Investment Comment Three anaylsts look at Inco

The latest financials coming out of Inco Ltd. have clearly been hurt by the tumbling price of nickel. Though the company did manage to break even for the latest fiscal year ended Dec 31, it did so by the skin of its teeth with net earnings of $200,000(US) before the allowance of preferred dividends.

After preferred dividends, Inco’s loss amount to 16 cents per common share, a wallop of a drop from net earnings of 28 cents per share or $52.2 million for fiscal 1985.

For the fourth quarter the company reported a net loss of $6.5 million or 10 cents per share versus net earnings of $7.6 million or 3 cents per share in the fourth quarter of 1985.

In light of these recent financials, what’s an investor to do? That all depends on whom he or she talks to.

Sell your Inco shares, is the opinion of both Ray Goldie, analyst at Richardson Greenshields of Canada and the mining team at Kleinwort Grieveson Securities, while the advice of Wood Gundy’s Bob Maloney is a hold.

In Mr Maloney’s examination of the nickel price situation he notes the average price for the metal in 1986 was $1.94 a pound, its lowest since 1974. A 37 cents price drop from $2.31 in 1985, cut Inco’s 1986 profits by 65 cents per share. This price erosion more than offset further reductions in operating costs, increased returns on platinum group metals and a pension accounting change that added 8 cents a share to net income.

Inco’s nickel deliveries in 1986 amounted to 380 million lb, including 16 million lb of nickel purchased on the London Metal Exchange. “Earlier in 1986, we had expected a modest drop in nickel prices, even with supply and demand in close balance, because of production curtailments by Inco and other major producers,” says Mr Maloney, Impact of oil

However, the larger-than-expected price erosion reflected increased net nickel shipments to the West from Russia and Cuba, weakness in capital goods markets for nickel and the impact of lower oil prices on nickel and other commodities. Because about a third of western world nickel processing entails using high amounts of oil to turn ore into metal, this segment of the industry had a very material cost reduction over the first three quarters of 1986.

But despite the recovery of world oil prices, nickel prices eroded in the fourth quarter.

Looking at this year, Mr Maloney projects a profit for Inco of 25 cents per share despite an anticipated loss in the first quarter. This profit improvement is predicated upon an expected upswing in nickel prices in the second half, and an average price of $2.15 per lb for the full year.

Mr Maloney says that even assuming there will be a major rebound in world nickel prices, he believes that Inco’s shares are fully priced relative to the company’s earnings potential through 1988. He advises investors to defer purchases in trading accounts and await lower prices.

Richardson’s Mr Goldie projects earnings per share at break-even this year from a loss per share in 1986. He says the improvements in the company’s “earnings” will come largely from higher productivity. Golden Pond

The company’s 60% interest in the Golden Pond gold deposits in Casa Berardi could be contributing to earnings in 1989 and the Crixas project in Brazil in which Inco has a 50% interest could be contributing to earnings in 1990.

Mr Goldie assumes that the present stock market price of Inco includes about $1.50 per share in recognition of Golden Pond and Crixas and that this amount could increase to around $2.50 per share over the next few years as these projects move towards production.

However, Mr Goldie gives a sell recommendation: “Over the next few months, investors will be paying more attention to the abysmal nickel market than to Inco’s future interests in gold production.”

The mining team at the British investment firm of Kleinwort Grieveson Securities simply says: The over-supplied nickel market indicates that the stock price will make little progress for some time. Mining funds should switch out of this stock.

At the time that these three reports were released Inco was trading on the TSE between the $17 and $18 level. At press time the shares were at the $20 level.