Thanks to a strong finish,
Falco pocketed US$194 million (or US$1.05 a share) on 2003 revenue of US$2.08 billion, compared with US$50 million (US24 a share) on US$1.5 billion in 2002. The recent period was bolstered by a US$94-million gain in the final three months, which reflects the turnaround in nickel and copper prices.
Similarly, cash flow from operations doubled, from 2002, to US$445 million.
“We are clearly benefitting from our strategy of focusing on nickel and copper — two metals that have excellent near- and long-term fundamentals,” says President Aaron Regent. “If you look at our production, we met or exceeded almost all the targets we established at this time last year.”
Regent emphasized Falco’s refined nickel output, which amounted to a record 104,410 tonnes. By comparison, the company produced 91,833 tonnes in 2002, when output was curtailed by a shutdown at the Falcondo ferronickel operation in the Dominican Republic and fewer deliveries of custom feed to the Nikkelverk refinery in Norway.
Falco’s bread-and-butter Integrated Nickel Operations (INO) raked in US$227 million. Although the major pulled less ore from its Sudbury and Raglan (in Quebec) mines, it offset the shortfall by sourcing more custom feed to produce record levels of nickel- and copper-in-matte.
Cash costs at INO averaged US$2.64 per lb. nickel, net of byproduct credits, leaving plenty of margin on realized nickel prices of US$4.40 per lb.
Falcondo, in which Falco owns an 85.26% stake, showed an operating profit of US$62 million, which compares with US$1 million in 2002. The improvement reflects a 17% increase in production, to 27,227 tonnes, and a 33% increase in realized ferronickel prices, to US$4.20 per lb.
The Lomas Bayas copper mine, in Chile, also set a new record, cranking out 60,427 tonnes of cathode — 4% ahead of target and 2% greater than a year earlier. Also in Chile, the similar but 44%-owned Collahuasi operation produced 27,895 tonnes of cathode, or 1,217 tonnes more than last year, though lower headgrades saw less ore pulled from the mine.
Combined, the Chilean operations contributed US$146 million to operating profit, up US$46 million from last year. A strong driver was a 14% increase in realized copper prices, to US82 per lb.
The Kidd Creek division had an even worse year than in 2002, reporting a loss US$70 million on metal sales of 94,719 tonnes copper, 132,364 tonnes zinc and about 2.7 million oz. silver. All were down considerably, largely because of an unscheduled 13-week shutdown of the metallurgical plant.
“Although we are disappointed with our performance at Kidd, many initiatives have been put in place or are under development to improve the profitability and cash flow of this business,” says Regent.
Kidd is not expected to make a profit in the current year but should break even in terms of cash flow, if not better. Profits are anticipated to flow in the following year.
“That’s when Mine D will become more fully operational, and that should significantly help our profitability,” notes Regent. “At the met site the focus is more on trying to secure higher-margin custom feeds, and we probably have over a half-dozen initiatives under way.”
He adds that 12% of the Kidd workforce was cut in 2003 and that more trimming is planned as a means to reduce costs even further. The division includes the Kidd Creek mine and the Kidd metallurgical plant in the Timmins region.
As for feed, the metallurgical plant is expected to benefit from the startup of the Mine D and Montcalm projects in late 2004 and mid-2005, respectively. The former, deep in the Kidd Creek mine, is expected to yield 250,000 tonnes of ore this year and keep mining rates steady thereafter, at 2.4 million tonnes annually.
Kidd Creek accounts for one-third of the copper and half the zinc ore pushed through the metallurgical plant. Third parties in the local region cover most of the difference.
Construction at Montcalm, also in the Timmins area, began earlier this year. The deposit is expected to contribute about 8,000 tonnes to Falco’s annual nickel output, plus copper and cobalt credits.
At last report, Montcalm hosted 5.1 million tonnes of reserves grading 1.46% nickel, 0.7% copper, and minor cobalt. The reserve is sufficient to support 8.5 years of operations at projected mining rates of 750,000 tonnes per year.
Regent expects tight supply to keep nickel and copper prices firm for awhile yet. “The world’s economies are expected to continue to recover, providing a solid backdrop for metal demand,” he says.
Still, Falco expects to produce less nickel in 2004, reflecting the recent onset of a strike at its Sudbury operations. Nickel output is reduced by 2,000 tonnes for each month of picketing; copper output, by 2,400 tonnes; and cobalt, by 40-50 tonnes (T.N.M., Feb. 9/04).
On a brighter note, copper production will rise when the expanded Ujina concentrator at Collahuasi comes on-stream. Civil engineering has been completed, construction work is 77% complete, and mechanical and electrical engineering is well-advanced.
Following the project’s completion, the concentrator will have the capacity to treat 110,000 tonnes of ore per day. It currently handles 70,000 tonnes daily.
Falco entered 2004 with about 11 million tonnes of new nickel resources under its belt. Most of the material was outlined in the Sudbury region.
“What’s most encouraging is that Sudbury continues to grow reserves at both Nickel Rim South and Fraser Morgan, where exploration programs are ongoing,” says Regent.
At year-end, Nickel Rim South hosted an inferred resource of 11.7 million tonnes grading 1.6% nickel and 3.7% copper, plus platinum group metal credits. On a volume basis, resources are 87% higher than at the year’s start.
As for Fraser Morgan, resources there are pegged at 6.3 million tonnes grading 1.6% nickel and 0.5% copper, or 158% greater than at the year’s start. Likewise, 1.3 million tonnes were outlined at the Raglan mine in northern Quebec, putting overall resources and reserves there at 24 million tonnes.
Positive price environment
Adds Regent: “We are reviewing the potential to expand Raglan to increase nickel production and take advantage of what we believe will be a positive nickel-price environment over the next five years.”
Farther afield, Falco is nearing a production decision at the 49%-owned Koniambo ferronickel project in New Caledonia. A bankable feasibility study is under way and should be completed in the third quarter.
“Our goal is to be in the position to make a development decision by the end of this year,” says Regent. “If that occurs, we would expect production to begin in late 2008 or early 2009.”
At last report, Koniambo hosted 121 million tonnes of measured and indicated resources grading 2.15% nickel and 0.06% cobalt. Another 190 million tonnes at 2.1% nickel and 0.08% cobalt are classified as inferred.
Falco is teamed in the Thompson nickel belt with
Falco and Donner will also explore the Circum-Superior boundary, northeast of Thompson, for magmatic nickel, copper and platinum group element deposits. Previous drilling on the 4,400-sq.-km project intersected both sulphide iron formation and ultramafic rocks.
Donner can earn a half-interest in the project by spending $5 million over five years. Under the deal, Falco will subscribe for $500,000 worth of Donner shares.
At the end of 2003, Falco had US$649 million in working capital, with US$298 million in cash or equivalents on the asset side. That’s 46% better than a year earlier.
Long-term debt rang in at US$1.36 billion, up slightly from a year earlier, owing partly to the issuance of US$250 million in corporate bonds that mature in 12 years and bear interest at 5.375% annually. Nevertheless, Falco’s net debt-to-net debt plus equity decreased to 37% from 42%.
Falco has declared quarterly dividends of 10 per common share, 2 per Series 1 preferred share, and 36.72 per Series 2 preferred share. Payments are scheduled for March 1.
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