The good times did not last long for
Pinning the blame on falling metal prices, a strike in Sudbury and production difficulties at the Kidd division, the company posted first-quarter earnings of just $4.6 million (1 per share) on revenue of $532 million, down from the $109 million (60) earned on $666 million during the corresponding period last year. Operating income for the quarter was an anemic $11.3 million, compared with $173.4 million a year ago.
With the U.S. economy cooling off dramatically, Falco suffered an across-the board reduction in the average realized prices of its bread-and-butter metals during the first quarter: nickel plummeted 24% to US$3.18 per lb.; ferronickel was off 19% to US$3.19 per lb.; copper fell 6% to US$0.77 per lb.; zinc slipped 11% to US$0.56 per lb.; and silver sagged 17% to US$4.54 per lb.
In Sudbury, Ont., the company’s 1,250 production and maintenance workers — represented by the Canadian Auto Workers union (Local 598) — signed a 35-month collective agreement in February, ending a six-and-a-half-month strike.
Falco also reached a 3-year collective agreement with its Sudbury-based office, clerical and technical workers, who are represented by the United Steelworkers of America (Local 2020, Unit 6855).
The strike cost the major an estimated $55-million (31 per share) during the first quarter, including a $35.6-million reduction in earnings and a $19-million drop in sales.
Falco’s Sudbury mines operated at 20% of normal capacity during the strike, while the smelter ran at 50-60%. Smelter deliveries were from three sources: on-site concentrate inventories; Sudbury mine output; and the Raglan mine in Quebec, which operated at full capacity during the quarter and is expected to produce 24,000 tonnes of nickel in concentrate this year.
Falco expects its entire Sudbury operations to be back at full production by June and predicts that mine production there this year will reach 25,000 tonnes nickel and 24,000 tonnes copper, both in concentrate.
The Sudbury strike also reduced the amount of feed being shipped to Falconbridge’s Nikkelverk refinery in Norway, resulting two 2-week shutdowns in the first quarter. Nikkelverk now expects to produce 66,000 tonnes of nickel and 26,000 tonnes of copper in 2001.
To help ensure Nikkelverk keeps operating at full capacity, Falco signed an agreement with Botswana’s Tati Nickel Mining Co. for the processing of up to 11,000 tonnes of nickel-in-matte per year by 2002-03.
At Falconbridge’s Kidd mining division, near Timmins, Ont., copper and zinc production was down in the first quarter as a result of ground movement earlier at the Number 1 mine.
Kidd incurred a loss of $6.2 million for the quarter, compared with a contribution of $7.1 million for the corresponding three months of 2000. The loss reflects lower prices for copper and zinc, a $2.7-million restructuring charge, and higher volumes of custom feed with lower profit margins.
Falco expects production at Kidd to fall 17% in 2001 to 2 million tonnes, or 40,000 tonnes of copper in concentrate and 80,000 tonnes zinc in concentrate. The company says it is addressing its lower production numbers by reducing its workforce by 121.
This year at Kidd, Falco is spending $76 million of its $300-million capital budget on the $640-million Kidd Deep project, which is designed to extend the operation’s life by 18 years to 2024 and create the deepest base metal mine in the world. Management expects Kidd Deep to be generating cash flow by 2004.
The company’s 85%-owned nickel mining subsidiary in the Dominican Republic, Falcondo, operated at close to capacity during the quarter, contributing $1.9 million in earnings, compared with income of $12.6 million during the first quarter of 2000.
In northern Chile, the massive Collahuasi copper mine, ownership of which is shared by Falconbridge (44%), operator
Falco’s share of Collahuasi’s earnings during the first quarter was $14.4 million, compared with $18.7 million a year ago. The decline is attributed to lower copper prices and ore grades, though these were partially offset by higher sales volumes.
In a deal expected to close soon, Falconbridge and parent company
In New Caledonia, Falco says its early-stage Koniambo nickel-laterite project remains on-track, with a prefeasibility study under way and due at year-end. Diamond drilling and an environmental baseline study have already been completed, and the company has decided to use coal as an energy source.
At the grassroots exploration level, Falconbridge and South African major
Looking ahead, Falconbridge President Oyvind Hushovd told shareholders at the company’s annual meeting in Toronto that demand for nickel “remains weak as the economy continues to struggle.”
Still, he sees some positive signs for nickel: a reduction in Russian exports; a tightening of scrap availability, especially in Europe; the financial difficulties of the Australian laterite producers; and low levels of London Metal Exchange stocks.
In the copper market, Hushovd said a slowdown had begun early this year but that, overall, the company expects to see a balanced market in 2001. With respect to its Sudbury operations, Hushovd said, the company faces some critical issues: “The mineral reserves are declining and we need to significantly improve the operating costs and efficiencies in order to extend [their] life.”
He said the company was dealing with these challenges in four ways: by reorganizing Sudbury into two separate business units and cutting overheads; by renegotiating its union contracts and streamlining its workforce; by solving capacity problems at the Sudbury smelter; and by stepping up exploration efforts in the area, in particular at the 14-million-tonne Onaping Depth project.
Hushovd praised the Ontario government for lightening the company’s tax load but expressed concern that a hike in electricity prices will boost production costs by about $15 million annually.
For shareholders, Falco has declared dividends of: 10 per share, payable May 14; 2 per preferred share (series 1), payable June 1; and 36.72 per preferred share (series 2), payable June 1.
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