The company earned $73 million (or 34 per share) in 2002 on revenue of $2.4 billion, compared with earnings of $16 million (2 per share) on sales of $2.1 billion in 2001. The improvement reflects stronger nickel and copper prices, bolstered by foreign-exchange gains related to expenses and higher production volumes.
Comparable cash provided by operations did not fare so well, slipping to $341 million from $354 million. The reversal is due to net changes to receivables, inventories and payables, with a reduction of $70 million recorded in 2002 versus a gain of $96 million a year earlier.
Still, Falco accumulated $62 million in cash over the year to finish with $260 million. The June 2001 acquisition of the Lomas Bayas copper mine in Chile and a reduction in debt repayments in 2002 account for the increase.
Fourth-quarter profits proved better, with Falco earning $33 million (or 17 per share) in the recent 3-month period versus a loss of $21 million (13 per share) a year earlier. Revenue between the two fourth quarters soared to $695 million from $514 million, thanks to stronger nickel and copper prices. Cash flow, in turn, rose to $121 million from $92 million.
The Integrated Nickel Operations (INO) showed the biggest improvement, contributing $48 million more to quarterly operating income and $62 million more to annual operating income. Working in the division’s favour were increased profits from toll smelting, which accounted for $17 million of the variance.
Production records were set at both the Sudbury smelter in Ontario and the Nikkelverk refinery in Norway, owing to higher custom feed volumes. The smelter operated at an annual capacity rate of 72,000 tonnes; the refinery, at 85,000 tonnes.
The Sudbury mines pumped out relatively less concentrate in the fourth quarter, but more on a year-over-year basis. In all, 27,800 tonnes of nickel-in-concentrate, or 10% more than in 2001, were produced last year, along with 31,050 tonnes copper-in-concentrate, or 36% more.
In 2003, the mines are expected to crank out 26,500 tonnes nickel and 26,000 tonnes copper.
In northern Quebec, the Raglan mine offset lower throughput rates over the year by producing ore richer in nickel. The result was that nickel production stayed virtually constant, at 24,600 tonnes, whereas copper output slipped 6% to 6,500 tonnes.
Raglan is expected to produce a similar volume of nickel, but 1,500 tonnes less copper, in the current year.
The only blemish on the group was the partly owned Falcondo ferronickel project in the Dominican Republic, where production was curtailed by maintenance shutdowns and fuel shortages. Falcondo imports its oil from Venezuela, but the national strike there has forced management to secure an alternative source in order to resume normal production levels.
The fuel contracts extend until March and possibly longer.
In the recent quarter, Falcondo lost $1.8 million to contribute a paltry $922,000 to the year’s earnings. Still, that represents a considerable turnaround from 2001, when the operation lost $18 million, owing mainly to weak ferronickel prices.
During the year, INO’s consolidated cash cost averaged US$1.96 per lb. nickel, net of byproduct credits but exclusive of custom feed credits. In 2001, similar costs averaged just US$1.52 per lb., reflecting higher credits of cobalt, palladium and platinum.
Falco’s copper division also had a mixed year, despite contributing $82 million to operating income, or $16 million more than in 2001. The biggest drag came from the Kidd Creek operations, near Timmins, Ont., which slipped deeper in the red.
Kidd Creek showed an operating loss of $78 million, or $14 million more than a year earlier. The losses piled up despite higher mine production and record volumes of refined copper and zinc.
“We continue to look for ways to improve profitably and optimize our competitive position by working closely with Noranda’s Horne and CCR plants [both of which are in Quebec],” says Falco President Aaron Regent.
At the corporate level, the partnership is expected to erase $8 million off of Falco’s expenses in 2003. Noranda currently owns about 60% of Falco.
“We expect further benefits through greater operational co-ordination of our Canadian and South American copper operations,” adds Regent.
At Kidd Creek, Falco is developing Mine D, which will extend workings another 1 km below surface. Starting in 2004, the mine will begin delivering 2 million tonnes of ore to the metallurgical plant, effectively extending its life to 2022 and reducing future depreciation costs by $24 million.
Falco sunk $106 million into the project last year, or nearly a third of its entire capital budget, and expects to spend another $96 million in 2003.
Kidd Creek’s cash costs averaged US88 per lb. in the recent quarter and US62 per lb. in the year.
In Chile, the partly owned Collahuasi and wholly owned Lomas Bayas copper mines excelled, contributing a combined $160 million to 2002 operating income and more than offsetting the loss incurred at Kidd Creek. The results would have been better had Collahausi produced similar volumes to 2001.
In September 2002, Falco and its partners approved the construction of a new grinding circuit at Collahuasi’s Ujina concentrator. The addition will nearly double the operation’s annual production capacity to 110,000 tonnes and compensate for the lower grades of ore found at the Rosario deposit, which will become the focus of mining in mid-2004.
