More on Scenario 1:
Maclean's Magazine
February 16, 1998
PAGE: 48
Peter C. Newman
The Nation's Business
Revealed: A Desperate Survival Plan for Inco: Faced by the possibility of a takeover or a huge sell-off of shares, CEO Michael Sopko has opted for drastic action
Inco is one of Canada's defining institutions. Founded in 1902, the company has written much of the history of Canadian mining, with its large base-metal deposits in Sudbury, Ont., Thompson, Man., and, of course, the mega ore body at Voisey's Bay in Labrador.
The world's largest nickel producer, Inco has some 16,000 employees and operates in 22 countries, including Indonesia, Japan, Taiwan and South Korea. Historically, the company has been big and successful, operating almost in a world of its own, not paying much attention to its critics, because it considered itself too big to fail. But in the past decade, uninspired management and lower nickel prices have driven Inco to the wall. Share prices have plummeted to $24.70 at the end of last week from a 1997 high of $51.25. Faced by the possibility of a takeover or a massive sell-off by frustrated shareholders, CEO Michael Sopko has opted for drastic action.
Due to be announced this week is a series of monumental cost-cutting measures that will dramatically transform the company. They include:
- Closing Inco's posh New York City office, which employs about 100 people.
- Major slashes in overhead both at the Toronto head office and on the operational end in Sudbury and other operating mines. A recent survey revealed that at its Sudbury underground operations, Inco has one manager for every three miners, way above the industry standard.
- Most significant, Inco will begin talks with its chief competitor, Falconbridge Ltd. of Toronto, to rationalize its Canadian operations, particularly in Sudbury, where the two companies each have processing plants, although one unit could handle the output of both.
This is a startling development, because it could lead to further operational mergers and eventually to a takeover by Falconbridge - the world's second-largest nickel producer. Falconbridge in 1989 was taken over by Noranda Inc., which in turn is controlled by Jack Cockwell and his group of financial wizards at EdperBrascan Corp. They have for some time had their beady eyes on Inco, dreaming about all the economies of scale that a merger of the two mining giants would produce. Falconbridge is not doing too well either, with its 1997 profit of $137 million half of the previous year's earnings. (Inco's 1997 profit was $108 million, down from $260 million the year before.)
Unlike Inco, Falconbridge, which is bringing two large developments onstream - in northern Chile and northern Quebec - has already completed most of the capital spending involved, and does not have to try and finance a mammoth project like Voisey's Bay at a time when nickel prices are at a four-year low. The metal is now selling for about $2.37 (U.S.) a pound, down from $3.50 a year ago.
The most touchy issue in any merger would be the location of the smelter to handle the 270 million pounds of nickel a year that will be mined at Voisey's Bay. Sopko has pledged to build a new $1-billion smelter and refinery at the former U.S. military base at Argentia, about 100 km west of St. John's, Nfld. Last week, however, Sopko said he wanted to discuss the "scope and timing" of the promised refinery in light of low nickel prices. But Newfoundland's mines minister, Charles Furey, said the refinery was not negotiable, except for details about power rates and taxes. He wasn't kidding. "If that's not acceptable, they can pack their bags and leave," he announced, meaning "leave" without a shovelful of the rich Voisey's Bay ore.
Newfoundland Premier Brian Tobin adds that construction of the expensive processing facilities is not only a condition of mining at Voisey's Bay, but that every pound of ore must be refined in his province. Were a merged Falconbridge-Inco entity renegotiating the deal, it might insist on relocating the Labrador mine's output to Nikkelverk in Norway, where Falconbridge operates one of the world's largest refinery smelters.
Despite its treasure house, Voisey's Bay has become a double-edged sword. At full capacity, the open-pit operation would grant Inco a long and prosperous run. But even if the impasse over building the Argentia smelter is resolved, deep and complex negotiations are continuing with the local population. At the moment, these talks have become a bit of a three-ring circus. Tobin is negotiating with Labrador's natives and Inco is negotiating with Tobin, while the natives are negotiating land-claims issues with Ottawa.
The root of the problem is that when it paid $4.3 billion for the Voisey's Bay deposit in 1996, Inco based its plans on the price of nickel at the time - $4 a pound. Start-up for mining the Labrador deposit has already been delayed from 1999 to 2001, mainly for environmental reasons - yet another problem in an area covered by impenetrable ice for part of the year. Most observers agree that even with its new cost-cutting, Inco will have to write down the value on its books of the Voisey's Bay deposit. A decrease of as much as $1.5 billion is being suggested.
Critics of Inco management, which include just about every analyst on Bay Street, are puzzled why the company has achieved so little - basically nothing - during the two years it has owned Voisey's Bay. At stake is the fate of one of Canada's rare megaprojects. If Inco goes ahead as planned, it will spend close to $1.5 billion to bring the project to market, creating thousands of construction and permanent jobs in a part of the country that desperately needs them. But if the various parties, whether it includes Inco or its successor, can't agree on development terms, they will be killing the goose that lays the nickel egg. |
