TECK COMINCO LTD. $43 (Toronto symbol TCK.B; Conservative Growth Portfolio, Resources sector; Shares outstanding: 441.9 million; Market cap: $19.0 billion; SI Rating: Average) is the world’s top producer of zinc, which accounts for 35% of Teck’s revenue.

To cut its dependence on zinc, Teck has diversified in the past few years through acquisitions. The biggest was its $4.1 billion cash-and-stock purchase of Aur Resources in August 2007. Aur owns the Duck Pond copper mine in Newfoundland, plus two other mines in Chile. Copper now supplies 30% of Teck’s revenue. Teck’s other products include coal (20% of revenue), as well as gold, silver, lead and other metals (15%).

Thanks mainly to strong demand and rising prices for metals, Teck’s revenue jumped from $2.4 billion in 2003 to $6.5 billion in 2006. Revenue slipped to $6.4 billion in 2007. Earnings rose from $0.28 a share (total $103.0 million) in 2003 to $5.26 a share ($2.2 billion) in 2006. Earnings in 2007 fell to $4.06 a share ($1.8 billion), mainly due to lower zinc and coal prices. The rising Canadian dollar also weighed on Teck’s 2007 earnings. That’s because Teck sells its products in U.S. dollars, but most of its expenses are in Canadian dollars. Cash flow per share shot up from $0.86 in 2003 to $5.76 in 2006, but fell to $4.64 in 2007.

Coal investment has long-term appeal

Teck is using its strong cash flow to expand its ownership in other long-term growth projects. In September 2007, it spent $599.4 million to increase its stake in Fording Canadian Coal Trust (Toronto symbol FDG.UN) from 8.7% to 19.95%.

Fording’s main asset is the Elk Valley coal project in British Columbia. Teck owns 40% of Elk Valley, and operates it. Combined with its ownership of Fording’s units, Teck has an effective 52% stake in Elk Valley.

Fording is currently exploring strategic alternatives to enhance its value, including a possible sale of Elk Valley or the entire trust. Teck has a right of first refusal over any sale of Fording’s Elk Valley stake.

Growing demand for Fording’s coal from steelmakers in Asia has helped increase Fording’s value in the past few months, making a takeover offer from Teck less likely. Still, Teck stands to benefit from rising coal prices. The company could also sell its Fording units to another bidder.

Oil sands are another growth area

Teck’s other big investment is the proposed Fort Hills oil sands project in Northern Alberta, which could begin operations in 2011. Petro-Canada owns 60% of this project, while UTS Energy Corp. owns 20%. Teck initially paid $850 million for 15% of Fort Hills, but increased its stake to 20% by agreeing to fund the development costs above a certain threshold. UTS and Teck also jointly own other oil sands properties.

Oil sands development is more expensive than traditional oil wells. However, the huge long-term potential offsets Teck’s risk. Teck’s expertise with open pit mining should also help keep costs down.

Teck is also gaining from rising gold prices. It owns 40% of the Pogo gold mine in Alaska, which began commercial operations in April 2007 and should last 10 years. Pogo’s ore requires more refining than more established mines, which has hurt its profits. However, operating costs are moving down and the mine is recovering more gold from raw ore.

However, rising costs for labour and construction materials forced Teck and its partner NovaGold Resources Inc. to suspend development on the Galore Creek copper and gold project in 2007. Besides the mine itself, the project’s remote location northwestern B.C. requires the two companies to build a 130-km road, tunnels and a large water diversion structure.

Gold project could come back to life

Teck had to write down the value of its Galore Creek investment by $33 million (after-tax). The company is now looking at ways to make the Galore Creek project economically viable, including processing the ore at other locations. Meanwhile, Teck will spend $10 million to $20 million a year to maintain the site until it decides to continue development or shut it down.

Teck’s strong balance sheet should let it support these projects. Long-term debt of $1.5 billion is just 75% of its 2007 cash flow. It has cash of $1.4 billion or $3.19 a share.

The company’s earnings should improve to $4.50 a share in 2008, and the stock trades at just 9.6 times that figure. It’s also attractive at 7.0 times its projected cash flow of $6.15 a share. The $1.00 dividend yields 2.3%.

Teck’s insiders control most of the company’s class ‘A’ multiple voting shares, which reduces the possibility of takeover from larger mining companies such as Xstrata or BHP Billiton. However, Teck should continue to benefit from growing demand for base metals in China, India and other developing countries. Falling production at existing mines and a lack of new mines should also push up metal prices in the next few years, and increase the value of Teck’s properties.

Teck Cominco is a buy.