Inco reviews phase II at Goro project
Inco Ltd N
Shares issued 185,322,236 May 21 close $41.97
Tue 25 May 2004 News Release
Mr. Steve Mitchell reports
INCO PROVIDES UPDATE ON KEY PRELIMINARY FINDINGS TO DATE OF PHASE 2 OF GORO
PROJECT REVIEW -- COMPANY REMAINS OPTIMISTIC ON GORO PROJECT
Inco has released the key preliminary findings reached to date as part of
phase II of the comprehensive review of its approximately 85-per-cent-owned
Goro nickel-cobalt project in New Caledonia. This review, which has
proceeded in two phases, began following the decision made in December,
2002, to suspend the project.
"Phase II of our review has progressed well, thanks to the skills and the
experience of our project review teams," said Inco's chairman and chief
executive officer, Scott Hand. "We have made good progress toward
confirming an operation that will add value to the company, will be
efficient and low-cost, and meet relevant environmental health and safety
standards, and will represent a significant contributor to New Caledonia."
The phase II review is currently expected to be completed in the late
summer of 2004. As previously indicated, this phase has involved a
structured process to further develop opportunities to reduce the project
capital cost estimate that had been identified in the first phase of the
project review completed in July, 2003. In addition, phase II includes the
development of an updated project cost-control estimate, an updated project
schedule, and an optimized and clearly defined scope and execution plan for
the project, as well as a value improvement program and continuation of
appropriate engineering work with the assistance of the joint venture of
the SNC-Lavalin and Foster Wheeler organizations, and other firms retained
to assist in this review.
As a result of the phase II review, the project's preliminary capital cost
estimate, taking into account the expected non-cash charge discussed below,
has been reduced to approximately $1.85-billion (U.S.), within a
plus-20-per-cent to minus-5-per-cent reliability range. This preliminary
estimate is within approximately 3 per cent of the $1.8-billion (U.S.)
capital cost estimate objective for the project that Inco had established
in August, 2003. This updated estimate includes the favourable impact of
approximately $500-million (U.S.) in reductions in the capital cost
estimate, offset by approximately $250-million (U.S.), relating principally
to unfavourable currency adjustments in view of changes in exchange rates
associated with certain expenditures which would be expected to be incurred
in Australian dollars, euros and certain other currencies, and cost
escalation in construction materials.
"We have developed a preliminary cost estimate that shows we continue to
move in the right direction to achieve our goal of a viable project," Mr.
Hand added. "As a result of the progress made to date, we have enhanced the
project's overall operability and increased its production capacity. At a
capital cost of $1.85-billion (U.S.) and using long-term prices for nickel
of $3 (U.S.) a pound and $7 (U.S.) a pound for cobalt, the project returns
would meet our long-term after-tax weighted average cost of capital of 9 to
10 per cent," Mr. Hand noted. "While we still have a number of key
milestones to be met, I remain very optimistic that we will reach a
decision to proceed later this year."
The phase II review to date has also reduced Goro's planned process plant
footprint by approximately 50 per cent from the original plan. This
development will enhance the plant's operability and maintainability, and
also result in considerable savings on concrete, structural steel, piping
and electrical requirements. In addition, this phase has identified certain
process improvements, including a move to direct heating from indirect
heating of the ore feed for the process plant autoclaves.
The work undertaken to date as part of this phase II review has also
resulted in an increase in the nameplate annual capacity for the planned
process plant, from approximately 55,000 tonnes of nickel and 4,500 tonnes
of cobalt to approximately 60,000 tonnes of nickel and 5,100 tonnes of
cobalt. The phase II review will continue to evaluate opportunities to
increase the nameplate capacity further based upon appropriate incremental
capital investments.
"As one of the world's best undeveloped orebodies, Goro is a very key part
of our growth strategy in nickel and has the clear capabilities to be
expanded significantly beyond its initial nameplate capacity in the
future," Mr. Hand noted. "We intend to continue to work hard to meet the
growing needs of our customers."
The principal changes from the phase II review in the planned Goro project
configuration, moving to direct heating of the ore feed and other changes
intended to reduce the capital cost estimate and enhance the operating
efficiency of the planned process plant, and the process itself is expected
to result in a material non-cash charge. As a result of such changes,
capitalized expenditures incurred to date in the range of $180-million
(U.S.) to $210-million (U.S.) are currently anticipated to be written off
as of the end of the second quarter of 2004. These changes have meant that
certain expenditures, principally engineering and related work associated
with the original project configuration and equipment purchased for the
indirect heating of ore feed, no longer would have any value for the
project or otherwise. It is currently expected that the precise amount of
this non-cash charge will be finalized by the end of the second quarter of
2004 and that there will not be any substantial difference between a pretax
and after-tax amount.
