Falconbridge predicts growth in base metals

Though depressed metal prices curtailed first-quarter earnings for Falconbridge (FL-T), company president Oyvind Hushovd told shareholders at their recent annual meeting that brighter times are ahead.

“We continue to experience very strong demand for our main metals [nickel and copper],” said Hushovd. “However, right now negative sentiment is dominating the markets.”

Hushovd said that markets for nickel and zinc are expected to stay balanced for the remainder of the year, but copper production will slightly exceed demand. On the potential for improved prices, he noted that uncertainty in the ability of nickel producers to meet quotas could tighten that market and result in better prices later in the year. He also anticipates a modest increase in the price of zinc.

Low metal prices hurt the company’s bottom line in the past quarter. For the three months ended Mar. 31, Falco reported consolidated earnings of $2.2 million (or 1cents per share) on revenue of $443.2 million, compared with $46.1 million (21cents per share) on $502.9 million in the corresponding period of 1996.

Operating income between the two periods fell to $10.2 million from $75.2 million. The company reported cash flow from operations, excluding net changes in receivables, inventories and payables, of $44.3 million in the recent quarter, compared with $101.5 million in the year-ago period.

The past quarter saw Falconbridge realize an average of US$2.62 per lb. of nickel sold and US79cents per lb. of copper. Those prices are 88cents and 33cents, respectively, less than realized prices in the corresponding quarter of 1996. Zinc was also sold at a slightly lower price, however, good selling prices were reported for Falco’s silver, cobalt, platinum and palladium.

Most of the company’s $199.1 million in capital expenditures last quarter went to the Collahuasi copper project in northern Chile, in which Falconbridge holds a 44% interest. Hushovd says project development is ahead of schedule and he expects the oxide plant to be commissioned shortly, followed by full production later in the year.

During the quarter, the major also shipped the first concentrate from its Raglan nickel-copper project on Quebec’s Ungava Peninsula to Sudbury for processing. The mine, which will boost the company’s Canadian nickel production by 50%, is not expected to contribute to earnings until the fourth quarter, as an agreement with a local Inuit-firmed firm, Makivik Corp., prevents shipping from mid-March to mid-June.

Both Raglan and Collahuasi are low-cost producers. Raglan’s operating costs are projected at US$1.50 per lb. nickel, net of byproducts, based on yearly production of 21,000 tonnes nickel, 5,000 tonnes copper, 200 tonnes cobalt and significant quantities of precious metals. Costs at Collahuasi are expected to vary between US45cents and US50cents per lb. copper, based on annual production of 350,000 tonnes copper in concentrate and 50,000 tonnes copper cathode.

Cost-cutting measures implemented at Falco’s other operations are also expected to reach projected targets by 2000. At Falcondo, Falconbridge’s Dominican Republic-based subsidiary, the cost of producing a pound of nickel in ferronickel is anticipated to drop to US$1.75 this year, from US$2.17 in 1997, assuming a constant oil price. Similarly, operating costs at the Sudbury division are expected to fall 26cents from 1997 costs of $1.56 per lb. nickel, partly through a cooperation deal with Inco (N-T).

Falconbridge expects to be able to lower its capital expenditures this year to $600 million, from a record $1 billion in 1997; they are expected to fall to $300 million in 1999.

Looking further ahead, Falconbridge believes growth trends for copper and nickel will continue to outpace the global economy. Accordingly, the company hopes to double its yearly nickel production to 200,000 tonnes per year and triple its annual copper production to between 400,000 and 500,000 tonnes by 2010.

“The stainless steel sector, which consumes two-thirds of the world nickel supply, has been expanding at a long-term annual rate of 5.3%,” noted Hushovd. “Based on this, and growth in other sectors, long-term nickel consumption is forecast to increase by more than 4% annually.

“Copper consumption has grown at roughly 3% a year since the 1980s and demand is expected to continue to grown at more than 3% for the foreseeable future.”

A portion of the company’s long-term plan for production growth may come from Raglan, where studies for expansion are ongoing. Husvold says the company hopes to increase annual production there by 50%, to 30,000 tonnes nickel. The capital costs for expansion are expected to be relatively small, while the increased output is expected to reduce unit cost.