MINING MARKETS & INVESTMENT NEWS — INVESTMENT COMMENTARY — Voisey’s Bay still a feather in Inco’s cap

Back in the days when Robert Friedland was conducting his arguably brilliant auction of the Voisey’s Bay project, the Asian tigers were roaring like lions. Inco‘s (N-T) US$3.5-billion purchase of the Labrador nickel project seemed equally brilliant, ensuring its status as the world’s largest producer of the metal. But no sooner was the ink dry on the deal when the good times began to roll away faster than a bowling ball down a mine adit.

At the height of Voisey’s Bay fever, the nickel price was about US$3.50 per lb. Then the Asian crisis hit, pushing the price down to a low of US$1.70 per lb. by late 1998. It has since rebounded to about US$2.60.

Voisey’s Bay has been effectively sidelined by onerous government policies and an arduous permitting process. While exploration is back on track, construction plans are collecting dust on the drawing board. Analysts now estimate that, at the current nickel price, the book value for Voisey’s Bay is a mere US$1 billion.

Roger Chaplin, a mining analyst with T. Hoare Canaccord, concedes that Inco remains unpopular with investors for spending more on Voisey’s Bay than its current total market value. However, in a July research report, he defends the purchase as necessary, and says that the current poor market for nickel might have been worse had another party completed the purchase. The project would now be under construction and due to come on-stream next year or in 2001.

“In that case, even if not all the new Australian laterite producers had been built, the nickel market would be in an even more over-supplied position and the nickel price no doubt even lower,” he points out. “Inco, in that situation, would not only have been squeezed on market share, but would have had to close down even more of its existing production.”

Chaplin has recommended Inco as “a buy for exposure to a recovery in nickel”, saying Voisey’s Bay has value, “both directly as a future mine and by giving Inco market leverage.”

The nickel company currently trades at about US$18, and has 181 million shares outstanding. “At the current nickel price we value Inco, including Voisey’s Bay, at US$16.18 per share,” Chaplin writes. “However, a 20% rise in the nickel price (to US$3) increases our valuation of Inco by almost 40%, to US$22.33 per share.”

Chaplin also gives a thumbs-up to Inco’s change in corporate strategy. “From wanting to maintain, and even grow, its market share at almost any cost in 1995/96, the strategy today is to be the world’s lowest-cost and most profitable nickel producer.”

Toward that end, Inco has closed a number of its higher-cost mines in Canada, and is looking for its cash costs to fall from a peak of US$1.71 per lb. in 1997 to just under US$1.25 in 2002.

Chaplin disputes the notion that Voisey’s Bay is more of a liability — because of permitting and financing difficulties — than an asset. “In terms of capital costs and pay-back period, Voisey’s Bay is better than any other project waiting in the wings. Inco can therefore, to a large extent, control the nickel market through the threat of Voisey’s Bay — and in the long term, the property is likely to be the next major development brought on-stream to meet future growth in demand for nickel.”

Inco’s plans call for production of around 100,000 tonnes per year, with cash costs of less than US$1 per lb. At a nickel price of US$2.50 per lb., the payback period for Voisey’s Bay is expected to be fewer than three years, about half that of the new Australian laterite producers. All this means that even though the project is waiting in the wings, Voisey’s Bay is robust enough to make competitors think twice about financing their projects.