. Lundin Mining's (NYSE: LMC ) nifty Neves-Corvo mine and Anglo American's (NYSE: AAUK ) low-cost Skorpion mine have nothing on Red Dog, the largest zinc-producing mine in the world. While actual zinc production at Red Dog merely rolled over, sales volumes were up by more than 50%. Add to that a torrid run-up in the lead price, and you're looking at a 76% rise in operating profit for the mine.
Results from the Elk Valley Coal partnership with Fording Canadian Coal (NYSE: FDG ) were dismal, but they represented a far smaller piece of the overall business in the quarter. Now that Teck has increased its ownership stake in Fording, this segment could do more damage in the future. I've written positive things about the near-term outlook for metallurgical coal, but management readily admitted on the call that the coal-price move would have to be very significant to outweigh Canadian currency appreciation.
Overall, Teck's operating profit ticked 2% higher, and adjusted net earnings rose by 9%. As I said, that's decent enough, but it's the currency conundrum that makes me think twice about tapping Teck for my team. All of the company's dollar hedges have expired, and I have a hard time understanding how that's a sensible move, given that Teck's earnings are more than twice as sensitive to exchange rates than to any commodity it sells.
- The jury's still out on whether Teck overpaid for this copper miner.
- Fording was looking fairly cheap back in August, though not without its share of problems.
- Check out this base-metal blast-off.