Deal reached at Voisey’s Bay

Inco (N-T) and the Province of Newfoundland and Labrador have entered into a non-binding statement of principles for the development of the Voisey’s Bay nickel project in Labrador.

The deal provides for development of a US$470-million, 6,000-tonne-per-day mine and mill/concentrator at Voisey’s Bay, and a US$120-million hydrometallurgical research facility, including a US$85 million demonstration plant at Argentia.

Development of the site at Argentia and land clearing at Voisey’s Bay will begin in July with an initial investment of about US$35 million coming by the end of March 2003. The operation’s first nickel concentrate shipment is expected in 2006.

Once the demonstration plant proves successful, and following a bankable feasibility study in 2008, Inco will undertake construction of a US$530-million 50,000-tonne-per-year commercial hydrometallurgical plant. Should the technology fail to meet technical and economic requirements, Inco would construct a plant of the same capacity using proven technology to produce finished nickel.

To allow for some early cash flow, the proposed deal allows Inco to temporarily ship concentrate (through 2011) to its smelters in Thompson, Man., and Sudbury, Ont., once the demonstration plant is up and running. The shipments would continue through construction of the commercial facility. Once the commercial facility is running, Inco must return to the province for processing the same amount of nickel-and-cobalt-in-concentrate that was temporarily shipped out.

Inco’s chairman and CEO said, “The willingness of the province to, in effect, loan our other Canadian operations nickel-in-concentrate during the first phase of development will produce the kind of cash flow required to help finance the second phase of the project.”

The company also said that the Canadian government has identified up to $150 million to “support activities in and around the Voisey’s Bay project.”

The proposed deal is subject to legislative approval and completion of definitive agreements, which should be in place by the end of September. Inco expects to wrap up two impact and benefits agreements with the Labrador Inuit Association and Innu Nation by late June 2002. The Innu vote on their agreement on June 12, and the Labrador Inuit vote on theirs June 24.

The deal is also subject to certain changes being made to the provincial mining tax regime, governmental and regulatory permitting and financing.

During its 30-year life, the operation is expected to pump about US$1.9 billion into the region. The mine and mill in Labrador will be staffed by about 400 workers with an equal number running the commercial processing plant in Argentia. The workforce in Labrador will increase significantly once mining enters the underground phase.

Inco says it is currently looking at writing down the net carrying value of Voisey’s Bay in light of the deal.

“The company will review the net carrying value of certain assets, including the net carrying value of US$3.7 billion for Voisey’s Bay, in light of these very recent, important events and taking into consideration how the development of Voisey’s Bay fits with the company’s overall long-term development plans,” explained Inco’s chairman and CEO Scott Hand.

He added, “The company currently anticipates that this review could well result in a significant adjustment to the net carrying value of Voisey’s Bay and possibly certain other assets and, as a result of such adjustment(s), a material non- cash charge to earnings is currently expected to be recorded in the second quarter of 2002.”

Analysts Barry Allan and Oscar Cabrera of Toronto-based brokerage house Research Capital have suggested that at a discount rate of 10% and a long-term nickel price of US$3 per lb., Voisey’s Bay has a net present value of only US$598.8 million. They estimate that the project’s cumulative net cash flow, after capital and taxes, is US$2.5 billion, whereas in mid-2001, Inco was carrying the project on its balance sheet at US$5.6 billion.

At last count, Voisey’s reserve estimate stood at 31 million tonnes grading 2.88% nickel, 1.69% copper and 0.14% cobalt in the Ovoid deposit. The larger resource contains 111 million tonnes running 1.29% nickel, 0.61% copper and 0.08% cobalt.

Inco intends to complete a bankable feasibility study for the mine and mill by year-end. The company pegs cash costs, after projected by-product credits of US$7 per lb. for cobalt and US90 per lb. for copper, at about US$1 per lb.

Inco, which is also in the midst of developing its 85%-owned, US$1.4-billion Goro project in New Caledonia, says it would consider taking on a partner at Voisey’s Bay if it meant that the project would become more financially viable.

The French government holds the remaining 15% stake in Goro. Inco says it is close to signing on a partner there for up to a 25% stake. The French government’s stake would fall to about 5% and Inco would be left with 65-70%.

The Goro project is expected to start up in late 2004.