Inco aims to sustain record PGM output

While Inco (N-T) has benefited strongly from higher nickel and copper prices of late, the company still sees platinum group metals (PGMs) as playing a key role as a by-product credit.

From its flagship Sudbury operations in 2002, Inco produced a record 431,000 oz. PGMs, comprised of 224,000 oz. platinum, 189,000 oz. palladium and 18,000 oz. of other PGMs, including rhodium, ruthenium and iridium.Prior to that, Inco produced 405,000 oz. PGM in 2001, 342,000 oz. in 2000 and 326,000 oz. in 1999.

However, this year, Inco’s PGM production is scheduled to decline to 355,000 oz., comprised of 180,000 oz. platinum, 145,000 oz. palladium, and 30,000 oz. of other PGMs.

More specifically, Inco estimates it will produce 90,000 oz. PGM in the first quarter of 2003, 80,000 oz. in the second, 75,000 oz. in the third, and 110,000 oz. in the fourth quarter.

While it doesn’t hedge its nickel output, as of Dec. 31, 2002, Inco had hedged 42% of this year’s platinum production at an average US$550 per oz., and 9% of its palladium production at an average US$830 per oz.

(At presstime, spot prices for platinum and palladium were US$675 and US$250 per oz., respectively, and, at the end of January, the consensus price assumptions for 2003 among sell-side analysts was US$571 and US$260 per oz. platinum and palladium, respectively.)

“We will not benefit as much from PGM hedges this year as we did in the last two,” said Farokh Hakimi, Inco’s chief financial officer, during a presentation to analysts in early February, adding that the hedges were put in place to “stabilize cash flow as we grow.”

Inco estimates it will post a US$12-million gain this year from PGM hedges, down from US$19 million in 2002 and US$23 million in 2001.

This year’s lower by-products credits are expected to tack on US10-15 to Inco’s cash costs, which are expected to rise by US$0.20 to US$1.65-1.70 per lb. nickel (the remaining US10 rise is attributed to higher pension and energy costs.)

With lower PGM production and realized prices expected in 2003, Inco expects that its PGM output will contribute US9-19 in earnings per share in 2003 — i.e., around US$16-35 million.

Still, on the upside, Inco calculates that every US$50-per-oz. rise in platinum or palladium prices would increase this year’s earnings by US1 or US3 per share, respectively.

“In Ontario, our big challenge is to get more PGM production, which will decline in 2003 as the Copper Cliff North 138 ore body approaches depletion,” said Chairman Scott Hand. “We aim to bring annual PGM production back to the 400,000-level beginning late this year.”

With Inco’s platinum-to-palladium production ratio averaging around 55-to-45, this means that, at a 400,000-oz.-annual rate, the company would likely produce about 206,000 oz. platinum and 170,000 oz. palladium in 2004.

“We expect to achieve our PGM objectives by mining orebodies with higher PGM concentrations, such as the 170 orebody at the Coleman mine,” said Ron Aelick, president of Canadian operations. “We are accelerating exploration and orezone definition in key areas… (and) we’ll focus on profitable cash flow, whether it comes from nickel, copper or PGMs.”

Another factor giving Inco’s PGM business a helping hand will be the commissioning, later this year, of the Acton refinery expansion in England, which should Inco’s PGM refining costs and reduce by 25% the processing-cycle time.