Falling Metal Prices crush Falco’s earnings

Slumping nickel, copper and zinc prices more than halved Falconbridge’s (FL-T) earnings during the three months ended June 30.

The company posted earnings of $55.8 million (or 30 per share) for the three-month period, about 56% lower than earnings of $126.3 million in the second quarter of 2000. Second-quarter revenues fell to $570 million from $753 million a year before. The recent quarter’s results include a $20-million tax benefit thanks to a revaluation of the company’s future liability for corporate taxes in Ontario, where future tax rates were recently lowered.

Operating income fell to $65.9 million, from $208.3 million the previous year, and cash flow from operations before working capital charges was $112.3 million, compared with $210.5 million a year earlier.

The company saw an across-the-board decline in the average realized prices of its mainstay metals during the quarter. Nickel dove 31% to US$6,900 per tonne; ferronickel was off 35% to US$6,550; copper slid more than 6% to US$1,650; zinc dropped 16% to US$1,014; and silver shed 8% to $4.41 per oz.

For the first half of the year, earnings are running at $60.4 million (31 per share), down significantly from the $235.8 million ($1.30 per share) earned in the first half of 2000. The company figures that the six-month-long strike at its operations in Sudbury took a $54.6-million bite out of first-quarter earnings in 2001.

Year-to-date revenues total $1.1 billion, down from the $1.4 billion the company took in during the first half of 2000, while operating income was $77.2 million versus $381 million. Cash flow of $190 million was less than half the previous year’s $405.1 million.

Falco’s president and CEO Oyvind Hushovd said in a prepared statement, “It has been a mixed quarter for Falconbridge. Our Sudbury operations are now back to full production after the strike.

“However, metal prices remained under pressure and, for the moment, we do not see any signs that this will change soon,” he added.

The company’s Sudbury mines continued to ramp up during the latest quarter, and by June had attained full production. Looking to replace some of the production lost to the strike, both the Sudbury smelter and Nikkelverk refinery in Norway operated at their highest quarterly production levels ever. The Raglan mine in Quebec operated at its capacity of 1 million tonnes annually.

At Falconbridge’s Kidd mining division, near Timmins, Ont., second-quarter copper and zinc production was higher than in the previous quarter, but still off last year’s pace thanks to an earlier ground movement at the Number 1.

Kidd incurred a loss of $14.6 million for the quarter, compared with a contribution of $17.8 million for the same period of 2000. The loss reflects lower metal prices and higher operating costs due to lower production.

The company has decided to accelerate development of the deep-level Mine D to bring it into production one year ahead of schedule. Work is currently focused on development of the No. 4 shaft. The division is expected to maintain an annual production rate of about 2 million tonnes until 2004, when Mine D is slated to begin production.

The company’s 85%-owned nickel mining subsidiary in the Dominican Republic, Falcondo, operated below capacity during the quarter due to unscheduled maintenance at the power plant. The company’s quarterly share of Falcondo’s earnings was $2 million, compared with income of $19.1 million during the second quarter of 2000. Falcondo is expected to churn out 26,000 tonnes of ferronickel in 2001.

In northern Chile, production at the massive Collahuasi copper mine, slipped slightly from a year ago thanks to lower ore grades, but is still on target to meet annual production estimates. The mine is shared by Falconbridge (44%), operator Anglo American (aauk-q) (44%) and a Japanese consortium (12%).

The group is currently looking at upping mill capacity to 110,000 tonnes per day from the current 70,000 tonnes to help counter a planned drop in grade in 2004. A decision is expected later this year.

Falco’s share of Collahuasi’s earnings during the second quarter was $12.8 million, compared with $20.3 million a year ago.

In New Caledonia, Falco says its early-stage Koniambo nickel-laterite project remains on-track, with a prefeasibility study due at year-end.

Falconbridge also acquired the Montcalm nickel-copper property near Timmins, Ont., from Outokumpu for $14 million. Montcalm has the potential to produce 5 million tonnes of ore at a rate of 750,000 tonnes annually. Ore from Montcalm would be milled at the Kidd Division with concentrates shipped on to the Sudbury smelter. The project could up the company’s annual nickel output by 8,000 tonnes.

The company also agreed to acquire 100% of the adjacent Lomas Bayas copper mine and Fortuna de Cobre copper deposit in Chile from struggling Swedish-Canadian miner Boliden (bol-t). The deal is slated to close by the end of July.

For shareholders, Falco has declared dividends of 10 per share, payable August 13, 2 per preferred share (series 1) and 36.72 per preferred share (series 2), both payable September 1.