Globe and Mail Inco Analysis:
Tue Mar.24,1998
Page: B22
Byline: Eric Reguly
Stock in the News -- Analysis
Inco at mercy of outside forces
Low metal prices, Voisey's Bay troubles sap analysts' enthusiasm for
nickel giant's shares
BY ERIC REGULY
Investment Reporter
If there were ever a company that is losing control of its future, it is Inco Ltd. Inco, the Western world's largest producer of nickel, is at the mercy of world nickel prices (falling), persistent takeover rumours (growing) and a Newfoundland government (angry) that fears the company will renege on a commitment to build a $1.4-billion smelter and refinery to process the concentrate from the new Voisey's Bay site in Labrador.
With so much uncertainty surrounding the company, it comes as no surprise that almost every analyst on Bay Street and Wall Street has a "neutral" or "hold" recommendation - widely regarded as a euphemism for "sell" - on the shares. "The stock looks expensive at current levels, given the outlook for nickel prices," said Nick Majendie, the research director at Vancouver's C.M. Oliver.
Inco has been on a downward trajectory since this time last year, when nickel prices went into freefall. Since then, the shares have posted a loss, including dividends, of about 43 per cent. The shares closed yesterday at $28.30 (Canadian), or slightly above Inco's book value of $28 a share. Inco's market value of $4.5-billion is only about 5 per cent more than the $4.3-billion it paid for the Voisey's Bay property in two transactions in 1995 and 1996.
At these prices, the shares should be the bargain of the century. But the consensus is they are still too expensive. In a recent report, Ernie Nutter, mining analyst at RBC Dominion Securities Inc. in Toronto, put a "reduce" recommendation on both the Inco and VBN shares, a class created in 1996 to reflect an interest in the Voisey's Bay project. The VBN shares pay 80 per cent of the dividend paid to holders of Inco common shares.
Mr. Nutter is no fan of either stock because of the gloomy outlook for the price of nickel. His long-term forecast is $3 (U.S.) a pound, compared with the current price of about $2.40. When Inco bought Voisey's Bay, the price was about 35 per cent higher. Nickel prices have been on the wane since 1988, when the cash price on the London Metal Exchange peaked at $10.84 a pound.
Low nickel prices are not the only reason for analysts' lack of enthusiasm. Other worries include the environmental and social liability costs of the operations in Sudbury, Ont., where the company plans to close mines and cut jobs in an effort to save about $75-million (Canadian) a year. More importantly, the startup costs and the scope of Voisey's Bay are anyone's guess.
Voisey's Bay is turning into a nightmare for Inco. When the company bought the site from Diamond Fields Resources Inc., controlled by mining promoter Robert Friedland, it was touted as the development that would secure Inco's fortunes well into the next century. Inco was convinced that the enormous size of the reserve and the extremely low production costs would effectively allow it to control world nickel prices.
What a difference a couple of years makes. Inco now admits privately that it probably overpaid for Voisey's Bay because of the low nickel prices - analysts believe the purchase price was based on nickel at $3.50 (U.S.) a pound - and because it is unsure exactly how much nickel-bearing ore really exists.
The company says it is secure in the knowledge that the so-called ovoid, the surface deposit, can produce a torrent of cheap nickel for about eight years, but has no idea yet whether the underground reserves can justify sinking a mineshaft to keep the mine going once the ovoid is exhausted. Some analysts think Inco will have to come clean and take a hefty writedown on the value of Voisey's Bay later this year.
Enter the Newfoundland government. Premier Brian Tobin and his chief negotiator on the Voisey's Bay project, Bill Rowat, insist they have a commitment from Inco to build a smelter and refinery in Argentia, a deep-sea port in Newfoundland that used to be a U.S. military base. Inco, however, no longer wants to build the complex because it does not think the price of nickel and the known Voisey's Bay reserves can justify the investment.
Inco wants to avoid the expense of building a smelter by shipping the concentrate to existing smelters around the world, including the one in Sudbury, which will have plenty of spare capacity when the nearby mines are closed.
Newfoundland is not backing down. It says a commitment is a commitment and is not buying Inco's argument that Voisey's Bay would turn into an economic basket case if the company is forced to spend $1.4-billion or so in Argentia. The government has hired independent appraisers to back its belief that the ovoid is so rich that Voisey's Bay will be the most profitable nickel mine in the world whether or not a smelter is built. Newfoundland government insiders say they will make the appraiser's figures public later in the spring, when Scott Hand, Inco's president, is scheduled to open talks on the smelter.
Inco shareholders, of course, need all the help they can get and would love to see the smelter cancelled. They should not count on it, though. The government has stated that no mining permit will be issued unless the smelter is built.
Do not be surprised if Inco takes the brinkmanship game to the point where it threatens to put Voisey's Bay in cold storage for several years.
Bottom Line
Given the outlook for nickel prices and the uncertain outcome of the battle over the Argentia smelter, Inco shares may be risky even at today's depressed prices. Takeover speculation has crept into the stock, but analysts say bidders are unlikely to emerge until it becomes clear whether a writedown is in store for Voisey's Bay.
Inco Ltd.: Vital statistics
Head office: Toronto
Telephone: 416-361-7511
TSE symbol: N
Business: Produces nickel and nickel alloys, as well as copper, cobalt, suphurix acid and precious metals around the world.
Share values
Trailing 12-month earnings a share.............$0.34
Trailing 12-month PE ratio......................83.9
Annual dividend................................$0.14
Dividend yield..................................0.5%
52-week high..................................$48.75
52-week low....................................$21.35
Last close.....................................$28.30
Change from previous...........................+$1.20
1-year total return..............................-41%
59-month average return...........................-9%
Top mutual fund holdings
% of total market value, as of Dec. 31, 1997
Caldwell Canadian Equity..........6.8
Caldwell Associate................6.3
Caldwell International............6.3
Members Mutual....................5.4
AIM Global RSP Income.............3.4
Allstar AIG Canadian Equity.......3.0
Trimark RSP Equity................3.0
Trimark Canadian..................2.9
Green Line Resource...............2.8
Trimark Select Canadian Growth....2.7
Industrial Alliance Stocks........2.4
North-West Life Ecoflex A.........2.4
Industrial Alliance Ecoflex A.....2.4
Maxxum Natural Resource...........2.1
Industrial Alliance Diversified...1.3
North-West Life Ecoflex D.........1.3
Sources: Bloomberg Financial Services; Datastream; Globe Information Services; Globe HySales |
