Inco aims to sustain record output of PGMs

While it has benefited strongly from higher nickel and copper prices of late, Inco (N-T) expects platinum group metals (PGMs) to remain a valuable byproduct at its operations.

At its flagship Sudbury operations in 2002, Inco produced a record 431,000 oz. PGMs, consisting of 224,000 oz. platinum, 189,000 oz. palladium, and 18,000 oz. other PGMs, including rhodium, ruthenium and iridium. In 2001, the company produced 405,000 oz. PGMs in Sudbury; in 2000, 342,000 oz.; and in 1999, 326,000 oz.

Production of PGMs in 2003 is scheduled to decline to 355,000 oz., consisting of 180,000 oz. platinum, 145,000 oz. palladium, and 30,000 oz. other PGMs. Projections for the first, second, third and fourth quarters are 90,000 oz., 80,000 oz., 75,000 oz. and 110,000 oz., respectively.

Inco does not hedge its nickel output. However, by the end of 2002, it had hedged 42% of this year’s platinum production at an average price of US$550 per oz., and 9% of its palladium production at US$830 per oz.

(At presstime, spot prices for platinum and palladium were US$675 and US$250 per oz., respectively, and, at the end of January, the consensus price assumptions for 2003 among sell-side analysts were US$571 and US$260 per oz. platinum and palladium, respectively.)

“We will not benefit as much from PGM hedges this year as we did in the past two,” said Chief Financial Officer Farokh Hakimi, who spoke at a presentation to analysts in early February. He added that the hedges were put in place to “stabilize cash flow as we grow.”

Inco expects to post a US$12-million gain this year from PGM hedges, down from US$19 million in 2002 and US$23 million in 2001.

This year’s lower byproducts credits are expected to tack on US10-15 to Inco’s overall cash costs, which are expected to rise by US20, to US$1.65-1.70 per lb. nickel (the remaining US10 rise is attributed to higher pension and energy costs.)

With lower PGM output and realized prices expected in 2003, production of those metals will likely contribute US9-19 in earnings per share, or around US$16-35 million.

On the upside, Inco calculates that every US$50-per-oz. rise in platinum or palladium prices would increase this year’s earnings by US1 or US3 per share, respectively.

“In Ontario, our big challenge is to get more PGM production, which will decline in 2003 as the Copper Cliff North 138 orebody approaches depletion,” says Chairman Scott Hand. “We aim to bring annual PGM production back to the 400,000-level beginning late this year.”

With Inco’s platinum-to-palladium production ratio averaging around 55-to-45, this means that, at an annual rate of 400,000 oz., the company will likely produce about 206,000 oz. platinum and 170,000 oz. palladium in 2004.

“We expect to achieve our PGM objectives by mining orebodies with higher PGM concentrations, such as the 170 orebody at the Coleman mine,” says Ron Aelick, president of Canadian operations. “We are accelerating exploration and orezone definition in key areas [and] will focus on profitable cash flow, whether it comes from nickel, copper or PGMs.”

Meanwhile, the imminent expansion of the Acton refinery in England is expected to reduce Inco’s PGM refining costs and processing-cycle time.