Facing sudden and significant cost overruns,
The company is beginning a 6-month engineering review of the project, in which it will be looking for ways to squeeze Goro’s capital costs and improve the expected return.
Goro, which has a reserve of 54 million tonnes grading 1.53% nickel and 0.12% cobalt and an additional measured and indicated resource of 99 million tonnes grading 1.4% nickel and 0.14% cobalt, had been scheduled to enter production in late 2004. It was scheduled to produce nickel at a rate of 55,000 tonnes annually, with 4,500 tonnes of cobalt coming out as a byproduct.
The review, which will examine all aspects of the project’s scope and design, is expected to delay production at least six months and could hold it up for a full year. A deal with
Inco decided to review Goro when contractors told the company that the capital cost could end up being 30-45% more than the US$1.45 billion estimated in a March 2001 feasibility study.
Inco wants to come up with a capital cost for Goro that will be low enough to be “consistent with the returns that we require,” says Inco Chairman Scott Hand. (He later said Inco estimates its cost of capital at 9-10% and aims for an internal rate of return of 12-15% on its projects; that in turn implies capital costs need to come in at around US$1.7 billion at Goro.)
While the announcement of the large potential overrun came as some surprise, it has been known since September that Goro was unlikely to meet budget. In early September there were work stoppages by employees of some of the subcontractors, and some “non-critical” construction activity — that is, work that would not greatly affect the project’s time line — was delayed. Inco began an internal review of the project that month, estimating at the time that construction could go about 15% over budget and warning of a “slight slippage” in the production schedule.
The nickel giant has already spent US$350 million on Goro and has committed to spending a further US$300-350 million. Hand says the committed expenditures were mainly on items the company still expected to go ahead with, so ongoing work is not being halted. He adds that the company will still be taking delivery of the project’s autoclaves and acid plant, which are under construction, and points out that, at this stage, penalty clauses in the contracts would make cancellation about as costly as completion.
Administrative and permitting activities for Goro will continue during the review.
In an analysts’ conference call in early December, Inco management said the overruns were “not process-related” but mainly caused by geo-technical problems and requirements for infrastructure “based on certain pilot plant work and related developments.”
Said Hand: “We cannot proceed with Goro unless we have an economically feasible project.”
The price tag for the geotechnical problems was initially estimated at US$230-250 million.
Inco President Peter Jones said a large part of the additional cost is related to earthmoving at the large laterite operation. That has been widely taken to mean that there will be hitherto unexpected water seepage in the excavation, which might make handling difficult and affect operating costs, as well as capital costs. Jones said that nothing in the information from the contractors indicates a change in expected operating costs, though Hand remarked “we’ll review that as well.”
Jones said the company had not yet looked closely at the source of the new costs: “They really are something that was dropped on us in the last few days.”
Among the options Inco will consider is moving from contracted to owner-operated work on some of the construction. “We’ll look at whether some of these things are better self-performed,” said Jones.
Another area where capital cost overruns have been identified is in mechanical and electrical infrastructure, which is now expected to be about US$160 million above the original budget. Part of that is a requirement for more pipe, and changes in material specifications.
Inco has not identified any difficulties with the nickel recovery process, a variant on the pressure acid leach (PAL) technique pioneered on Western Australian dry-laterite deposits such as Murrin Murrin, Cawse and Bulong. The Australian operations have fallen very short of their promised performance, with Cawse owner Centaur Mining going into administration, Murrin Murrin developer Anaconda Nickel facing creditor problems, and Preston Resources, Bulong’s owner, turning the operation over to its lenders.
Inco has consistently said its PAL process, which uses different solvent-extraction reagents from those used at the Australian plants, had been exhaustively tested in the US$50-million Goro pilot plant, and would work well at commercial scale.
The decision to take delivery on the autoclaves and acid plant suggests Inco is still confident its PAL process will work economically.
Inco had planned to apply this year for favourable tax concessions from the French government, tax rules Inco expected to be entitled to and which had a significant effect on the project’s economics. That application has been placed on hold, but the company expects to be able to apply for the same tax package next year.
Hand also said Inco’s projections for nickel shortages through to about 2005 remain roughly intact, and that Goro would have supplied about 35,000 tonnes that year had it remained on schedule. Curiously enough, nickel prices fell following Inco’s announcement. Spot London Metal Exchange nickel was down to US$7,180 per tonne on Dec. 6, down US$180. LME 27-month contracts — roughly corresponding to the time when Goro would have come on-stream — were fixed at US$7,035, down US$75.
Be the first to comment on "Inco reviews Goro development"