Following losses totalling US$53 million in the three previous quarters, Inco posted a second-quarter net loss of US$1 million (US5 cents per share after preferred dividends) on sales revenue of US$501 million. This compares with net earnings of US$2 million (a loss of US3 cents per share) on sales of US$494 million for the second quarter of 1998 — the company’s last profitable quarter.
During the quarter, Inco reached its goal — one year ahead of schedule — of achieving permanent, pretax annual savings of US$215 million.
Launched in February 1998 in response to an unexpected drop in nickel prices, Inco’s cost-cutting campaign has centred on mine and office shutdowns in the Ontario division and workforce reductions totalling 1,600 employees in the Ontario and Manitoba divisions.
“Management’s success in meeting our cost-reduction goals reflects our determination to return to profitability and, as the nickel market improves, provide good returns to our shareholders,” said Inco President Scott Hand during a conference call with analysts.
Inco is now commited to reducing annual costs by a further US$35 million by the end of next year, giving the company a total of US$250 million in permanent annual savings.
Peter Jones, vice-president of operations, said these additional savings will come from two sources: “First, we’re increasing the emphasis on cost savings with PT Inco [the company’s 59%-owned Indonesian subsidiary]. With the expansion of that operation nearing completion, more attention can now be given to initiatives in the mining, processing, maintenance and utilities departments, and to reducing the levels of management. Second, in Canada, the very substantial changes that are under way in every operation are generating results that are exceeding our original expectations.”
The cost-cutting is showing up in Inco’s cash cost figures: during the second quarter, the company’s cash cost of nickel production, net of byproduct credits, dropped to US$1.24 per lb. compared with US$1.40 per lb. a year ago.
Inco’s realized nickel prices for primary nickel products, including intermediates, averaged US$2.59 per lb. during the second quarter, up from US$2.51 per lb. during the corresponding period last year. By comparison, the LME’s second-quarter cash nickel price was US$2.37 per lb., up 5% from a year earlier.
Chief Financial Officer Anthony Munday said Inco expects to break even, on a profit-and-loss basis, at LME cash nickel prices ranging from US$2.35 to $2.40 per lb.
At the PT Inco operations, a US$638-million expansion project is expected to be completed by the end of the year. PT Inco’s annual production capacity will then soar 50% to 68,000 tonnes of nickel-in-matte, with cash-production costs dropping to less than US$90 cents from the current US$1 per lb.
Much of the expanded plant has been commissioned and only awaits completion of a new 94-MW hydroelectric power facility, to be completed in August. Power is expected to flow in the fourth quarter.
During the second quarter, PT Inco’s net earnings were US$4.1 million on sales revenue of US$50.3 million, compared with earnings of US$5.5 million on revenue of US$41.5 million last year.
At Inco’s 85%-owned Goro nickel-cobalt project in New Caledonia in the South Pacific, construction of a US$50-million pilot plant is also nearing completion, with commissioning scheduled for the third or fourth quarter.
In contrast to its Australian competitors, who are fast-tracking their pressure-acid-leach (PAL) nickel-laterite projects (T.N.M., June 28-July 24/99), Inco is taking a slower, more methodical approach to developing its own patented PAL processes for Goro, which has nickel grades 40% higher than the Australian deposits.
“By going to a pilot plant, we will sort out any operational problems that could arise and enable changes to be designed into a commercial plant,” said Hand. “We plan to operate the plant on a trial basis for a period of several months, after which we expect to be in a position to make a production decision, probably during the second half of the year 2000.”
Added Inco Chairman Michael Sopko: “What we want to do is eliminate, to a maximum extent, the uncertainty associated with capital investment and the final production cost, so that when we go ahead with the project, our shareholders feel confident that we’re going to be able to deliver what we promised and that Goro will, in fact, be the leading laterite producer in the world.”
Asked to comment on the three new nickel-laterite projects — Cawse, Bulong and Murrin Murrin — coming on-stream in Australia, Sopko replied: “Cawse has done a pretty good job of coming along — their technology is reasonably good; Bulong has got more problems; and Murrin Murrin’s got some major problems to overcome.”
He added that the problems stem from corrosion and erosion in the hydrometallurgy plants.
“There’s a lot of noise made about how low-capital cost these PAL plants were going to come in at in Australia and how low their operating costs will be. Well, I think their capital costs are going to be a lot higher than they originally anticipated and their production costs will be determined largely by their throughput, which I expect will be significantly higher than people are bragging about today.”
Regarding the Voisey’s Bay project in Labrador, Inco confirmed that informal negotiations with the Newfoundland government have been taking place.
The company is still waiting for the provincial and federal governments to respond to an environmental review of the mine-mill complex. The review was submitted by an advisory panel in early April. Once the two governments have digested the report and its recommendations, Inco says, formal discussions can begin.
If an agreement is reached with the provincial government and aboriginal groups by the end of the year, Inco could begin construction in mid-2000, in which case production of concentrates could get under way by the end of 2003.
On the exploration front, Inco says total resources for all zones at Voisey’s Bay have increased 10% to 136.7 million tonnes, with overall nickel grades within the Eastern Deeps zone increasing slightly from 1.36% to 1.4%. There were no substantial changes in the copper or cobalt contents.
Proven reserves in the Ovoid remained unchanged at 31.7 million tonnes grading 2.83% nickel, 1.68% copper and 0.12% cobalt.
Robert Horn, vice-president of exploration, said the tonnage increases reflect the physical extension of mineralization in the Eastern Deeps to the north into the Ned zone, as well as marginal increases around the Eastern Deeps and the Reid Brook zones to the west.
Inco still anticipates that resources at Voisey’s Bay can be boosted to at least 150 million tonnes.
During the second quarter, the company raised net cash proceeds of US$273 million by selling 15 million shares on a bought-deal basis. Most of the money was used to repay debt, which stood at US$1.38 billion on June 30. In June, the company also renewed a US$815-million revolving line of credit.
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