Declining zinc prices drops operating profits at red dog: Teck Cominco, NANA and Northwest Arctic Borough settle lawsuit with Kivalina residents.

• Author: Liles, Patricia
• Position: MINING

[ILLUSTRATION OMITTED]

Falling zinc prices contributed to a significant decline in operating profits for the first half of 2008 at the world's largest producer of the industrial metal--Red Dog mine, located on Native-owned land in the remote region of Northwest Alaska.

PROFITS EXPERIENCE A DROP

For the first six months of 2008, the mine's operator, Teck Cominco, reported operating profits of $137 million, almost half of the $265 million in profits realized for the same period in 2007. The decline was due mainly to "significantly lower zinc prices and the effect of the stronger Canadian dollar," Teck Cominco reported in its second quarter report, released in late July.

"Very much what our revenue is, is driven by metal prices," said James Kulas, manager of environmental and public affairs at Red Dog. "To some degree, operating expenses contribute ... like the cost of diesel fuel. We just ordered and purchased 17.5 million gallons of diesel fuel and that's gone up significantly, but mainly the revenue has decreased due to the decrease in global metal prices."

The price for zinc has fallen off of the recent market high set in late 2006 that was slightly more than $2 per pound. In late September, zinc was trading below 80 cents per pound. Teck Cominco reported an average market price of 96 cents per pound of zinc during the second quarter of 2008, compared to $1.66 per pound during the second quarter of 2007.

The decline in profits at Red Dog means less revenue to share with NANA, the Alaska Native regional corporation that partners with Teck Cominco in the open pit, hard-rock mine and mill complex located 52 miles from the coast of the Chukchi Sea. According to Teck Cominco's second quarter report, royalties paid to NANA and the State of Alaska for the second quarter totaled $6 million, compared to $13 million for the same period in 2007.

Last year, the relationship between Teck Cominco and NANA shifted from payments based on a 4.5 percent net-smelter return to a profit-sharing mode. Now, NANA receives a 25 percent share of profits generated by the Red Dog Mine. After five years, NANA's share will increase by 5 percent. Ultimately, NANA will receive half of Red Dog's profits, provided the mine continues to operate profitably in future years.

EXPLORATION KEY TO FUTURE PROFITS

Current efforts to ensure Red Dog's future as an operating mine are focused in two areas--exploration drilling to identify additional mineralization, and permitting work...