BUY Inco Ltd. (N:TSE:$22.35, N:NYSE:US$16.73 Issued 181.7M)
Greg Barnes (416) 869-3092 greg_barnes@canaccord.com
HIGHLIGHTS
* Inco beats consensus reporting EPS of US$0.39
* Company's most profitable year since 1990
* Mike Sopko steps down as CEO to be replaced by Scott Hand. Peter
Jones becomes president and COO
* Tax regime for Goro close to ratification - 15 year tax holiday
positive for the project
Recommendation: BUY
Target price: US$24.50
52-week price range: US$21 5/8 - 13 5/8
Shares O/S: basic 181.7M
Price: book ratio 0.64X
Working capital: US$365M
Long-term debt: US$952M
Market capitalization: US$3,039M
Enterprise value: US$3,992M
Sector: Metals & Minerals
Website: www.inco.com
Inco reported solid fourth quarter results beating First Call
consensus by US$0.03/share. EPS for the quarter were US$0.39, ahead
of consensus (US$0.36) and our estimate (US$0.37). Q4/99 earnings
were US$0.18/share (impacted by the strike at the Thompson, Manitoba
operations). Cash flow before changes in working capital for the
quarter was US$1.04, which compares to US$0.77 for Q4/99.
Dr. Mike Sopko announced yesterday that he will step down as CEO of
Inco after the company's AGM on April 25. Replacing him as CEO will
be Scott Hand, formerly president. Peter Jones will assume the role
of president and chief operating officer. These management changes
should bring a new dimension to the company as it embarks on an
aggressive growth strategy that could see the development of two major
projects - Goro and Voisey's Bay - within the next 5-7 years.
The company realized a nickel price of US$3.60/pound during the
quarter vs. US$3.68/pound in Q4/99. The company's realized copper
price in Q4 was US$0.88/pound vs. US$0.82/pound in Q4/99. Inco's
realized nickel price during the quarter was US$0.22/pound higher than
LME prices. Inco indicated that it continues to expect to receive a
US$0.15-0.20/pound premium to LME nickel prices in 2001.
Cash operating costs (before by-product credits) for the quarter were
US$1.53/pound, US$0.26/pound higher than for the same period in 1999.
Costs were pushed higher by several factors including higher fuel
prices and costs for external feeds. For Inco as a whole, higher fuel
prices drove cash costs higher by US$0.08/pound nickel year-over-year.
Skyrocketing palladium prices in 2000 helped pushed Inco's cash
operating costs after byproduct credits down to US$1.24/pound nickel,
marginally higher than the US$1.23/pound reported in 1999.
Inco's 2001 production target is 461 million pounds of nickel, which
compares to 447 million pounds in 2000. Inco indicated in early
January that it intends to increase PGM production in 2001 to 416,000
ounces from 342,000 ounces in 2000, an increase of 22%. Since 1989,
Inco has delivered, on average, about 300,000 ounces of PGM's annually.
Inco's balance sheet has improved considerably over the course of 2000.
At the end of Q4, the company was carrying cash and marketable
securities of US$193 million vs. US$38 million at the end of 1999. In
addition, long-term debt was reduced by US$314 million over the same
period to US$1,030 million. The company's net debt in relation to net
debt plus equity declined to 23% during the quarter from 29% at the
end of 1999.
A tax regime has been negotiated with the territorial government of
New Caledonia that includes a 100% tax holiday for Goro over its first
15 years and a 50% tax holiday for the ensuing five years. The tax
holiday includes import, export and income taxes. The tax regime is
expected to be passed into law by the New Caledonia government by June.
Management indicated that they are fully confident that the
legislation will be passed and that they are not waiting for this to
occur before they give a full green light to development.
Inco management continues to like the medium term outlook for nickel.
In the shorter term, however, the impact of the Falconbridge strike
and expected lower exports from Russia have been offset by higher
scrap availability. If level of exports from Russia is about 175,000
tonnes, or similar to 2000 levels, Inco is expecting a deficit in the
market of 10,000 tonnes of nickel. In the medium term, the supply
side of the market continues to look positive with very little new
capacity coming onstream and the company believes that there is little
likelihood of an oversupply scenario developing.
Inco is well positioned to continue its role as the Western World's
largest supplier of nickel. The company is also focusing its drive
towards generating more of its revenue from high margin special
products such as powders and nickel foams. In 2000, the special
products business generated US$250 million in revenue and by 2004, the
company hopes to increase this to more than US$400 million. In
addition, management stressed yesterday that they are committed to
both the Goro and Voisey's Bay projects - and the potential that both
could be developed almost simultaneously (with partners entering the
projects). With a new tax regime almost in place in New Caledonia and
a new premier in Newfoundland, significant advances on both projects
look possible in 2001. We believe that the market will also react
positively to the management changes at Inco announced yesterday.
Inco remains as one of our top picks in the base metal sector and we
are maintaining our BUY recommendation and our US$24.50 target price. |
