ASIA — PT Inco expansion continues apace in Indonesia

Despite troubles at home and a depressed nickel market, Inco (N-T) is making strides in expanding its Soroako nickel operations on the island of Sulawesi in Indonesia.

Inco has been in commercial production at Soroako since 1978 through its 59%-owned Indondesian subsidiary, PT Inco. Japan-based Sumitomo Metal Mining holds 20% of PT Inco and the remainder is publicly held.

PT Inco’s contract of work at Soroako extends to the year 2025. The operation consists of an open-pit nickel-laterite mine, a processing plant with three electric-furnace smelting lines, power generating facilities, as well as a town, airport and port. Proven and probable reserves within the Soroako plant area stand at 108 million tonnes grading 1.85% nickel.

Extensive nickel resources in the Soroako Outer Area, and at Bahodopi and Pomalaa, may be developed in the future.

Begun in 1995 and scheduled for completion late next year, the US$580-million expansion will boost PT Inco’s production by 50%, to 150 million lbs. nickel in matte per year. As well, it is expected that PT Inco’s already-low cash production costs will be reduced by more than 10%.

Existing facilities are being upgraded and a fourth smelting line is being added at a cost of US$450 million. For a further US$130 million, a 93-MW hydroelectric power station is being built on the lower Larona River. This new power source will complement an existing 165-MW hydroelectric facility on the upper Larona River and a smaller thermal power station.

Inco says that the expansion will secure the company’s position as a reliable, low-cost nickel supplier to the Asian market, and that the new capacity will replace deliveries of purchased nickel to Asia, rather than increase market share.

With a current capacity of 100 million lbs. of nickel in matte per year, PT Inco is expected to be able to produce at a rate of 115 million lbs.

annually by late 1998, at which time all equipment will be commissioned.

Capacity will be further boosted into the 150-million-lb. range in April 1999, when the new hydroelectric facilities are scheduled to begin operation.

All of the nickel matte produced at Soroako is sold to Inco and Sumitomo under long-term contracts and shipped to Japan for refining. In preparation for the added feed from Soroako, the Japanese refiner TNC, which is 51%-owned by Inco, has nearly completed increasing its own annual capacity by 50%, to 54,000 tonnes of refined nickel.

While PT Inco’s expansion is progressing on schedule and on budget, production during the latter half of 1997 and early 1998 was hampered by Indonesia’s severe drought, which has been attributed to the El Nino effect.

The drought lowered water levels in Danau Towuti, the lake drained by the river that feeds PT Inco’s hydroelectric plant, thereby limiting the amount of power that could be generated. In response, PT Inco deepened the river channel, providing a more consistent water flow to the plant. Intermittent rainfall finally returned in late 1997 and, by January, PT Inco had resumed production at about 70% capacity. Since mid-April 1998, PT Inco has been operating at a rate of 85 million lbs. per year.

During 1997, PT Inco’s cash costs were a miserly US$1.15 per lb. nickel, making it one of the industry’s lowest-cost producers. The company’s net earnings last year were US$24 million, compared with US$61 million in 1996, a drop the company attributes to lower deliveries and lower realized prices.

At year-end 1997, Inco’s equity investment in PT Inco stood at about US$355 million and PT Inco’s debt stood at US$290 million, having risen from US$112 million at the end of 1996 as a result of the expansion project.

During the quarter ended March 31, PT Inco had net earnings of US$5.2 million (or 2 cents per share) compared with US$7.1 million (3 cents per share) for the first quarter of 1997. The drop, attributed to lower realized prices, was partially offset by higher deliveries and reduced production costs. The company’s realized price for nickel in matte averaged $2.09 per lb. in the first quarter, compared with $2.59 per lb. in the corresponding period of 1997.

Production of nickel in matte for the first quarter of 1998 was 20.1 million lbs., compared with 17.7 million lbs. a year earlier. Production in the first quarter of 1997 was affected by the planned rebuild of one of the electric furnaces, whereas the limited production during the first quarter of 1998 was due primarily to the reduced hydroelectric power generating capabilities.

The first quarter saw PT Inco’s long-term debt jump by US$32.3 million, to US$322.7 million, as a result of drawdowns from its available credit facilities to finance the expansion.

Of Inco’s planned capital expenditures of US$430 million in 1998, about US$220 million will be directed to the PT Inco expansion.