'A shock to all of us': Teck Resources' dam sale upsets workers, community in Trail, B.C.

Mike Mozak's union was in the middle of labour negotiations with Teck Resources Ltd. last spring when the company announced a proposed $1.2-billion deal to sell its hydroelectric dam that powers the lead and zinc smelter where his members worked.

"It was a shock to all of us," said Mozak, president of United Steelworkers Local 9705, who questions how the sale could affect the smelter's future.

Nestled on a hill overlooking the town of Trail in British Columbia's West Kootenay region, the smelter complex has operated for more than 100 years and is one of the largest in the world, certainly the largest in Canada where it supplies 1,400 jobs and props up the regional economy.

Last year, through the first three quarters, the smelter produced more than 230,000 tons of zinc, essential for rustproofing the steel and iron found in everything from bridges to frying pans, and a component used in fertilizers and batteries.

The British Columbia Utilities Commission (BCUC) has just started studying whether to give final approval on the sale of Waneta Dam to B.C. Hydro. But the transaction is already raising questions about whether Teck Resources is laying the groundwork to eventually pivot away from its smelting business, and possibly devote more resources to some of its newer energy and mining projects located elsewhere in Canada as well as the U.S., Peru and Chile.

So far, the company has said the sale does not signal any changes in its strategy, and chief executive Donald Lindsay has emphasized in announcements that the deal includes a 20-year leaseback of the electricity from the dam at "below-market" rates.

Teck also claims it has recently invested $525 million to improve efficiency and performance at its Trail Operations, and may spend an additional $150 million in the coming years.

But labour leaders point to the company's shifting profit centres: Even as zinc prices hit decade highs of more than US$3,400 per ton, driven by voracious demand from China, Trail Operations has not contributed more than eight per cent of Teck's gross profits before depreciation and amortization in the past few years.

According to the most recent financial statements, from November 2017, Trail Operations contributed $92 million to Teck's $3.3-billion gross profit through the year's first three quarters.

"If you take a look at Teck's business interests, smelting is pretty far down the list," said Brian Onyschak, president of United Steelworkers Local 480, which represents 1,000 workers at the smelter. "They're more of a mining company and the past few years they've gotten into oil."

The company's financial statements back up his point: The steelmaking coal part of its business accounted for $2.41 billion of its gross profits through the first nine months of the year, about 72 per cent of the total $3.3 billion. Zinc and copper accounted for $647 million and $322 million, respectively.

Still, Onyschak has vowed to fight the dam sale and said he will press the BCUC to reject the sale to BC Hydro.

'You could get a very well paying job right out of high school'

BC Hydro's proposed purchase of Waneta Dam has largely been overshadowed by the utility's plan to build the Site C dam, which could cost an estimated $10.7 billion and calls for the flooding of a valley and relocating farms and people.

But Onyschak said the residents of Trail and surrounding communities have just as much at stake: The smelter remains the community's economic and cultural centre; its influence seen everywhere from the name of the local junior hockey team, the Smoke Eaters, to the stacks that loom above town.

He also points to his own family's history: His parents arrived in the area from Saskatchewan in the 1950s, so his father could work at the smelter and live in the Kootenays.

"It was one of the places back in the day ... where you could get a very well paying job right out of high school," he said. "And I'm one of those people (who did)."

Around the same time his parents arrived, workers constructed the Waneta Dam on the Pend D'Oreille River, just south of Trail to provide cheap power to the smelter.

“What makes a smelter viable in this area — considering we’re not on a port, which makes our transportation costs higher — is the access to the low-cost power,” Onyschak said.  

Indeed, he said, much of the lead and zinc ore now arrives in Trail by rail or truck from Teck’s Red Dog mine in Alaska.

But the smelter workers also make a trade off: In exchange for close proximity to world-class skiing, hiking and other outdoor activities, and good paying jobs with defined-benefit pensions, they expose themselves to dangerous conditions, where lead, arsenic, cadmium and other toxins are known to be present, according to Onyschak.

Nurses still draw blood and check if any workers are "leaded" - local lingo for when a person exceeds a certain threshold of lead in their bloodstream.

"If you ever got above a certain amount, then they moved you in a certain area where you didn't get (exposure to) lead," said Rick Fontaine, who retired several years ago after a decades-long career at the smelter. "I can remember mine being up and now it's practically nothing."

