Thanks to much stronger prices for nickel and platinum group metals (PGMs),
Before an unusual item (in this case, a deferred US$38-million benefit relating to recent tax cuts in Ontario), Inco reported net earnings of US$110 million (US57).
Net sales were an impressive US$837 million, up from just US$501 million in the second quarter of 1999.
For the first half of 2000, net earnings were US$243 million (US$1.16 per diluted share) on sales of US$1.61 billion, compared with a net loss of US$17 billion (US18 per share) on sales of US$939 million in the first six months of last year.
In the past quarter, Inco realized an average of US$9,979 per tonne for nickel (compared with US$5,710 per tonne a year ago) and US$1,870 per tonne for copper (US$1,543 per tonne).
As well, quarterly earnings received a boost from byproduct precious metals revenues, which rose US$42 million to US$77 million. Specifically, prices were up significantly for PGMs derived from the Sudbury basin, with output rising to 116,000 oz., compared with 80,000 oz. in the second quarter of last year, though the company says it is not high-grading PGM-rich portions of the mine.
Another highlight of the quarter was the labour settlement with unionized Ontario Division workers, whose wages will now be tied in part to nickel prices. Workers in Sudbury also celebrated Inco’s decision to go ahead with a US$32-million expansion that will provide access to a high-grade deposit at McCreedy East, adding about 15 years to the mine’s life.
“This is a substantial turnaround,” says Chairman Michael Sopko. “But what has not changed is our determination to hold the line on costs while profitably growing our low-cost production.”
Still, the company’s deliveries of base metals for the second quarter stayed relatively flat at 68,299 tonnes nickel in all forms, 28,236 tonnes copper and 374 tonnes cobalt.
Second-quarter cash costs, after byproduct credits, were US$2,513 per tonne of nickel, compared with US$2,734 per tonne in the same quarter of 1999. The decrease was primarily due to the higher PGM prices, which more than offset increased fuel prices as well as increased costs associated with the narrowly averted strike at the Ontario Division.
The company’s finished nickel inventories, which are expected to decline during the third quarter as a result of vacation shutdowns at the Ontario and Manitoba Divisions, were 29,882 tonnes at June 30, 2000, compared with 37,327 tonnes a year earlier.
Capital expenditures were down US$26 million to US$49 million in the second quarter, principally reflecting the completed expansion of 59%-owned Indonesian subsidiary PT Inco.
The strong quarter has allowed Inco to take a bite out of its debt load, reducing its long-term debt to US$1.1 billion, down US$217 million from March 31, 2000. At the same time, cash and equivalents swelled to US$128 million, and a renewed credit line of US$700 million remains untapped.
“Our focus this year, from a financing standpoint, is to maximize our free cash flow in a favourable environment,” says Sopko. “This is in order to build up our financing capacity to fund the attractive slate of investment opportunities we have over the next few years.”
One potential development in the pipeline is Inco’s 85%-owned Goro nickel-laterite project, on the South Pacific island of New Caledonia. French government-owned Bureau de recherches geologiques et minieres (BRGM) owns the remainder.
There, Inco has been operating a US$50-million pilot plant and gathering data for a feasibility study due to be completed by year-end.
Inco is seeking a third partner at Goro to help it shoulder capital expenditures that are expected to exceed US$1 billion. Inco President Scott Hand says the search will likely intensify only after the feasibility study is completed.
Hand adds that discussions with the New Caledonian government are going well: “It’s best to say that New Caledonia seeks nickel investment, and they’re doing whatever they can to see that it happens.”
Regarding the stalled Voisey’s Bay project in Labrador, Hand says there have been no discussions with the Newfoundland government since early January. But the company is continuing its research into the hydrometallurgical processing of Voisey’s Bay ore. On the ground in Labrador, Inco is also carrying out a modest exploration program that is primarily targetting the deposit’s Eastern Deeps section.
Peter Goudie, executive vice-president of marketing, is bullish about nickel’s mid-term prospects. He expects demand for primary nickel in the Western World to grow by almost 8% this year to 1.05 million tonnes.
Goudie notes that stainless steel production (which accounts for two-thirds of nickel demand) was up 13% this year, while nickel consumption by the non-stainless sector was up 14%. At the same time, London Metal Exchange inventories have fallen 31,000 tonnes this year to 15,900 tonnes, representing just five days of total demand. On the supply side, capacity-utilization rates of Western nickel mines remain high, and the three new Australian nickel-laterite mines are still only operating at an average capacity of 40%, owing to chronic technical difficulties.
“When stainless-steel scrap supply begins to tighten, as it must do … the primary-nickel industry is going to find it hard to fill that gap,” cautions Goudie. “I think people are going to find that the market is a lot tighter than what they really understand it to be.”
Inco’s new chief financial officer, George Halatsis, says that for the balance of the year, the company expects to earn a premium of about US15 over the LME nickel price, assuming a relatively stable nickel market. Inco’s production targets for 2000 continue to be for 211,000 tonnes nickel, up from 177,000 tonnes last year.
Halatsis also cautions common shareholders not to expect a resumption of any dividend payments in the third quarter: “All the shareholders we’ve spoken to said to us, ‘If you have money that you can re-deploy into attractive projects, we’d like you to do that before you distribute out to us.'”
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