Falconbridge ends 2001 on sour note

Weak metal markets kept Falconbridge (FL-T) firmly in the red during the final three months of 2001, but not deep enough to erase profits made earlier in the year.

Falconbridge squeaked by last year with $16 million in profits despite losing $20.5 million in the fourth quarter. However, 2001 earnings are down a whopping 96% from the previous year as revenue plummeted 18% to $2.1 billion.

“The picture is the same as the fourth quarter,” says Chief Financial Officer Lars-Eric Johansson. “Lower metal prices accounted for $312 million [of the variance] and lower custom-feed profits at INO [Integrated Nickel Operations] and Kidd [in Timmins, Ont.] accounted for $71 million.”

The INO and the Kidd division account for Falconbridge’s largest source of income. The former comprises the Sudbury mines and smelter, the Raglan mine in Quebec and the Nikkelverk refinery in Norway; whereas the latter includes the Kidd Creek mine and Kidd metallurgical site.

Falconbridge also owns a 44% interest in the massive Collahuasi copper mine in Chile, an 85.26% stake in the Falcondo ferronickel operation in the Dominican Republic and a full interest in the Lomas Bayas copper operation in Chile. Lomas Bayas was acquired in mid-2001 from Boliden (BLS-T) for $124.5 million.

Overall, Falconbridge recorded $26 million in operating profits last year, or $510 million less than in 2000. Collahuasi turned the largest profit among the bunch, followed by INO and Lomas Bayas. Both Kidd and Falcondo lost money.

The company’s 2001 production volumes include: 71,458 tonnes nickel (versus 74,153 tonnes in 2000); 21,662 tonnes ferronickel (27,830 tonnes); 289,950 tonnes copper (268,297 tonnes); 81,670 tonnes zinc (82,655 tonnes); and 2.8 million oz. silver (2.4 million oz.). The difference in comparable copper output reflects the inclusion of production from Lomas Bayas.

Comparable refined metal production was up as well, at 89,883 tonnes nickel and 205,428 tonnes copper. But Falconbridge only realized an average of US$2.79 per lb. nickel and US70 per lb. copper sold, or 32% and 17%, respectively, less than in 2000.

“We have been encouraged by the discipline that copper producers have shown regarding cutbacks for 2002 production,” says President Oyvind Hushovd. “However, we have not seen that many cutbacks in the nickel market and we’re a bit worried that a lack of discipline during a period of weak demand could continue to act as a drag on prices and profitability for the sector.”

Every US10-per-lb. swing in nickel prices affects Falco’s earnings by $16 million and its cash flow by $24 million, whereas similar changes in copper prices affect earnings by $74 million and cash flow by $114 million.

Following a prolonged strike, the Sudbury mines resumed full production in February 2001 and went on to crank out 25,200 tonnes of nickel before year-end, or 2,000 tonnes more than 2000. A similar increase is expected in the current year as revisions to the Lockerby and Fraser mining schedules kick in.

Raglan churned out 24,600 tonnes nickel and 6,915 tonnes copper last year to set new production records. The mine is expected to produce 26,000 tonnes of the former metal and 7,000 tonnes of the latter metal in the current year, owing to the inclusion of higher-grade sections in the mining schedule.

The refinery operated well below design capacity of 85,000 tonnes, producing just 68,200 tonnes of refined nickel. Production is expected to top 76,000 tonnes in 2002, owing to higher deliveries from the Sudbury smelter and new, long-term custom-feed contracts.

Search continues

“In 2002, the focus for the Integrated Nickel Operations will be to improve the operating efficiencies and to try to find additional nickel and [platinum group metals] feed to fill the capacity at the refinery,” says Hushovd. “The search for more reserves will continue both through our own exploration programs and through joint ventures.”

Hushovd expects better times for Falcondo, which recently resumed production after shutting down for three months on account of low nickel prices. “It will probably take three or four weeks to have the plant up at full capacity, but with lower oil prices and better nickel prices, the operation has now turned profitable.”

Shaft sinking is under way at Kidd Creek’s Mine D, where more than half of the alloted $400 million capital budget has been spent. Mining is expected to follow in late 2003 and ramp up to planned rates in the following year.

Concurrently, Falconbridge is shutting down the No. 1 shaft and replacing the ventilation system with a more energy-efficient one. In 2002, Kidd Creek is expected to deliver 52,000 tonnes copper-in-concentrate and 91,000 tonnes zinc-in-concentrate to the metallurgical site, which, combined with cost-cutting measures implemented last year, is expected to improve the division’s operating performance.

The Collahuasi and Lomas Bayas copper operations both beat 2001 production projections. However, operating incomes were reduced by depressed metal prices. Nevertheless, the former provided Falconbridge with $122 million in operating income and the latter, $8 million.

At Collahuasi, prestripping of the Rosario surface deposit will begin sometime during the current year in preparation for a switch from the Ujina pit. Falco’s share of the transition costs and proposed mill expansion is US$140 million.

On the development front, the company is continuing with environmental studies and a test-mining program at the Koniambo laterite project in New Caledonia. It has also hired a financial adviser to establish a financing program.

Koniambo hosts a resource of 151 million tonnes averaging 2.58% nickel, sufficient for 25 years of production at anticipated mining rates.

In mid-2001, Falconbridge announced it would process the ore into ferronickel instead of using pressure-acid-leach technology. Accordingly, 120,000 tonnes are being test-mined in preparation for a bankable feasibility study.

Meanwhile, Falconbridge has allowed its option on the Gag Island nickel laterite project in Indonesia to expire. The decision was based on government initiatives to protect forests and ban open-pit mining in the project area.

The project has reverted back to BHP Billiton (BHP-N), though the new restrictions may force that company to walk away as well.

For 2002, Falconbridge has budgeted $387 million for capital expenditures. Most is allocated to Mine D, Collahuasi and Raglan.

At the end 2001, Falconbridge had $198.3 million in cash and a net-debt to net-debt-plus-equity ratio of 42%. The latter rose 8% over the year, owing to the purchase of Lomas Bayas, lower metal prices and the Sudbury strike.