MINING MARKETS & INVESTMENT NEWS — Analysts see return to profitability for Inco

John Lydall and Robert Webb of First Marathon Securities believe that beleaguered nickel miner Inco (N-STT) is turning the corner with a strong cost-cutting effort at its worldwide operations.

The Bay Street mining analysts issued a buy recommendation for the Toronto-based company, which has set its sights on becoming the lowest-cost and most profitable nickel producer in the world.

“This phrase can be easily dismissed by skeptics and those with a short-term viewpoint as being both unrealistic and unachievable,” the analysts noted in a March research report. “It is easy — perhaps too easy — to point to Inco’s dismal recent track record in terms of cash flows, earnings and return on equity.”

Last year, for example, the company reported a loss in every quarter, and also suffered from negative investor sentiment owing to a political impasse that stalled its Voisey’s Bay nickel-copper-cobalt project in Newfoundland. And early this year, it was forced to eliminate the common share dividend. However, the analysts point out that Inco suffered through several debilitating years following the 1982 recession, and survived by doing many of the things it is doing now, including shedding labour and cutting costs.

More importantly, the analysts give Inco marks for facing reality and not expecting a quick end to low metal prices. Part of that exercise meant removing about US$200 million from the company’s cost base, closing seven mines in Sudbury (along with the New York office), selling peripheral assets and reducing capital expenditures.

“All of this should help to achieve two objectives,” the analysts wrote. “It puts the company in a much better position to survive a period of low prices and it ensures that the company will be able to take advantage of higher prices when they occur.”

Accordingly, First Marathon recommended that Inco’s shares should be bought as “a recovery situation,” in anticipation of a return to profitability this year, and substantially stronger cash flows in 2000 and beyond.

Specifically, the analysts noted that Inco has stemmed the recent tide of increasing cash costs and break-even costs. For example, cash costs fell 16% in 1998 from 1997 levels, and closed the year averaging US$1.43 per lb. on the year and US$1.31 per lb. in the last quarter. “This was a dramatic improvement for Inco, which had seen its cash costs per lb. increase from US$1.30 in 1995 to US$1.71 in 1997.”

First Marathon expects further declines in cash and break-even costs as Inco continues its stringent cost-cutting measures. By the end of 1998, the company had achieved US$175 million in savings on an annualized basis. By the end of 1999, the annual savings are expected to reach US$215 million.

“Realization of the additional US$40 million target in savings required to reach the US$215 target would mean a US10 cents decline in cash costs, which, if applied to the fourth-quarter average, would give Inco a cash cost of US$1.21 per pound of nickel,” the report concludes. “In the longer term, by 2000 and 2001, the advantages of the PT Inco expansion [in Indonesia] and the high-grade Creighton deposit at depth in Sudbury, as well as the potential for savings through co-operation with Falconbridge in Sudbury, should allow Inco to drop costs even further.”

The report does not address the stalled Voisey’s Bay project, which is expected to have production costs among the lowest in the world. However, at presstime, an environmental review panel gave Inco a green light to go ahead with the project once agreements are reached with the Newfoundland government and aboriginal groups.