Collahuasi, Lomas Bayas firm up Falco earnings (July 24, 2002)

Higher sales volumes combined with newfound production from the Lomas Bayas mine in Chile to keep Falconbridge (FL-T) financially steady during the three months ended June 30.

The company earned more than $41 million (or 21 per fully diluted share) on revenue of $634 million in the second quarter, compared with nearly $56 million (30 per share) on $570 million in the corresponding period of 2001. The earlier period includes a tax benefit of $20 million arising from an adjustment to future tax rates in Ontario.

Operating income rose $10 million to nearly $71 million as copper sales ballooned and overhead costs shrunk by a third. Falconbridge sold 27% more copper, or 22,243 tonnes, of which the Lomas Bayas mine in Chile, purchased in July 2001, accounted for 64%.

Nickel sales climbed by nearly 4% to 24,597 tonnes. Most of the increase reflects higher sales of ferronickel and nickel bought from the market for resale.

Cash flow from operations was up 21% over the year-earlier period, at $136 million, though the amount was reduced by $16 million to reflect changes to working capital. Financing activities made up for the reduction, but the major still ended the period with $16 million less cash than it had a year ago, or $327 million.

Falconbridge’s bread-and-butter Integrated Nickel Operations added $46 million to operating income, or $18 million less than in the second quarter of 2001. A 50% reduction in precious metals revenues is to blame.

Production at the Sudbury mines and mill rose considerably, especially in the case of copper, but the opposite occurred at the Raglan mine in northern Quebec. Raglan suffered an engine failure in the grinding mill, which has since been fixed.

The Sudbury smelter had a mixed quarter, churning out 9% less nickel-in-matte but nearly 4% more copper-in-matte. Having had its capacity increased, the smelter was shut down in mid-June and will remain closed until early August, the objective being to reduce operating costs.

The Nikkelverk refinery in Finland paralleled the smelter, cranking out 7% less pure nickel but 18% more pure copper. A shortage of custom feed hindered production of the former.

Nikkelverk is now expected to crank out 70,000 tonnes nickel in 2002, or 2,000 tonnes less than previously forecast. The revision partly reflects the problems at Raglan.

Rounding off the nickel operations is Falcondo in the Dominican Republic, in which Falconbridge holds an 85% stake. The operation delivered $12 million to the major’s account — 71% more than last year.

Falcondo produced 7,162 tonnes ferronickel, which is 13% more than in the second quarter of last year but still below budget. A ruptured pipeline (now repaired) accounted for the shortfall.

Falconbridge’s copper operations contributed $32 million to operating income, though the Kidd Creek division actually showed an operating loss of $18 million. The mine and metallurgical plant cranked out more metal, but not enough to overcome a 15% reduction in realized zinc prices and fewer custom feed contracts.

Negotiations with production and maintenance workers at the metallurgical plant are scheduled to begin shortly. Their contract expires at the end of September.

The 44%-owned Collahuasi copper mine in Chile contributed $44 million, or $11 million more than last year, as sales volumes increased and operating costs declined. Lomas Bayas added nearly $7 million to the pot.

Overall, Falconbridge’s various mines cranked out 20,354 tonnes nickel, including ferronickel, 83,343 tonnes copper, 26,858 tonnes zinc and 774,000 oz. silver during the quarter. Refined output totaled 25,476 tonnes nickel (7,162 tonnes in the form of ferronickel), 65,618 tonnes copper (excluding 36,496 tonnes in blister form) and 34,654 tonnes zinc.

The major’s realized metal prices averaged: US$3.23 per lb. nickel; US$3.12 per lb. ferronickel; US75 per lb. copper; US39 per lb. zinc; and US$4.70 per oz. silver. As noted, zinc prices were off from last year, but copper prices are unchanged, and the rest are higher.

On the exploration front, Falconbridge has six drills turning at the newly discovered Nickel Rim South deposit, 3 km north of the Sudbury airport. Preliminary results put the inferred resource at 4.2 million tonnes grading 2.2% copper and 4.9% copper, plus 19 grams silver, 3.9 grams palladium, 3.3 grams platinum and 2.6 grams gold per tonne.

The resource is divided between the Contact and underlying Footwall zones, with the latter proving to be the larger and richer of the two. The northern, eastern and western limits of the Footwall zone have been delineated, but a hole drilled 15 metres to the southeast of the resource boundary hit 6.2 metres of contact-type mineralization and 53.6 metres of footwall-type mineralization. Assays are pending.

Broadly spaced holes are being drilled up to 1.5 km to the northwest and southeast of the the deposit to test for new mineralization. The stepout program should wrap up by year-end, after which time a decision on whether to proceed with shaft-sinking will be made.

A shaft and subsequent underground drill program would take two years to complete, meaning production would be begin no earlier than 2007 if results pan out.

At the corporate level, Falconbridge issued US$250 million worth of unsecured notes during the quarter to repay amounts outstanding under its commercial paper program. The unsecured notes bear interest at 7.35% annually and mature in mid-2012.

Falconbridge continues to integrate operations with parent Noranda (NRD-T) in order to reduce costs even further. Part of that effort has involved managerial swaps, the latest being the reassignment of Michael Doolan as Falconbridge’s new senior vice-president and chief financial officer.

At June 30, Falconbridge had $1.1 billion in current assets and $516 million in current liabilities for a working capital of $592 million. This is $100 million more than what it had when it began the year.

Falconbridge’s net-debt-to-net-debt plus equity remains unchanged at 42%.The company has declared a dividend of 10 per common share, 2 per Series 1 preferred share and 36.72 per Series 2 preferred share. Nearly $41 million was doled out during the second quarter.