Tax dispute solvable: Falconbridge

A first-quarter 1988 profit of “only” $35.2 million, or 45 cents a share, could have been as much as $8 million more had it not been for the company’s troubles in the Dominican Republic, William James, chairman of Falconbridge Ltd. (TSE) said following the annual meeting.

The company’s profit in the period was somewhat lower than expected, he told the meeting, because there was no contribution then from the ferronickel operations in the Dominican Republic of subsidiary Falconbridge Dominicana C. por A. (Falcondo).

Falcondo, which produces about 70,000,000 lb per year of nickel in ferronickel, was hit late last year by a prohibitive 25% export tax levied by the Dominican Republic government, and Falconbridge has been trying since to come to terms with the government on the situation.

Despite the tax imposition, Falconbridge continued production at Falcondo, even managing to ship out some 12,000,000 lb nickel to its customers since early December last year.

But because the government recently banned any further shipments until some agreement is reached, operations at Falcondo have been closed down and notice of force majeure sent to customers, James said. Some 20,000,000 lb of nickel are stockpiled at the site.

He said he remains optimistic that a satisfactory solution will be found through continuing negotiations with the Dominican Republic government, and that he will shortly be personally and directly involved in the discussions with Dominican officials.

James told The Northern Miner after the meeting he did not believe the government in the Caribbean country would move to nationalize Falcondo’s operations, as had been suggested last week by a senior nickel analyst.

The analyst, Ilmar Martens, had said (N.M., April 25/88) that the government might be forced into such a move as one result of the fact that some 1,500 Dominican employees at Falcondo would be put out of work by the plant closure.

The Falconbridge chairman said, however, that Falcondo is actually continuing to pay those employees, while negotiations continue.

“We are willing to negotiate and make some concessions on taxes,” he said. “We have come together a bit now.”

Meantime, he told the meeting that the improvement in the company’s earnings over the first quarter of 1987 (a loss of $15.4 million), was due mainly to increased prices for most of the company’s metals, partially offset by the stronger Canadian dollar in terms of U.S. funds.

In fact the current high price of nickel (about $7.70(US) a lb at presstime), could constitute a considerable danger, the Falconbridge chairman said. Both users and producers are concerned that an extended period of high nickel prices will encourage substitution to the detriment of long term growth, he warned. “Too damn high”

“The price of nickel is just too damn high,” he said, adding that producers like Falconbridge would be more comfortable with the nickel price around the $4-a-lb level.

Price increases for other metals are seen as more positive. James said for instance that the almost tenfold price increase for cadmium (to about $8US per lb) means a “welcome addition” to Falconbridge’s bottom line. Cadmium is produced by the company’s Kidd Creek division, and is in strong demand for nickel-cadmium batteries.

Another, and new revenue producer, he said, will be indium from Kidd Creek. Indium has been a so far unrecovered byproduct of Kidd Creek’s operations, but Falconbridge is developing a process for its production, to serve an emerging market in electronics, in fusible alloys and in automobiles.

Indium currently sells for about $10 per oz. An understanding has been reached with the Indium Corporation of America to market the new product, James said. He declined to give figures on the quantity of indium Falconbridge expects to produce, but noted that world consumption is around 2-3 million oz.

At Sudbury, he told shareholders, a significant proportion of an $87-million capital expenditure program (out of a 1988 total company program amounting to $150 million) is being assigned for development and pre-production of the Strathcona deep copper zone, and the Craig mine.

He said the Craig mine, for instance, which has proven and probable reserves of 14 million tonnes at a grade of 2% nickel, will account for a substantial portion of Sudbury nickel production by the early 1990s.

An extensive underground exploration and ore delineation drilling program is under way at the Craig mine to increase its reserves.

The Strathcona deep copper zone, which is estimated to contain four million tonnes in narrow, high grade copper veins, showed a recovered metal value from development ore already mined about three times that of normal Sudbury ore, the meeting was told.

The company is also bullish about the prospects for its Lindsley nickel/copper prospect, about 15 km west of the Falconbridge smelter in the Sudbury area.

James said good grades have continued to be encountered in 35 holes put down since last July, when one hole intersected 2.35% nickel and 4.41% copper, as well as values in precious metals, over 255 ft.

The company expects to complete the current phase of drilling on the Lindsley project by June, after which a decision will be made on an underground exploration program.

On the financial front, James said, Falconbridge has now reduced its long-term debt to just over $500 million, from $1.2 billion, and has $160 million in cash. He said following the meeting that while it’s likely additional payments will be made this year, the company plans no equity issues or further sell-off of assets at present. A dividend is being considered, however, he told the meeting.