Political sabre-rattling stalls Voisey’s Bay

Beset by low nickel and copper prices and facing an all-or-nothing ultimatum from the government of Newfoundland, Inco (N-T) is suspending engineering and procurement work on the Voisey’s Bay nickel-copper project.

Inco announced the suspension of work after the province, insisting the ores from Voisey’s Bay must be smelted and refined in Newfoundland, broke off talks with the company on July 23. In a letter to Inco Chairman Michael Sopko, the province’s premier, Brian Tobin, said the government considered further discussions pointless.

Inco has said its feasibility studies show that a mine and mill at Voisey’s Bay, with concentrates shipped to Inco’s existing smelting and refining plants in Ontario and Manitoba, is the only economical way to develop the existing reserves at Voisey’s Bay. The province insists the project would still be economic if ores were smelted and refined at Argentia, on the southeastern coast.

The company reacted to the government’s action by closing down the engineering and procurement activities on the project, though it continues to explore the property and expects to spend $20 million this year.

President Scott Hand said that with negotiations suspended, the proposed 2000 startup at Voisey’s is no longer possible: “We can’t predict when Voisey’s Bay will start.”

The Voisey’s Bay deposit has a reserve of 32 million tonnes grading 2.83% nickel, 1.68% copper and 0.12% cobalt. A second deposit, the Eastern Deeps, has an indicated resource of 50 million tonnes grading 1.36% nickel, 0.67% copper and 0.09% cobalt, and the whole property has an inferred resource of 116 million tonnes.

By comparison, Inco’s recent discovery zone at the Creighton mine in Sudbury has proven and probable reserves of 5.9 million tonnes grading 3.54% nickel and 3.11% copper, though average grades in the Sudbury mines are generally lower than that. However, Voisey’s Bay is dwarfed by the Sudbury camp, which hosts more than 50 mines and former producers.

Hand insisted that a feasibility study for Voisey’s Bay could only be based on the proven and probable reserves, and not on the resources. On its proven and probable reserves alone, Voisey’s Bay is a respectable, but not huge, nickel deposit; the attraction is its resource base, which offers potential for greatly increased reserves but cannot be taken to the bank.

Inco has been prevented from outlining additional reserves on the deeper zones at Voisey by a court order obtained by the Innu Nation and the Labrador Inuit Association, which ruled that any underground development is subject to the environmental assessment process governing the whole project.

The environmental impact studies are not complete, so additional underground investigation that could convert the resources into reserves has not been done.

Hand said the company was hopeful the environmental review could be finished this year, which would permit underground bulk sampling and drilling to establish a larger reserve that might make a more ambitious project feasible.

At the same time, the Labrador Inuit Association (LIA) said the dispute between the government and Inco effectively means that the project is dormant, and that the environmental review mechanism should not move to the next stage of public hearings until the two parties have an agreement. The LIA’s officials could not be reached for comment.

The dispute between the province and Inco has its roots in a requirement, under Newfoundland’s Mineral Act, that ores mined in the province be smelted and refined there as well, as long as the processing is economically feasible. In 1995, Sopko wrote to Clyde Wells, then premier, committing Inco to “use its best efforts to ensure that the processing of all of the ores would take place in the province,” with the proviso that processing would have to be economically and technically feasible.

Since that letter, the government has taken the position since that the Voisey project must include a smelter and refinery, essentially making the assumption that downstream treatment of concentrates is feasible. Inco settled on a site at Argentia, on Placentia Bay, southwest of St. John’s, as a possible location for a smelter, but still insisted that the smelter would have to carry its weight as a part of the project.

Since Inco’s designation of Argentia in November 1996, the nickel price has fallen from US$3.15 per lb. to US$1.98 per lb. at presstime, and the economics of the project have changed drastically. Hand told a telephone conference that “the only economic project for Voisey’s Bay today would be a mine and mill in Labrador.”

That proposal has a capital cost of $1.1 billion, and was expected to create about 1,750 direct and indirect jobs. Hand said a second proposal, which would see just over half of the Voisey’s Bay concentrates processed in a nickel-oxide plant in Argentia, would cost a total of $1.9 billion, but that such an operation would be feasible only with tax concessions from the Canadian and Newfoundland governments, plus assistance with infrastructure, “training, and things like that.”

