Inco hit by weak demand

Low nickel prices cut deep into Inco’s (N-T) sales revenue and pulled the major back into the red during the third quarter.

For the three months ended Sept. 30, Inco lost US$24 million (or 18 cents per share), compared with net earnings of US$5 million (or a loss, after dividends, of 2 cents per share) during the corresponding period last year. For the first nine months of 1998, Inco lost US$63 million (50 cents per share), compared with earnings of US$79 million (32 cents per share) a year ago.

Net sales from continuing operations amounted to US$369 million in the third quarter and US$1.36 billion for the first nine months of 1998, compared with US$567 million and US$1.83 billion, respectively, in the corresponding periods of 1997.

“Our performance over the third quarter reflects the difficult current circumstances of the nickel market,” says Inco Chairman Michael Sopko. “However, our cost-cutting program is in high-gear: we are expanding low-cost, profitable production; we are aggressively pursuing our development projects; we are expanding value-added product lines which command premium prices over commodity nickel products; and, thank God, we are selling every pound of nickel we make.”

During the third quarter, Inco delivered 133 million lbs. nickel (compared with 151 million lbs. a year ago), 50.7 million lbs. copper (53.3 million lbs.), 1 million lbs. cobalt (1.2 million lbs.), 81,000 oz. platinum-group metals (60,000 oz.), 11,000 oz. gold (13,000 oz.) and 220,000 oz. silver (240,000 oz.).

Cash costs after byproduct credits were reduced to about US$1.40 per lb. nickel during the recent 3-month period, in spite of summer shutdowns in Ontario and Manitoba and lower production volumes in Indonesia caused by a lack of rainwater for power generation.

The company’s realized nickel price for primary nickel products averaged US$2.17 per lb. in the third quarter (the lowest value since the second quarter of 1987) and US$2.50 per lb. in the first nine months of 1998. This compares with US$3.29 and US$3.45, respectively, in the corresponding periods of 1997.

Vice-President of Marketing Peter Goudie says nickel demand has fallen because the steel industry has cut back on production in order to reduce inventories. He predicts the reduced demand will continue through the fourth quarter.

In light of this, Inco is scaling back its nickel production this year by about 20 million lbs. and is forecasting production of 420-425 million lbs. nickel for 1998, including about 80 million lbs. from Indonesian subsidiary P.T. Inco.

The bad news does not end there: the squeeze in world capital markets has made it difficult for Special Metals (SMCX-Q) to finance its US$408-million acquisition of Inco’s wholly owned subsidiary, Inco Alloys International. Inco President Scott Hand suggests there may have to be “a haircut” on the price of Inco Alloys in order to close the deal.

As part of its cost-cutting program, Inco has already chopped 1,264 employees from its workforce in 1998, and by year-end the company anticipates it will have eliminated 1,390 workers at its Ontario and Manitoba divisions, about 190 workers short of its 1998 target.

Three projects previously slated for termination — the Garson mine in Sudbury, Ont.; the low-grade area of the Stobie mine, also in Sudbury; and the Birchtree deepening project in Thompson, Man. — have been given a tentative reprieve, with miners, maintenance personnel, engineers, union and management representatives joining forces to propose and implement “non-traditional” cost-cutting measures.

At P.T. Inco, the commissioning of several expansion facilities has begun and the expanded process plant should be essentially finished by year-end, with new hydroelectric facilities to be completed in the second half of 1999. Because of construction delays, the cost of the total expansion project is expected to rise about 10% over the original US$580-million estimate.

The financing of the Indonesian expansion was the primary reason Inco’s total debt swelled by US$211 million over the past nine months, to US$1.7 billion at Sept. 30.

Meanwhile, in the French territory of New Caledonia in the South Pacific, activity is picking up at Inco’s Goro laterite-nickel project, where crews have been clearing land and building roads so that construction can begin in November. The Goro management team is in place, and by year-end they will be transferred to the island. Modules for a US$50-million pilot plant are being built in southern Ontario for shipment this winter.

Closer to home, at Voisey’s Bay in Labrador, Inco says there have been no further discussions with the Newfoundland government since talks were broken off in July following Inco’s refusal to submit to the government’s demand that a smelter and refinery be built in Argentia.

Still, there has been some progress. Since September, public hearings have been held in several communities in the province regarding the environmental impact statement covering the mine and mill. Hand says that while the hearings were opposed by the provincial government on the grounds that the project had changed, the panel ruled against the government and decided to proceed.

Things are brighter on the exploration front, with the recent discovery of two mineralized zones at Voisey’s Bay. One is a zone of disseminated mineralization drilled north of the Eastern Deeps into a feeder dyke; the other consists of similar mineralization and was outlined in the same geological environment, about 1 km southeast of the first zone. Drilling is ongoing and new resources are expected to be identified.

As well, high-grade mineralization was drilled deep beneath the Discovery Hill zone. The intercept comprised 61.9 metres (35 metres true width) grading 1.73% nickel, 0.7% copper and 0.12% cobalt at a depth of 1,550 metres.

In September, surface geophysical surveys and geological mapping were completed over a large area north of the main claim block. The resulting data are expected to be interpreted by year-end.

Regional exploration at the Kiglapait property, about 60 km north of the main claim block, was completed during the quarter, and further exploration of this area will be undertaken next year.