INVESTMENT COMMENTARY — Falconbridge recommended for exposure to nickel, copper assets

Production from two new mines has prompted mining analysts to take a closer look at Falconbridge (FL-T), the world’s third-largest nickel producer and Canada’s largest producer of copper.

Roger Chaplin, a mining analyst with T. Hoare Canaccord, has recommended the company as a buy for its exposure to both metals and for the production growth expected from the Raglan nickel-copper mine in northern Quebec, and the Collahuasi copper mine in Chile.

The major has 177 million shares outstanding and trades at about $21, within a 52-week trading range of $11.25 to $22.35. However, Chaplin sees a “base-case value” for the company of $24.76 per share, or 17% above the current price, at prices of US$2.50 per lb. for nickel and US75 cents per lb. for copper. If metal prices take off, he adds, shareholders will have plenty to cheer about.

In recent years, Falco has spent roughly $2.4 billion, mostly to develop the wholly owned Raglan and the 44%-held Collahausi mine. Falco’s copper production reached 120,443 tonnes (or 266 million lbs.) in 1998. However, thanks to the new Collahausi mine, copper production this year is expected to reach 325,000 tonnes, or 717 million lbs., making Falco Canada’s largest copper producer.

“Collahausi doubles Falconbridge’s copper production,” Chaplin noted in a July research report. He added that the company’s share of production from the Chilean mine will be around 175,000 tonnes. Copper is produced from concentrates as well as onsite using the solvent extraction-electrowinning process.

Last year, the company earned 48% of its revenue from nickel, compared with 26% from copper. The balance was from cobalt, zinc and other metals. However, with Collahuasi entering full production this year, 40% of revenues are expected to come from copper and 35% from nickel.

Collahausi has reserves and resources totalling 2 billion tonnes grading 0.83% copper and is expected to produce for 50 years. The mine plan for the first 25 years calls for the treatment of almost 600 million tonnes of higher-grade material averaging 1.27% copper. Cash costs are expected to be about US45 cents per lb.

Falco’s nickel production from its own mines reached 79,922 tonnes (176 million lbs.) last year, or roughly 8% of world production. In addition to its five mines at Sudbury, Ont., the company owns 85% of the Falcondo ferronickel operation in the Dominican Republic.

Cash costs at Raglan are at or below US$1.50 per lb. nickel, and about US$1.58 per lb. at Sudbury. By 2000, Falco hopes to slash its costs at Sudbury to US$1.30 per lb. Considerable progress toward this goal was made in the first quarter of 1999, when costs were pared down to US$1.43 per lb.

On the development side, the company holds rights to a joint-venture nickel project in New Caledonia that is the now the subject of a feasibility study. The Koniambo deposit is reported to host 132 million tonnes of resources grading 2.46% nickel and 0.06% cobalt. However, Chaplin believes the project requires a higher nickel price to justify the US$1.4 billion in capital required to build a plant capable of producing 54,00 tonnes (120 million lbs.) of ferronickel per year.