Inco earnings slide on higher costs

Nickel giant Inco (N-T, N-N) saw its third quarter net earnings more than halved to US$62 million owing mostly to increased production costs for nickel and copper. The company also said lower copper and platinum group element deliveries also hurt earnings.

The earnings translate to US30 per diluted share, and compare with year-ago earnings of US$142 million (US69 a share). Revenue climbed by 5% to US$1.08 billion on higher realized prices for nickel, copper and certain platinum group elements, and higher nickel deliveries.

Cash flow from operations during the quarter was US$258 million; full year cash flow is pegged at around US$1.3 billion.

Inco’s third quarter nickel production slipped by around 5% to 50,508 tonnes, in line with previous guidance. The decrease is attributed mostly to a longer-than-anticipated maintenance shutdown at the company’s Manitoba operations, which were being prepared to accept concentrate from the Voisey’s Bay project in Newfoundland and Labrador.

Voisey’s Bay produced its first concentrate in early September; the first shipment is slated for November, well ahead of schedule, with the first finished nickel production expected in early 2006. The operation is expected to produce some 110 million lbs. of nickel in concentrate in 2006.

Inco cranked up Voisey’s hydrometallurgical demonstration plant in Argentia in October. The plant will run until late 2007 with the aim of determining whether the water-based processing technology is technically and economically feasible.

Inco expects to produce up to 66,000 tonnes of nickel during the fourth quarter and up to 222,000 tonnes for all of 2005.

Inco also produced 27,215 tonnes of copper during the quarter. Plans call for production of 40,823 tonnes in the fourth quarter; the full year target has been increased to 124,737 tonnes. Platinum-group-element production exceeded expectations at 57,000 oz. Fourth quarter PGE production is pegged at up to 86,000 oz., and up to 390,000 oz. for the full year.

The company’s averaged nickel unit cash cost (after by-product credits) was US$3.03 per lb., up from US$2.30 per lb. a year earlier. The increase reflects a strengthening loonie, higher energy prices, and lower production. The purchase of nickel intermediates for processing also added to costs. Cash costs are expected to average around US$2.95 per lb. for the full year.

On the sales side, Inco realized US$14,857 for each tonne (US$6.74 per lb.) of nickel sold and US$3,921 per tonne (US$1.78 per lb.) of copper both better than year-ago realized prices, and the quarter’s average London Metal Exchange cash prices.

“While we have seen a downturn in nickel prices during the third quarter and into the fourth quarter, nickel prices still remain at historically high levels,” said Inco CEO Scott Hand in a prepared statement.

During the third quarter, the LME cash nickel price averaged US$6.61 per lb., down from US$7.44 per lb. in the second quarter; the price slipped to US$5.71 per lb. during the first three weeks of October. Inco says the lower prices reflect an inventory correction in the stainless steel market. The company expects the “short-term effect” to end in late 2005 or early in 2006.

Hand said that with limited supply growth over the next two years, he expects tight market conditions for nickel to continue into 2006.

On the merger watch, Inco mailed its formal offer and take-over bid circular to Falconbridge (FAL.LV-T, FAL-N) shareholders on Oct. 24. Inco’s offer of $34 in cash plus 0.6713 of one of its own shares for each of Falco’s outstanding shares requires at least two-third of Falco’s shares to be tendered. The $12.5-billion transaction is expected to close in late 2005 or early 2006.

At the end of September, Inco had US$916 million in cash and equivalents, down from US$1.1 billion at the end of 2004, thanks to capital spending on growth projects and sustaining capital. Likewise, total debt was US$86 million lower at just shy of US$1.8 billion.

Inco declared a quarterly dividend of US10 per share, payable Dec. 1, 2005 to shareholders of record on Nov. 15, 2005.