A nickel-oxide plant in Argentia could sell its product directly to the stainless steel industry, or ship to a refinery. The expanded project would create an additional 550 jobs. In an interview with The Evening Telegram in St. John’s, William Rowat, deputy minister responsible for the project, contested Inco’s job figure, saying the Argentia plant would create only 150 direct jobs, plus spinoffs. Both Rowat and Tobin declared Inco had “promised” about 850 jobs at an Argentia smelter.

Hand also pointed out that with Inco scaling back production from its most costly mines in the Ontario and Manitoba divisions, excess smelting and refining capacity would become available in Sudbury and Thompson. He said the opportunity to use that excess capacity could improve the economics of the Voisey’s project.

Premier Tobin said he was “disappointed that Inco continues to back away from its commitment to the people of Newfoundland and Labrador to mine, mill, smelt and refine the nickel from Voisey’s Bay in this province…our bottom line has not changed — no smelter/refinery; no mine/mill. Our analysis indicates a mine/mill and smelter/ refinery is feasible.” The province has not made public any specifics of the studies it has done on the Voisey’s Bay project. Bruce Hollis, an assistant to Rowat, cited the confidentiality between the province and Inco, but said “Inco knows” which firm did the studies for the province.

Inco’s figures from May 1997, the most recent available, imply production costs at Voisey’s Bay would be under US$1 per lb., and Rowat told the Telegram that the cash production costs at Voisey’s Bay would fall in the bottom 25% of world nickel producers, or below about US$1.50. Smelting and refining could be expected to contribute about US70 cents per lb. to that figure.

In an interview on CBC television on July 28, Tobin said the reports had been made available to Inco. He also acknowledged that the internal rate of return on a project that included a smelter and refinery is not as good as that on a simple mine and mill.

In the same interview, Tobin said the province might find another partner to develop Voisey’s Bay, echoing a comment he had previously made, to the CP news agency, that Newfoundland was “getting on with life…there are many other projects and many other partners.”

The “other partners,” presumably, would include Falconbridge (FL-T), the only other Canadian company with a strong base in the nickel market.

Falconbridge did make an offer to acquire Diamond Fields Resources, the original owner of the Voisey’s Bay property, but lost out in a bidding war with Inco. In the present market, Falconbridge would have neither more nor less incentive than Inco to put a refinery in Argentia, but it would certainly have fewer resources, its current assets of $846 million being less than half of Inco’s $1.9 billion. Whether there exist other partners — for example, foreign ones — is less clear.

The slow progress on the Voisey’s Bay project has also forced Inco
to bring more effort to bear on its Indonesian and New Caledonian nickel projects.

The company is in the middle of an expansion at its nickel laterite mine on Sulawesi in Indonesia, and should have a pilot plant running at the Goro deposit in the French overseas department of New Caledonia in 1999, with possible production by 2000. In a barb clearly aimed at the Newfoundland government, Hand said “the governments of France, New Caledonia and Indonesia are most supportive of our efforts.”

Inco also announced results of a cost-cutting program at its Ontario and Manitoba divisions. The company had been seeking annual cost savings of US$165 million, and now expects to save US$215 million a year. Cash costs are down 14%.

Reviews of the Ontario and Manitoba mines centred on their ability to reach cost targets. Inco has closed two mines, both of which were already scheduled for decommissioning — Shebandowan, west of Thunder Bay, and Whistle, near Sudbury. Another five, all in the Sudbury camp, have been scheduled to close over the next three years: Little Stobie will close at the end of 1998, Levack and Frood by the end of 1999, Crean Hill in 2000, and Coleman in 2001.

Three mines are still under review, including Garson and Stobie in Sudbury, and Birchtree Lower in Thompson. Work continues on the mining plans at these operations in an attempt to bring costs down.

Inco’s six other Canadian mines have long lives and low costs that will keep them open: Copper Cliff North and South, McCreedy East, Creighton, Thompson, and Birchtree Upper. Improvements at the metallurgical plants are also expected to decrease costs at the Canadian operations.

Retirements and attrition at Sudbury and Thompson have cut the workforce by more than the 1,175 people Inco had intended, but the company is now looking to decrease its payroll further. As many as 1,000 more jobs may be cut in the next three years, and production from the Ontario division is expected to fall to 80,000 tonnes from 100,000.

Inco posted neat earnings of US$2 million (3 cents per share) in the second quarter of 1998, on revenue of US$494 million. In the corresponding period in 1997, the company earned US$8 million on revenue of US$645 million. For the six months ended June 30, Inco lost US$39 million on revenue of US$994 million, against a profit of US$74 million on revenue of US$1.26 billion in the first half of 1997.