Lower grades slow Inco’s earnings

An 85% drop in second-quarter earnings for nickel giant Inco (TSE) reflects predictions the company made at an analysts’ meeting last November.

“They warned us,” says Richardson Greenshield’s Ray Goldie, who forecasted earnings of 23 cents per share for the three months ended June 30. Inco reported a profit of US$30.3 million (28 cents per share), compared with US$203.9 million (US$1.94 per share) a year ago. In 1990, income was bolstered by the US$133-million partial sale of PT Inco, Inco’s Indonesian subsidiary.

“Sure it was a profound drop, but the reason was the sale of 20% of PT Inco,” said Bob Purcell, a spokesman for the company.

But the market was startled by the poor performance, shaving 62 cents off Inco’s share price on the day the results were released. Some analysts were forecasting per-share earnings of 45-50 cents.

At the end of last year, Inco warned investors to expect a 10% cost increase in 1991 as a result of lower nickel and copper grades, increased depreciation, and higher employment, energy and supply charges. (T.N.M., Nov. 26/90).

“The single main reason for the decline in earnings is grade,” confirmed Goldie. “They are mining about the lowest-grade ore in the company’s history.” At the company’s Ontario division, which accounts for about 50% of Inco’s total production, nickel grades average about 1.13%, down from more than 1.3% in 1986. In Manitoba, the depletion of the low-cost Thompson open pit north mine has pushed average grades to less than 2.5% from 3% in 1986. Inco has also been hit by lower copper prices. In the second quarter, the company realized an average price of US$1.05 for every pound of refined copper, compared with US$1.19 last year.

Earnings for the first half of the year totalled US$83.9 million (78 cents per share) compared with US$271.6 million (US$2.58 per share) in 1990. As the new labor contract at the Sudbury division kicks in the third quarter, Inco’s employment costs are expected to increase. Grades will likely remain steady until the beginning of 1992, when new higher-grade mines — including the I-D body at Thompson and the McCreedy East in Ontario — are brought into production.

At June 30, Inco had a total debt of US$1.25 million and a debt-equity ratio of 42-to-58.