Inco posts loss despite nickel’s rise

Inco‘s (N-T) US$1.6-billion writedown during the summer on its Voisey’s Bay project in Labrador, combined with a host of other added costs, pushed Canada’s nickel giant deeply into the red in 2002.

For 2002, Inco posted a net loss of US$1.5 billion (US$8.27 per diluted share) on sales of US$2.2 billion, compared with profit in 2001 of US$305 million (US$1.49 per share) on sales of US$2.1 billion.

For the fourth quarter, Inco lost US$1 million (US5 per diluted share) on sales of US$528 million, compared with a loss of US$5 million (US7) on sales of US$463 million during the fourth quarter of 2001.

The Voisey’s writedown had been expected for years, and was Inco’s final admission that it has wildly overpaid for the deposit during a bidding war with Falconbridge in the mid-1990s (T.N.M., July 29-Aug. 4/02).

On the ground at Voisey’s, Inco is reporting progress, including: the expansion and upgrading of the work camp; the clearing of land to build a concentrator; installation of a temporary dock at the port site; and construction of a temporary airstrip and a 13-km access road from the port to the mine site.

On the island of Newfoundland, work has started on the site chosen for a demonstration plant to test hydrometallurgical processing technologies at the Innovation Centre at Memorial University.

An updated feasibility study for the first phase of the Voisey’s Bay project, the mine and concentrator is due to be completed next month.

Inco’s Goro project in New Caledonia also took a bite out of the company’s bottom line.

After talking-up Goro for years (and possibly using it as a bargaining tool during negotiations with the Newfoundland government), Inco surprised the market in December 2002 by announcing it was beginning a 6-month engineering review of the project to look for ways to squeeze capital costs and improve the expected return.

Apparently, Inco was stunned when contractors told the company that capital costs could wind up being 30-45% more than the US$1.45 billion estimated in a March 2001 feasibility study.

As result of the review, Inco took an after-tax non-charge of US$26 million in the fourth quarter, after having spent US$385 million on the project.

Goro had been scheduled to ship its first metal in late 2004, and then ramp up to produce nickel at a rate of 55,000 tonnes annually, with 4,500 tonnes of cobalt coming out as byproduct.

Goro hosts reserves of 54 million tonnes grading 1.53% nickel and 0.12% cobalt, plus a measured and indicated resource of 99 million tonnes grading 1.4% nickel and 0.14% cobalt.

Ownership is currently divided between Inco (85%) and the French government agency Bureau de recherches gologiques et minires (15%).

The review has delayed an important deal with Japan’s Sumitomo, which was about to acquire a 25% interest in Goro that would have included BRGM’s stake.

Higher oil and gas prices are taking their toll on Inco, with higher oil costs affecting the PT Inco operations and higher gas prices affecting the Canadian ones. The net effect, along with external feed costs, will be to lower Inco’s earnings by about US3 per share.

Meanwhile, in a familiar scenario being played out across North America among the older industrial companies, Inco is also getting whacked by rising pension costs. The cash outlay of US$67 million in 2002 is set to rise to US$140 million for 2003 and the following years.

Inco’s metal output in 2002 was fairly constant, year-over-year: 231,590 tonnes of nickel in all forms, including purchased material (compared with 230,049 tonnes in 2001); 113,116 tonnes copper (116,751 tonnes); 1,582 tonnes cobalt (1,454 tonnes); 431,000 oz. platinum group metals (405,000 oz.); 71,000 oz. gold (76,000 oz.); 1.6 million oz. silver (1.5 million oz.).

Cash costs for 2002 rose to US$3,197 per tonne, from US$2,976 a year earlier.

The fourth quarter was particularly painful, as nickel production shrank 13% to 50,436 tonnes, which the company attributes to two factors: a scheduled furnace rebuild at its 59%-owned Indonesian subsidiary, PT Inco; and lower ore grades at the Canadian operations, principally resulting from unanticipated shaft work in Sudbury, Ont., and furnace feed problems in Thompson, Man.

Inco says these issues were “largely resolved” by the end of 2002.

The real highlight of Inco’s fourth quarter — and the driver behind the higher sales figures — was the stunning improvement in nickel prices, and, to a lesser extent, copper prices. Inco’s average realized price for nickel shot up to US$7,565 per tonne in the recent quarter compared to US$5,463 per tonne a year earlier. Realized copper prices rose to US$1,610 per tonne from US$1,503 a year earlier.

For all of 2002, Inco sold its nickel for US$7,143 per tonne (US$6,468 per tonne in 2001) and its copper for US$1,629 per tonne (US$1,668 per tonne).

(All the above realized prices represent significant premia over average London Metal Exchange prices during the respective periods.)

With increased spending at Voisey’s Bay and Goro, capital expenditures in the fourth quarter totalled US$262 million, up from US$100 million a year earlier.

At Dec. 31, 2002, Inco’s total debt stood at US$1.6 billion, and the company had US$1.1 billion in cash and marketable securities. The swelling cash position, up more than US$700 million from a year earlier, was the result of the sale of US$791 million in securities during the second and third quarter.

At year-end, Inco had 183.2 million outstanding common shares.

For 2003, the major expects to post earnings of between US$1.05 and US$1.15 per diluted share, compared with First Call’s Jan. 31 estimate of US$1.37 per share.

“2003 will be a great year for the nickel market,” says President Scott Hand. “We see strong fundamentals well into this decade, with demand growing and Goro and Voisey’s Bay as the only major projects coming on-stream soon. Many people may be underestimating the potential for nickel.”