"We are managing to increase production and efficiency in a plant with a
significantly smaller footprint, without cutting any corners in the areas
that will produce revenue," said Peter Jones, Inco's president and chief
operating officer. "Even as we reduced the project's cost, we have been
very careful not to compromise its design," Mr. Jones noted. "In fact, we
have made a number of design enhancements, particularly with respect to the
engineering of the process and environmental improvements."
The phase II review has also included an evaluation of the project
schedule. Taking into account the additional time required to complete the
phase II review beyond what Inco had initially projected, it is currently
expected that, assuming that a decision to restart the project were made in
October, 2004, process plant commissioning would start some time in early
2007, with initial plant startup around mid-2007. "Completing our review in
the right way has taken longer than anticipated, but it has allowed us to
identify important improvements and to develop a more reliable project,"
indicated Mr. Jones. "We will look for ways to improve on this schedule,
but only if we can ensure the proper construction and startup of the
plant."
Since early 2004 certain preliminary mining and civil construction work at
the Goro site at a cost of about $6-million (U.S.) has been completed and,
during the balance of the phase II review, Inco expects to undertake
certain additional engineering and other work at an anticipated total cost
of approximately $25-million (U.S.).
Inco has continued its discussions with the French government covering the
$350-million (U.S.) in tax advantaged financing which the French government
had earlier agreed in principle to provide to the project. These
discussions continue to examine ways in which the French government can
provide additional financial support directly or indirectly to the project,
including support for a power generating facility to be constructed in New
Caledonia by a third party which would meet the Goro project's anticipated
external power requirements.
Inco and the Goro project company, Goro Nickel S.A., have also continued
discussions with the Japanese consortium led by Sumitomo Metal Mining Co.
Ltd. concerning the interest in acquiring up to a 25-per-cent interest in
the Goro project. Inco and Goro Nickel currently expect that negotiations
with this consortium concerning the terms and conditions of its future
participation in the project will restart by the end of the second quarter
of 2004.
Inco and Goro Nickel continue to make progress in developing a good
neighbour agreement that will set out Goro Nickel's commitments to local
communities in New Caledonia. "We want to ensure that local communities
benefit from this project in terms of employment, training programs, and
business and service development opportunities," said Mr. Jones. "We will
also explore ways for community members to serve as advisers on key aspects
of our operations, such as environmental matters."
In addition to the satisfactory completion and results of the phase II
review, the key milestones to be met to enable Inco to be in a position to
make a decision in the late September to October, 2004, period to proceed
with the project include (1) having achieved sufficient progress on all
required permits in New Caledonia and the good neighbour agreement, and
having reached other appropriate understandings or arrangements with local
labour unions and other key stakeholders in New Caledonia to enable any
restart of the project, including construction, to proceed on a basis that
avoids any potential labour or other disruptions; (2) finalizing the terms
of the tax-advantaged financing and other support to be provided to the
project by the French government; and (3) reaching a satisfactory agreement
on the disposition of the interest in Goro Nickel held by the French
government agency, Bureau de Recherches Geologiques et Minieres, as part of
a required realignment of the equity ownership in the project to enable a
new partner to be brought into the project and provide for New Caledonia's
equity participation in Goro.
"We believe that we can have a project which is economically feasible and
which can be implemented in a financially prudent manner," Mr. Hand added.
"Major projects like Goro face significant challenges but we must and will
get it right and this remains our clear and firm objective."
Access to webcast
As previously announced in Stockwatch, interested investors can listen to
the presentation on the update on the key preliminary findings to date of
phase II of the Goro project review on a live, listen-only basis, or access
the archival webcast or the recording of the presentation through the
Internet or by calling the toll-free telephone call in North America as
indicated below.
The presentation is scheduled for May 25, 2004, beginning at 9 a.m.
(Toronto time). Slides or other statistical information to be used for the
presentation can be accessed and will be available for on-line viewing
through www.inco.com by clicking on the "latest presentations."
The archival webcast of the presentation can be accessed via the Internet.
A recording of the presentation can be listened to until 11:59 p.m.
(Toronto time) on June 8, 2004, by dialling 1-800-558-5253 in North America
and by entering the reservation No. 21196019. This recording is also
available outside North America by dialling 416-626-4100.
WARNING: The company relies upon litigation protection for
"forward-looking" statements.
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