Falconbridge soars on buoyant base metals

Higher metal prices helped Falconbridge (FAL.LV-T, FAL-N) more than double its earnings during the first three months of 2006.

The company pocketed US$462 million (or US$1.21 per diluted share) on sales revenue of US$2.9 billion. During the corresponding period of 2005, earnings rang in at US$176 million (US58 a share) on US$1.9 billion.

The improved performance also reflects higher copper and nickel sales volumes, and improved treatment and refining charges at the company’s copper smelters and refineries.

During the quarter, Falco churned out 143,000 tonnes of refined copper, up 18% from a year earlier, owing to expansions at the Horne copper smelter and CCR refinery in Quebec. Refined nickel production edged 2% higher to 28,400 tonnes. On the flip side, refined zinc production slipped by 2% to 37,300 tonnes, mostly owing to lower grades at the Antamina mine in Peru.

Realized prices for copper and zinc increased 49% and 70% to US$2.29 per lb. and US$1.07 per lb., while the company’s realized nickel price fell by 3% to US$6.84 per lb.

Falconbridge CEO Derek Pannell expects the high metal price environment to continue during the second quarter, noting that prices on the London Metal Exchange at the beginning of the second quarter are already exceeding average prices for the first quarter.

On the cost side, operating expenses jumped by 50% to US$2.1 billion on higher prices for raw materials (up 67% to US$1.2 billion). Mining, processing and refining costs climbed 25% to US$743 million owing to increased production, higher energy costs, and a weakening greenback.

Looking ahead, Falconbridge expects to produce 635,000 tonnes of refined copper, 115,000 tonnes of refined nickel, and 210,000 tonnes of refined zinc during 2006.

Meanwhile, Pannell describes talks with the U.S. Department of Justice and the European Commission regarding its proposed takeover by Inco (N-T, N-N ) as “constructive.”

The Department of Justice is expected to deliver its verdict by the end of April. A decision from the European Commission could come as late as August.

Both regulators are concerned about the position the combined entity would have in the high-grade nickel market. Such nickel is used in nickel plating and in superalloys, which are employed in high-tech products, such as the rotating parts of jet engines.

Another hurdle the deal may soon face is a competing bid from Xstrata (XSRAF-O, XTA-L), which holds a 20.01% stake in Falconbridge. The Swiss-based miner picked up most of its shares from Brookfield Asset Management (BAM.LV.A-T, BAM-N), formerly Brascan, for around $2 billion in mid-August 2005.

The deal’s stipulation that Xstrata top up the compensation paid to Brascan if it goes for the rest of Falconbridge’s shares at a price higher than $28 per share expires in mid-May. Xstrata would also have to absorb a US$320-million break fee payable to Inco should Falco accept a superior offer. Inco retains the right to match any offer.

Labour pains

The next few weeks promise to be busy on the labour relations front for Falconbridge, with the miner needing to strike deals with unions at several of its operations.

The company is poised to tick one item off its to-do list, reaching a tentative deal with the United Steelworkers of America, Local 9449, which represents workers at the Raglan nickel-copper mine in Nunavik Territory in Quebec. The proposed deal will be put to an employee vote on May 26. Details of the agreement will be released upon ratification.

Likewise, a tentative deal has been struck at the Brunswick zinc-copper mine in Bathurst, N.B. Negotiations there have been helped along by government-appointed conciliators. Workers had been without a deal since the end of February.

Meanwhile, in Chile, workers at the Lomas Bayas open-pit copper mine recently handed their union a strike mandate. As at Raglan, the existing contract there expires at the end of April. At the Nikkelverk refinery in Norway, Falco has an additional month for negotiations, with that operation’s pact good through May.

Talks are also ongoing at General Smelting in Quebec, where workers have been without a contract since Jan. 31.

Looking ahead, labour contracts at the Antamina open-pit copper-zinc mine in Peru, Norandal foil fabrication plants in North Carolina, Tennessee, and Arkansas, and Altonorte copper smelter in northern Chile expire on July 24, Nov. 20, and Dec. 12, respectively.

In all, Falco employs 14,500 people at operations and offices in 18 countries.