Price woes hit nickel industry — Inco, Falconbridge both lose money in ’98

Canada’s two big nickel-copper producers were hit for losses in 1998, as markets for both metals went into tailspins. But Inco (N-T) is sticking to its carrying value for the stalled Voisey’s Bay project in Labrador, defying speculation that it would write the value down as part of its year-end accounting.

Inco showed a loss of US$76 million on 1998 revenue of US$1.77 billion, compared with a profit of US$75 million on US$2.37 billion in revenue in 1997. After dividends, the 1998 loss was US$104 million, or 25 cents per common share.

For crosstown rival Falconbridge (FL-T), the year was a little brighter than Inco’s, with a loss of $36.4 million on revenue of $1.67 billion in 1998. Over the previous year, Falco earned $137 million on revenue of $2.09 million.

Inco, on releasing its year-end results, also announced it would suspend its 10 cents annual dividend on common shares. This eliminates the dividend on the Voisey’s Bay Nickel share series, which is calculated as a fraction of the common dividend. Inco’s E-series preferred shares will retain their dividend.

Nickel production costs for Inco fell to US$1.31 per lb. in the final quarter of 1998, and average costs for the year were US$1.52, a decline of 11% over the year. Inco got lower prices for copper and cobalt, and higher prices for its platinum group byproducts.

Other corporate expenses were down 18%. The company’s total costs in 1998 were about 85% of the total in 1997, but revenues declined faster.

Inco’s cost-cutting program, which included a significant decrease in the workforce at its Ontario and Manitoba divisions, has realized about US$175 million in savings in 1998, ahead of the goal Inco set in early 1998. This has come at the cost of about 1,000 jobs in Sudbury, Ont., and Thompson, Man., though most have been cut through attrition and early retirements. By 2000, Inco expects to realize annual savings of US$215 million.

The Garson mine in Sudbury, whose future was being reviewed, has reached its production-cost goals and will remain in production. The Stobie mine is still under review, and three others — Little Stobie, Levack, and McCreedy West — will close as scheduled. Inco closed both the Frood mine, near Sudbury, and the Shebandowan mine, west of Thunder Bay, in 1998.

Inco’s capital expenditures in Canada fell but rose at its Indonesian subsidiary, where plant expansion ate up US$229 million, and at the Goro project in New Caledonia. Company-wide capital expenditures were US$437 million, down from US$535 million in 1997. In 1999, Inco expects to spend about US$235 million, including $104 million in Indonesia. Exploration budgets, which totalled US$30 million in 1998, are expected to remain the same; about US$15-20 million will go into work at Voisey’s Bay, where a revised resource estimate is scheduled in the next few months.

The company revised its planned 1999 nickel production to 185,000 tonnes, down slightly from an earlier forecast. The Sudbury and Thompson operations will have an extended summer shutdown this year, which will probably be a minimum of five weeks.

The Voisey’s Bay project, which is awaiting resolution of environmental and land-claims issues, remains on Inco’s books at its carrying value. Anthony Munday, Inco’s chief financial officer, says the decision not to write the value down had the approval of the company’s external auditors.

Negotiations with the Newfoundland government over the development broke off in July and have not resumed. Inco proposed a mine and mill at Voisey’s Bay, but the government has insisted that the company also build a smelter and refinery at Argentia, on the Avalon Peninsula. With the Liberal government under Brian Tobin returned to power in the Feb. 9 provincial election, Scott Hand, president, speculated that negotiations with the government might begin again. “The election’s over,” said Hand. “It seems to me this is a time we can recommence and have a dialogue. . . . it’s not a big deal how it happens.”

The Premier was also quoted by news services as suggesting Inco was ready to come back to the table.

Even in a year of weak metal prices, Falconbridge’s Integrated Nickel Operations division — the Sudbury and Raglan mine-mill complexes and the Kristiansand refinery in Norway — turned an operating profit of $9 million, and the Kidd Creek division, $57 million. Falconbridge Domincana surmounted a 3-month production shutdown — dealt by Hurricane Georges and the ferronickel market — to make $6 million.

Even though operating costs fell, all three divisions showed lower profits that could not carry the corporate costs. Those costs included greater net interest charges, which swelled to $59 million in 1998 from $39 million in the previous year.

The silver lining in Falco’s cloud was a doubling in capacity, following the commissioning of the Raglan mine in Quebec and the Collahuasi mine in Chile. With Raglan having entered commercial production in June 1998 and Collahuasi in January 1999, the company expects to keep capital expenditures to $175 million in the current year.

Falconbridge realized an average of US$1.91 per lb. nickel (US$4,210 a tonne), against an London Metal Exchange spot average of US$4,678 for 1998. The company’s realized price for copper, at US74 cents (US$1,630 a tonne), was also below LME average; zinc, at US48 cents (US$1,060) was slightly better.