Cost-cutting Inco stays the course

Though encouraged by the recent buoyancy of nickel prices, Inco (N-T) remains determined to lower production costs as it strives to return to profitability.

For the first quarter of 1999, Inco posted a loss of US$16 million (or 13 cents per share) on net sales of US$438 million, compared with a loss of US$41 million (32 cents per share) on sales of US$500 million in the corresponding period last year.

During the recent quarter, Inco delivered the following: 62,030 tonnes of nickel in all forms (compared with 64,267 tonnes during the first quarter of 1998); 34,686 tonnes copper (37,252 tonnes); 466 tonnes cobalt (515 tonnes); 105,000 oz. platinum-group metals (62,000 oz.); 14,000 oz. gold (15,000 oz.); and 395,000 oz. silver (410,000 oz.).

Realized prices for the company’s primary nickel products (including intermediates) averaged US$5,181 per tonne (US$2.35 per lb.) in the first quarter of 1999, down from US$6,173 per tonne (US$2.80 per lb.) a year ago. (The London Metal Exchange average cash nickel price for the first quarter of 1999 was US$4,630 per tonne, or US$2.10 per lb.).

Inco’s realized price for copper averaged US$1,455 per tonne (US66 cents per lb.) in the recent first quarter, down from US$2,006 per tonne (US91 cents per lb.) a year ago.

The cash cost of nickel production, net of byproduct credits, was US$2,932 per tonne (US$1.33 per lb.) for the first first three months of 1999 — up slightly from US$2,888 per tonne in the fourth quarter of 1998 (due to lower byproduct prices) but down 18% from US$3,594 per tonne (US$1.63 per lb.) in the first quarter of 1998.

“As our costs come down, Inco will become the most profitable nickel producer in the world,” Chairman Michael Sopko told shareholders at the annual meeting in Toronto. “Inco is going to do more than merely survive; Inco is going to prosper.

“We continue to believe that the long-term growth in nickel demand is excellent and that it will be only a matter of time before prices return to higher and more normal levels.”

Capital expenditures were US$74 million during the recent first quarter, down from US$106 million a year ago. The decrease is mainly due to lower spending in Indonesia associated with the 50% expansion of Inco’s 59%-owned Indonesian subsidiary, PT Inco; that project is expected to be completed in the second half of 1999.

PT Inco lost US$2.1 million (1 cents per share) on net sales of US$30.6 million during the first quarter, compared with earnings of US$5.2 million (2 cents per share) on sales of US$44 million in the first three months of 1998.

Owing principally to the PT Inco expansion, Inco’s total debt rose to US$1.61 billion on March 31, 1999, up from US$1.52 billion at the end of 1998, giving the company a total debt-to-equity ratio of 27-to-73.

Work on a pilot plant at the 85%-owned Goro nickel-cobalt project in New Caledonia in the South Pacific is proceeding on schedule, with construction expected to be completed in August.

Meanwhile, Inco continues to be stymied by the Newfoundland government with respect to the Voisey’s Bay project in Labrador (T.N.M., Jan. 4-10/99). Although no formal negotiations are going on, the two sides are known to be meeting informally.

During the first quarter, Inco continued a limited drilling and geophysical exploration program at Voisey’s Bay. The company completed 13,434 metres of drilling, delineating extensions to known deposits and testing more regional geological and geophysical targets away from the main block area. An updated resource estimate is to be announced by mid-year.

A geophysical crew is testing the Franco target on the Kiglapait property, 60 km north of the main block area. While drilling there last autumn encountered narrow nickel mineralization, follow-up drilling will focus on a 6-km-long geophysical anomaly related to the base of an intrusion on the southwestern edge of the Kiglapait property.

In March, a Canadian federal court rendered a decision in the September 1997 action filed by a Newfoundland-based organization, whose members include environmental and other groups. This ruling, which has not been appealed, confirmed a decision made by a federal minister that the environmental review and approval process for any proposed smelter and refinery facilities be separate from the process governing the mine-mill project.

In April, a panel overseeing the environmental review process for the Voisey’s Bay mine-mill complex issued its report. The panel recommended that the mine-mill project proceed subject to more than 100 recommendations, which the company says can be addressed so long as they do not create unrealistic demands of the project.

In early May, Labrador’s Inuit reached a preliminary agreement with the federal and provincial governments to receive a $255-million land and self-government package. Voisey’s Bay will be covered by a separate deal that would give the Inuit 3% of any provincial revenue. The Inuit will vote on the deal this summer.

Also in May, Inco entered into a US$285-million bought deal with RBC Dominion Securities and Credit Suisse First Boston Securities Canada. Inco will be issuing 15 million Inco shares priced at $27.50 each (or US$19) for net proceeds of about US$273 million.

Inco says most of the funds will be used to repay the existing debt that financed the Goro project, the PT Inco expansion, and new mine development at the Ontario division.