Meanwhile, Regent notes that the oxide plant continues to exceed, by 20%, its design capacity of 50,000 tonnes, helping to offset a 22% drop in grades at the Ujina deposit since mining began in 1999. Head grades are averaging 1.7%.
Lomas Bayas, which was acquired in mid-2001, produced a record 59,300 tonnes copper last year, and 58,000 tonnes are expected in 2003.
For all of 2002, Falco produced the following volumes: a record 327,302 tonnes copper (compared with 289,950 tonnes in 2001); 75,772 tonnes nickel (71,458 tonnes); a record 104,083 tonnes zinc (81,670 tonnes); and 3.67 million oz. silver (2.86 million oz.). The increase in copper output reflects a full year’s worth of production from Lomas Bayas.
Falco’s consolidated cash operating costs slipped to US$926 per lb. copper from US$947 per lb., net of byproduct credits.
Refined copper production jumped to 263,140 tonnes from 205,428 tonnes, and nickel production, to 91,833 tonnes from 89,883 tonnes. Likewise, copper sales volumes climbed 15% to 412,859 tonnes, while nickel sales volumes rose 3% to 92,599 tonnes.
Falco’s realized prices were as follows: US$7,518 per tonne for nickel (compared with US$6,151 per tonne in 2001); US$6,967 per tonne for ferronickel (US$6,283); US$1,587 per tonne for copper (US$1,543); US$860 per tonne for zinc (US$970 per tonne); and US$4.61 per oz. silver (US$4.39 per oz). Offsetting the revenue gains was a loss of $11 million related to currency hedging.
Falco is highly sensitive to nickel and copper prices: every swing of US50 per lb. in nickel affects earnings by $88 million and cash flow by $95 million, while a change of US10 per lb. in copper affects earnings by $71 million and cash flow by $102 million.
For 2003, the major expects nickel demand to grow by 3.9% but supply, by only 2.9%, leaving a global deficit of 19,000 tonnes. As for recent price gains, it attributed this to fund-buying spurred by, among other things, a possible strike at Norilsk in Russia and the political unrest in Venezuela.
“Currently, nickel demand is benefiting from overbuying in order to beat higher nickel-alloy surcharges, which will kick in during April,” says Santo Ranieri, director of market research. “The keys to the sustainability of the improved nickel price are steadily improving demand prospects and the manner in which Norilsk chooses to liquidate its off-warrant nickel stocks.”
Ranieri also attributes copper’s recent gains to fund-buying, triggered in part by the strike at Grupo Mexico’s 150,000-ton-
per-year Cananea mine in northern Mexico. Workers walked off the job on in late January, only to return three weeks later after winning concessions on production bonuses.
“A delivery production cut by BHP Billiton and Codelco’s intention to temporarily stockpile 200,000 tonnes until exchange stocks hit the 800,000-tonne level also have supported the market,” says Ranieri.
He forecasts a copper deficit of 277,000 tonnes for 2003. “Any sustained price recovery, though, will need to be demand-led and supply-supported, as the Coldelco stockpile and exchange stocks act as a drag on further price rallies.”
As for Falco’s long-term production goals, Regent says $600 million will be spent on capital projects in 2003. Most is earmarked for Mine D and Collahuasi, though some is intended for the advanced Koniambo laterite and Montcalm nickel-copper-cobalt projects.
Situated in New Caledonia, Koniambo hosts 79.5 million tonnes in the measured and indicated categories at a grade of 2.62% nickel. Another 70.8 million tonnes grading 2.53% nickel are classified as inferred.
Infill drilling is to be completed by March, and an environmental impact statement a month later. The goal is to outline at least 10 years’ worth of measured resources and 15 years’ worth of indicated resources at a cutoff grade of 2% nickel.
A feasibility study will begin in the second half of the year and should be finished by mid-2004. The bankable feasibility study is expected to cost US$123 million.
The Montcalm deposit, near Timmins, Ont., hosts an indicated resource of some 7 million tonnes grading 1.39% nickel, 0.67% copper and 0.06% cobalt. Inferred resources stand at 700,000 tonnes grading 1.68% copper, 0.7% copper and 0.07% cobalt.
Should Montcalm proceed to production, run-of-mine ore would be milled and concentrated at the Kidd metallurgical site and then trucked to Sudbury for smelting. Annual nickel output is forecast at 8,000 tonnes.
At Dec. 31, Falco had just over $1 billion in current assets and $424 million in current liabilities, resulting in working capital of $627 million. Its long-term debt stood at $1.9 billion, giving it a net-debt-to-net-debt-plus-equity ratio of 44%, up from 42% a year ago.
In 2003, Falco will contribute $85-90 million to its pension plan and record an after-tax charge of $8 million against earnings. The plan’s deficit has risen $80 million over the past year to $278 million.
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