Investment Comment Strong lead, zinc base making Cominco a buy

An expected end to the recent copper “boom” may not be music to the ears of Cominco Ltd.’s Vancouver-based executives. With an output of 194 million lb in 1987, Cominco was Canada’s second- highest levered liquid copper producer.

But strong exposure to lead and zinc, may offset any reduction in copper prices which peaked last year at $1.40. Increased participation in gold and silver, plus a profitable fertilizer wing, adds additional weight to the company’s versatility.

“A zinc price explosion is possible in 1988 but we expect the price net to producers to stabilize around 40 cents (US) later in the year,” according to Davidson Institutional, which has placed Cominco on its recommended list. “The shares remain a buy for further capital appreciation,” said analys t Ernie Nutter who committed himself to a price target within the $17-to-$20 range in his Feb 29 report. At presstime, the Cominco issue was trading on The Toronto Stock Exchange at $17.63 in a 52-week range of $23.63 and $11.

“A possible dividend increase combined with a 5% share purchase by Teck Corp. gives strong downside protection to the shares,” said Nutter.

In 1987, lady luck smiled on the Vancouver-based resource giant. Across-the-board increases in metals prices sent profits rocketing to $172 million ($2.18 per share) compared to a loss of $151.6 million ($2.53 per share) in 1986.

The 1987 results included an extraordinary gain of $91.3 million from sale of West Kootenay Power and Light Co., a public share issue by Cominco Resources International, and adjustments to 1986 restructuring provisions.

According to Nutter, the change in earnings performance is largely attributable to a corporate restructuring program. Soon after Teck seized control of the company in late 1986, the emphasis was placed on reducing Cominco’s long-term debt load ($600 million at the time). While a consortium led by Teck now owns 29% of Cominco, Teck has said it will buy an additional 5% of common shares.

In May, 1987, Cominco spun off its exploration activities outside of Canada, Australia and Alaska into a new entity called Cominco Resources International. Cominco retains a 60% interest in the new outfit which holds 76% of the Buckhorn gold-silver mine in Nevada.

Earnings from the Highland Valley copper partnership, managed on a 50/50 basis by Cominco and Lornex, also contributed to the dramatic turnaround in the former company’s financial fortunes.

As reported (N.M., March 28/88), the $70-million project will increase mill throughput to approximately 145,000 tons. And with an annual production rate of 400 million lb, each 1 cents increase in the price of copper is worth about $4 million to the partners’ bottom line.

While Cominco’s fertilizer operation reported a $15.6-million profit in 1987 compared with a 1986 loss of $18.9 million, the company’s metals division remains by far the most important area of business, said Nutter.

Among its assets, the company has interests in the Trail lead-zinc smelter, a number of mines around the world, high-technology metals production and metal and mineral exploration projects.

The Trail smelter is capable of producing 300,000 tons of refined zinc, 135,000 tons of refined lead and a variety of precious and other metals as byproducts. “The facility is expected to operate at capacity in 1988,” Nutter says.

He regards the Red Dog polymetallic deposit in Alaska as Cominco’s most valuable asset. With reserves standing at 85 million tons grading 17.1% zinc, 5% lead and 2.4 oz silver per ton, the project is expected to produce 700 million lb zinc and 300,000 million lb lead annually when full production is reached in 1991.

Expected to reach full production two years earlier is Cominco’s 47%-owned Hellyer lead/zinc project. Located in Tasmania, it is currently operating at 3,000 tons per day. But with reserves of 20 million tons grading 11.8% zinc, 6.4% lead and 4.3 oz silver, Hellyer will be in full stride by 1989.

To boost a gold production rate of 70,400 oz in 1987, Cominco is planning to spend around $30 million on exploration this year. Much of that is earmarked for the Snip project, 125 km northwest of Stewart, B.C. In a 60/40 joint venture with Delaware Resources, the partners have outlined around 1.2 million tons of 0.75 oz in inferred reserves on a property thought to host one of the largest untapped gold deposits in western Canada.

As reported (N.M., Feb 1/88), a $4.8-million underground exploration program began in February and a 115,000 oz annual production rate at a cost of $140(US) is envisaged.

“Nevertheless, due to the huge Red Dog deposit, scheduled to come on stream in 1990, Cominco’s long-term future appears strong,” said Nutter who sees earnings in the $1.40-to-$1.50-per-share range for 1988.

However, he says the company is in a performance hiatus until the Hellyer and Red Dog deposits begin to generate profits.