'There are lots of ifs to evaluate'

Rick Fontaine and others said Teck has always invested to make the smelter cleaner and more efficient, and even now it's investing $171 million to build a new acid plant for that purpose.

Those efficiencies have allowed the company to reduce its workforce. Onyschak estimated union membership at the plant has declined to about 1,400 today from a peak of 5,000.

The efficiencies also mean that Waneta Dam supplies more energy than is needed to operate the smelter. Historically, Teck has taken advantage of this, as it did in 2009, earning $40 million by selling excess power, according to an annual report from the time.

Back then, Teck was facing a different financial situation.

In 2008, it took on about $10 billion in debt to finance its $14-billion acquisition of Fording Canadian Coal Trust. But the global financial system crashed and commodity prices cratered, forcing Teck to sell assets, including a one-third interest in the Waneta Dam to BC Hydro for $825 million in 2009.

That sale planted the seeds for the more recent sale. Last May, Teck announced a deal to sell the remaining two-thirds interest in Waneta Dam to Fortis Inc. for $1.2 billion cash. But BC Hydro in 2009 had negotiated a right of first offer if Teck ever put the rest of the dam up for sale, and it pulled the trigger on that clause last summer.

If the deal goes through, BC Hydro will own the entire dam. But it includes a 20-year lease agreement whereby two-thirds of the power generated by Waneta would still go to the smelter. Under the deal, Teck would buy power at fixed annual cost, starting at $74 million, and escalating two per cent per year for 20 years, with a 10-year lease extension option.

Donald Lindsay called it "below-market pricing" in a press release issued at the time of the proposed sale to Fortis, saying the deal strengthens the company's balance sheet. In addition to providing capital to grow the overall business, the cash proceeds would allow for more modernization of the Trail Operations, he said.

The company declined to comment for this article, but has said it expects to book an $800-million net book gain when the sale closes, which can't happen before August 2018, when the BCUC is expected to issue a decision on the deal.

Nonetheless, debt-rating agency Moody's noted the deal is credit positive for Teck, and will provide a cushion if it chooses to expand a copper project in Chile or invest capital in other projects.

In November, Teck announced a supplemental dividend of 40 cents per share.

"The return of a total of $578 million, or $1.00 per share, to shareholders in 2017 ... reflects Teck's strong free cash flow," Lindsay said in a press release.

But the deal is also drawing scrutiny from ratepayers around B.C., many of whom have registered as intervenors with the BCUC.

David Craig, executive director of the Commercial Energy Consumers Association for B.C., noted Waneta Dam is already 80 years old and due diligence requires complex engineering judgments.

"There are lots of ifs to evaluate and they can have significant ranges of uncertainty," Craig said via email. His association has yet to take a position on the deal.

BC Hydro said it will finance the deal through a mix of short- and long-term debt.

"Over the longer term, our customers would benefit from the lower-cost energy that we'll have access to after the lease is over," Tanya Fish, a BC Hydro spokeswoman said via email.

Back in Trail, the sale has divided the community: Mayor Mike Martin has expressed concern about what it means for the future of the smelter, but told the local press that BC Hydro may be a better alternative than Fortis, a private company.

Onyschak, who turns 60 this year, said many of his union's members are younger and concerned that the 20-year lease will end before they're ready to retire.

Teck has a 10-year extension option on the lease, but the annual payments will then jump 33 per cent to $144 million.

"Teck is saying all the right things, and that they're entering into this deal with eyes wide open," Onyschak said. "That isn't our belief. What assurances are in place after that 20-year time span?"

If the smelter can't get cheap electricity, then Trail may be forced to rely on tourism, possibly facing the same inequality that has left other parts of the country with high unemployment and increasing inequality.

Onyschak figures the cleanup costs associated with closing the Trail Smelter would be so high that it would be more attractive to sell it, but it won't be as attractive without that cheap electricity, he said.

Whether his fight can block the sale remains to be seen: In 2009, more than 500 people signed and submitted a petition to the BCUC attesting that they worked for Teck in Trail, or lived nearby and opposed the sale of one-third of the dam.

The petition didn't work then, but Onyschak, who spends his days in the union hall since taking over as president in January, said he isn't discouraged.

"We're even more upset now," he said. "It doesn't mean we aren't going to put in a submission and say we don't think this sale is in the best interest of anyone in the community."

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