Investment Commentary — Falco’s earnings potential makes it

With development plans proceeding at two projects and growth in earnings expected for 1995, Falconbridge (TSE) should have an excellent year, says First Marathon Securities. Mining analyst John Lydall is recommending the nickel producer as a buy at $23 per share.

Expected to contribute to Falco’s earnings potential are Collahuasi in Chile, one of the world’s largest undeveloped copper plays, and the Raglan nickel play in northern Quebec.

In February, Falco and Luxembourg-based Minorco announced they would purchase Shell’s one-third interest in Collahuasi for US$195 million. Each will have a half interest in the project.

Collahuasi is expected to produce 350,000 tonnes of the red metal per year, in both concentrate and cathode forms. A feasibility study is expected by mid-year and, if results are positive, startup could occur as early as 1998. Reserves stand at 1.9 billion tonnes averaging 0.9% copper.

At the Raglan project, first delineated in the early 1970s, Falco hopes to produce 20,000 tonnes of nickel per year. Concentrate will be shipped to the company’s smelter in Sudbury, Ont., and then on to Norway for refining. Reserves at Raglan stand at 18 million tonnes averaging 3.13% nickel and 0.88% copper.

For the fourth quarter of 1994, the company reported earnings of 46 cents a share, based on revenue of US$1.30 per lb. of copper and US$3.37 per lb. of nickel. This compares with 7 cents a share for the same period in 1993. Lydall expects earnings will increase further as a result of improved metal prices. For 1995, he predicts earnings will amount to $3 per share based on average realized per-pound prices of $1.40 for copper and $4.25 for nickel. If Lydall’s earnings forecast proves correct, Falco will have a gross cash flow of $700 million, enough to pay the recently announced 10 cents quarterly dividend and to fund planned capital expenditures.

In 1994, Falco had a consolidated cash flow of $467 million and was able to pay down $100 million in long-term debt, thereby reducing its remaining debt to $473 million. The company plans to make payments of $100 million towards long-term debt this year.

To fund the acquisition of Collahuasi and develop Raglan, Falco will need more than $500 million. Development costs for Collahuasi would require still more capital.

Lydall concludes that Falconbridge offers an attractive alternative to the world’s leading nickel producer, Inco (TSE), an opinion based on the former’s broad exposure to copper, nickel and zinc ores within large, highly profitable and long-lasting mines.

Where the company may be lacking, however, is in its exposure to international markets. Lydall suggests that by listing on other exchanges, such as New York, Falco could increase its profile among foreign and, in particular, American investors.