Falco rides higher metal prices

Higher metal prices more than offset lower production and increased mining costs, helping Falconbridge (FL-T) to more than triple second-quarter earnings to US$139 million.

The earnings translate to US77 per share, and compare with year-ago earnings of US$39 million (or US21 per share). The recent quarter’s earnings include a non-cash US$9-million after-tax mark-to-market loss related to how it accounts for its interest rate hedge contracts. The company does not expect the item to reoccur in subsequent quarters. An early shutdown of the Kidd metallurgical operations also cut into earnings.

Falco’s second-quarter revenue rose 44% to US$704 million, operating income jumped by US$139 million to US$189 million, and cash flow from operations (before working capital changes) more than doubled to US$216 million. Higher average realized nickel, copper and zinc prices, which rose 49%, 64% and 31%, respectively, from a year earlier, were behind the impressive increases.

Still, the improved prices were tempered somewhat as nickel and copper sales volumes fell 4.6% and 15.5% to 25,833 tonnes and 88,020 tonnes.

Falco’s mined metal volumes during the quarter amounted to 18,828 tonnes nickel (versus 20,311 tonnes in the second quarter of 2003), 6,871 tonnes ferronickel (6,557 tonnes), 84,719 tonnes copper (79,864 tonnes), 10,700 tonnes zinc (16,479 tonnes), and 757,000 oz. silver (548,000 oz.). Refined production totalled 22,970 tonnes nickel (26,697 tonnes a year earlier), 49,348 tonnes copper (68,259 tonnes), and 35,918 tonnes zinc (30,966 tonnes).

Company-wide operating cash costs per lb. of mined nickel rose 15% to US$2.83; copper cash costs rose US2 to US52 per lb.

For the quarter, Falco realized an average of US$5.76 per lb. of nickel, US$5.85 per lb. ferronickel, a weighted average of US$1.25 per lb. copper, and US51 for each lb. of zinc. The company also got US$6.22 for each ounce of silver sold, a 35% increase over the year-earlier period.

“We remain optimistic about the balance of the year. The backdrop for metal prices continues to be very strong with good demand, low inventories, and insufficient supply coming on stream to eliminate the deficits in nickel and copper," said Falco’s CEO Aaron Regent in a prepared statement. As a result, metal prices should continue at these higher levels. With a large and growing production base of nickel and copper, Falconbridge is well positioned to benefit.”

Falco says it met or exceeded most of its production targets for the quarter, except at Kidd Creek, where performance was below expectations. The Kidd Metallurgical Division’s copper smelter was shutdown in mid-May after the failure of a cooling block on the C furnace. The company moved a planned five-week shutdown ahead six weeks, declared force majeure on cathode deliveries, and completed an early replacement of the smelter’s walls and roof.

The smelter returned to duty at the end of June, and the company expects to make up for most the lost production during the third quarter. Second-quarter copper cathode production from Kidd was nearly halved to 19,531 tonnes.

At the Kidd Mining Division, production at the No. 1 mine was suspended during April and May owing to ground stability problems and stope blockage and maintenance issues associated with the ore handling system. At Mine D, two new ventilation fans failed, but existing fans helped minimize lost production; the two fans are back up and running. A portion of the tonnage shortfall in the first half should be recovered during the balance of the year.

The company says its still figures to produce 100,000 tonnes of nickel and 350,000 tonnes of copper this year.

“We had another solid quarter with our earnings being driven by solid metal prices and good production,” said Regent. “Our projects continue to advance well and we are particularly pleased with the completion of the US$654 million Collahuasi expansion, which was finished ahead of schedule and will be under budget."

At quarter’s end, Falco had US$427 million in cash and equivalents, US$864 million in working capital, and long-term debt of US$77 million.