PT Inco triples earnings despite constrained production

Higher nickel prices allowed Inco‘s (N-T) 59%-owned Indonesian subsidiary PT Inco to triple its earnings in 2002 despite lower production numbers.

For the the year ended Dec. 31, PT Inco’s net earnings were US$30.3 million (US12 per share) on US$321 million in sales, up from the US$9.3 million (US4) earned on sales of US$296 million in 2001.

Fourth-quarter earnings were US$5.7 million on sales of US$73 million, compared with the US$8 million lost on sales of US$56 million in the corresponding period of 2001.

PT Inco generates its revenue from its integrated mine and pyrometallurgical processing plant on the island of Sulawezi, situated near the town of Sorowako about 70 km inland from a shipping port near Malili.

The company’s nickel-laterite deposits at Sorowako are divided into two blocks — East and West — with each having a different chemistry, mineralogy and weathering profile developed over serpentinized (East) and unserpentinized (West) ultramafic bedrock.

West-block ore is a low-grade, boulder-saprolite clay mixture that PT Inco upgrades by rejecting boulders at screening stations before ore is fed into the processing plant.

Ore mined from the East block is said to be a more-typical laterite profile with variably weathered rock and saprolitic clay that requires less screen upgrading.

PT Inco’s nickel-in-matte production for 2002 totalled 59,500 tonnes, down from 62,600 tonnes a year earlier. The decline was driven mainly by fourth-quarter production, which slipped 20% year-over-year to 12,300 tonnes nickel in matte.

In 2002, the company realized an average US$5,114 per tonne (US$2.32 per lb.) for its nickel-in-matte deliveries, up from US$4,836 per tonne (US$2.19 per lb.) in 2001.

PT Inco says that production in 2002 was constrained by two factors: the “complexity” of the orebody; and the rebuilding of its no. 3 electric furnace, which should back online by April.

In a prepared statement, Edward Hodkin, PT Inco’s president and CEO, said that recent drilling, test pitting, and ore-blending programs have put the company “back on track” to supplying better nickel grades from the mine to the plant, and that the company continues “to work hard to reduce costs that are within our control.”

Specifically, PT Inco will be opening in 2004 a new, large East block-type orebody named Petea, which was drilled extensively last year and is still open to expansion. Petea is described as having good grades and being ideal for blending with ores from areas that are currently being mined.

In 2002, the mined ore grade increased to 1.77% from 1.70% a year earlier, and PT Inco is targeting a grade of 1.78% in 2003. Nickel recoveries are expected to remain at 89% this year.

Hodkin emphasized that, in the fourth quarter, PT Inco showed that its processing plant can consistently operate at feed rates equivalent to its design capacity of 150 million lbs. (68,100 tonnes) nickel in matter per year.

As a result, for 2003, PT Inco has upped its production target to 140 million lbs. (63,600 tonnes) nickel in matte, with cash costs expected to decrease US3 to US$1.36 per lb.

However, energy costs are rising at PT Inco, with the cost of a barrel of oil expected to rise from US$21.58 in 2002 to US$23.43 in 2003. PT Inco uses about 2.6 million barrels of oil annually, but the company has hedged 589,000 barrels of oil at US$18.18 apiece for 2003. (Current spot prices are in the neighbourhood of US$35 per barrel.)

PT Inco plans to use 200,000 additional barrels of oil in 2003 to produce 4,086 more tonnes of nickel-in-matte.

“We will be challenged by oil prices but far less than our competitors, because of our major hydroelectric-generating capacity (at PT Inco),” said Inco Chairman Scott Hand during a meeting with analysts in early February.

Accordingly, PT Inco is looking to maximize the usage of its 258-megawatt, Balambano hydroelectric dam, which has created the main Lake Towuti reservoir. In 2002, 98% of power from the dam was derived at a cash cost of US$0.0015 per kilowatt hour.

The company says it is closely watching water inflows to its reservoirs, which have averaged only 45% of normal during the latter half of 2002, bringing the reservoir 0.4 metre below normal at year-end. Rainfall in January recovered modestly to 72% of normal.

In terms of its cash-flow statement, after making debt repayments and spending US$42 million on capital expenditures, PT Inco’s net cash outflow in 2002 was US$21.0 million, compared with US$6.8 million in 2001.

Since PT Inco began its latest debt-repayment program in 2000, its long-term debt has been cut in half to US$269 million, and the company expects to have paid off the remainder by March 2006.

Also, as of Dec. 31, PT Inco reports that its nickel-in-matte inventory was 1,098 tonnes, compared with 2,043 tonnes at the end of the third quarter.

On the labour front, PT Inco signed a two-year collective labour agreement with its Indonesian workforce, effective from December 2002.

Meanwhile, PT Inco is looking at development opportunities elsewhere on Sulawezi, and in early February signed a joint venture with PT Aneka Tambang to supply the latter’s processing facility with saprolite ore from PT Inco’s Pomalaa East deposit, situated in the southeastern portion of the island.

PT Inco will spend US$2.8 million defining reserves sufficient for two years of production, and hopes to bring the deposit into production by 2005.

Inco President Peter Jones brushed off concerns relating to the political risk of operating in Indonesia: “While the political and social situation in Indonesia remains unsettled, we had no significant work interruptions last year…I was in Indonesia (at the end of January) and I came away feeling very positive.

“Our focus this year is on achieving significant productivity gains and enhancing our leading competitive position in Asia,” he continued. “Our major orebodies in Indonesia and our low-cost hydroelectric power represent a long-lived and low-cost operation.”