Inco strengthens Chinese steel ties

Inco (N-T, N-N) will begin building a US$63-million nickel refinery in China’s Liaoning province in the third quarter. It will be the company’s fifth processing plant in the country, which is poised to become the world’s largest stainless steel maker.

The plant, proposed for Dalian on the southern tip of Liaodong peninsula in northeast China, will produce 32,000 tonnes of utility-grade nickel specifically designed to feed China’s stainless steel industry. It will be partially fed from Inco’s giant Goro nickel-laterite project in Caledonia in the South Pacific.

The plant is scheduled for commissioning in the first half of 2008; Goro is slated to begin producing 60,000 tonnes nickel and 4,300-5,000 tonnes cobalt annually, beginning in September 2007.

Inco recently said in its first quarter financial results that it was still assessing the impact of recent vandalism on estimated capital costs and scheduling at Goro. Still, it said that work continues, including the erection of 400 modules and preassembled units. At quarter’s end, engineering work was around 72% complete.

In April, angry protesters set up road-blocks and caused at least $10 million worth of damages to excavation equipment, water pipes and a communications tower. They eventually forced a temporary shutdown of the operation.

Construction has since resumed, but Inco has yet to give a final tally of the damages or what impact the vandalism will have on the project schedule.

The US$1.9-billion project is home to reserves totaling 95 million tonnes grading 1.53% nickel and 0.12% cobalt. It is owned 69% by Inco, 21% by Japan’s Sumitomo Metal Mining (STMNF-O) and Mitsui and 10% by three New Caledonian provinces.

Inco will own a 97% stake in the operating company, Inco New Nickel Materials (Dalian), with Chinese partner, Ningbo Sunhu Chemical Products holding the remaining 3%.

Talks regarding a possible investment in the Dalian plant by Sumitomo and Mitsui are ongoing.

Inco has also signed a letter of intent with Taiyuan Iron and Steel Corporation (TISCO), China’s largest manufacturer of stainless steel, to study thwe feasibility of building a second plant at or near TISCO’s facilities in Taiyuan in Shanxi province.

The nickel giant already operates a nickel shearing and packaging facility in Dalian is partnered in a nickel salts refinery in Kunshan, near Shanghai and nickel foam plants in Dalian and in Shenyang in northern China.

Inco says the plants are part of its plan to expanding its presence as a nickel marketer and manufacturer in the world’s fastest growing nickel market.

On the merger front, Inco said recent meetings with the U.S. Department of Justice and the European Commission regarding its friendly takeover of rival Falconbridge (FAL.LV-T, FAL-N) have focused on the terms of a remedy that might address competition concerns.

Both regulators are concerned about the position the enlarged Inco would have in the high-grade nickel market. The Department of Justice is expected to deliver its verdict by the end of April. A decision from the European Commission could come as late as August.

Inco offer has been extended until June 30.

Shares in Inco were $1.48, or 2.3%, higher at $65.49 in afternoon trading in Toronto following the news on May 5. The shares are up around 28% so far this year.