COMMENTARY — Staying ahead in the nickel market

The year 1992 was a challenging one for Inco. Reflecting low nickel prices, the company incurred a net loss — its first in eight years. As nickel prices fell, Inco worked even harder to reduce costs and conserve cash. Many actions were taken, including reducing capital expenditures and common dividends as well as curtailing production.

The company also turned the corner in terms of unit production costs, reducing unit costs of its Canadian primary metals operations by 5% from the 1991 level. As a consequence of these and other actions, Inco was able to reduce debt by $129 million in 1992, a noteworthy accomplishment in light of the continued low price of nickel.

Inco had a net loss in the first quarter of 1993, which was mainly due to an after-tax charge of $14 million in its alloys business and the low level of metal prices; however, cash flow remained positive, and the unit cost of nickel production was reduced by 13% compared with the first quarter of 1992. Costs are being reduced through productive mining and implementation of new processing technologies, among other means. Costs are also being aided by the weakness of the Canadian dollar.

Given the productivity improvements and cost reductions already being achieved, it is anticipated that Inco could break even in 1993 at an average realized nickel price of about US$3 per lb. This compares with a breakeven price of some US$3.25 per lb. in 1992. I want to make it clear that these figures are not Inco’s cash production costs for nickel but take into account price realizations on its other metal products, the performance of its alloys and engineered products businesses, interest charges and other factors. Currently, the cash nickel price on the London Metal Exchange (LME) is about US$2.66 per lb., which is below the company’s projected price for 1993. However, there is an interesting twist: At low nickel prices, Inco’s average realizations actually exceed the LME price by 20-25 cents per lb. So when the company says it can break even at an Inco average realized price of about US$3 per lb., it believes it can achieve those realizations when the LME price is only US$2.80 per lb. That distinction is important because it enhances Inco’s staying power, relative to its competitors, at low LME prices. — From a speech by Inco Chairman Michael Sopko at his company’s recent annual meeting.