Inco has a record quarter, but best is yet to come

Profit earned by Inco Ltd. (TSE) for the first quarter of this year is the largest such profit in the company’s history. Bolstered by the strongest nickel prices in the history of the industry, the company realized earnings of $125.9 million (US) or $1.18 per share. To put the earnings in perspective, the quarterly earnings exceed the entire year’s earnings of $125 million realized in 1987.

What left the majority of shareholders attending Inco’s annual meeting almost giddy, was the prospect for further dramatic earnings this year. For the first quarter, Inco’s record performance was based on a price realization of $3.47 per lb of nickel and $1.04 per lb of copper. However, during March and April spot nickel prices on the London Metals Exchange (LME) have soared to a record high of $10.84 per lb. On the morning of the meeting (April 20), the nickel price was $8.48 per lb, Inco’s chairman, president and chief executive officer, Donald J. Phillips, said.

Based on such strong prices, which far exceed Inco’s first quarter realized price of $3.47, the second quarter results are expected to be stellar.

“We were clearly in a period of nickel shortage and the LME as a commodity exchange was reacting to it,” Chairman Phillips said, explaining why nickel prices rocketed after years of weak performance. He added with a chuckle that “this is the understatement of the year,” to the delight of the shareholders.

During the early 1980s, nickel producers were ravaged by low prices and declining demand which materialized after years of over- production and a long bout of economic recession in the early 1980s. With consumption booming again, especially by stainless steel users, which consume almost 55% of all nickel, demand blossomed to a record 1.4 billion lb in 1987. Such high demand drained worldwide nickel inventories creating a physical shortage which caught most consumers and producers by surprise. This disequilibrium between supply and demand is being reflected in commodity prices.

During the quarter, Inco sold 130 million lb of nickel. If that pace can be sustained, then the company will be looking to break the 500-million- lb mark this year. Last year, Inco set a 10-year record with sales of 477 million lb of nickel. Word of caution

A word of caution was sounded by Phillips: “What must also be understood is that if the price of nickel rises too high it will choke off the use of the metal in many applications and if prolonged, will lead to an extended and even permanent decrease in demand.” The warning suggests that Inco will try to put a lid on prices, even though the company insists that it has little control over prices.

However, as one analyst hinted to The Northern Miner, with control of 34% of the global nickel market, Inco’s ability to actually regulate prices has greatly improved.

The benefits of the record financial performance are being passed around. In addition to doubling the quarterly dividend to 20 cents per share, Inco has also increased pensions to pensioners and has introduced a profit sharing plan to non-unionized employees. Also, unionized workers in Manitoba and Ontario will be getting a bonus based on nickel prices. And, for the first since since 1979, Inco will be hiring miners at Sudbury, Ont. Approximately 160 vacancies need to be filled. Share price doubles

More importantly to shareholders, Inco’s stock performance on the Toronto Stock Exchange is finally reflecting the strength in nickel prices and the record earnings. New highs have been set almost weekly this month and much higher gains are anticipated, especially with the expected record second quarter. “Since the beginning of 1987, our stock price has more than doubled,” Phillips said.

One of the people in attendance probably most responsible for the company’s ability to fully enjoy the benefits of the current high nickel prices was Charles Baird, Inco’s retired chairman, who steered the company during the troubled 1980s. Under Baird’s leadership, the company implemented a rigorous cost- cutting and productivity improvement program — the benefits of which Inco is taking full advantage of today. Since 1982, Inco’s unit nickel production costs have been reduced by 33%. This program is ongoing. Inco plans to spend $230 million this year — almost $100 million more than last year — on nickel mine developments designed to further improve productivity. A portion of the funds will also finance gold mine developments.