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The Toronto Star
Thu 23 Apr 1998
Metro
BUSINESS
PAGE C1
Lisa Wright
INCO SAYS VOISEY'S BAY MAY BE DELAYED: Future hinges on metals price, shareholders told; Inco loses $41 million
Inco Ltd.'s plans to build the biggest nickel mine in the world at its prized Voisey's Bay site in Labrador are in jeopardy unless metals prices bounce back, the company chairman warned investors yesterday.
In the wake of a staggering $41 million (U.S.) loss in the first quarter, Inco's chairman and chief executive officer Michael Sopko left the door open yesterday to further delays past its projected 2000 startup - and discussed possible alternatives if it never gets off the ground.
"We wish to proceed with full development of Voisey's Bay - but only if it makes economic sense to our shareholders," Sopko told shareholders at Inco's packed annual meeting at the Metro Convention Centre.
"This commitment was always subject to technical and economic realities to the project. It was never unconditional," he said to the crowd of about 500 people.
The project, touted as the crown jewel of Inco's considerable assets, has already been plagued by numerous delays due to environmental concerns and aboriginal land disputes.
But nickel prices are languishing at their lowest level in four years, which observers say has put a new spin on the company's negotiations with the provincial government over taxes, the cost of power and the size of the project.
However, Sopko insisted Inco remains "fully committed" to the project and vowed there will be no writedown of the $4.3 billion (Canadian) investment Newfoundland is banking on to stimulate its economy and boost job creation.
"We will proceed with commercial development once the necessary approvals are in place and only when it is clear that our shareholders will benefit," Sopko said.
If Voisey's Bay doesn't work out, Sopko mused that Inco could instead rely on production from its PT Inco division in Indonesia, the Goro site in New Caledonia and its recent $125 million infusion to expand its existing Creighton mine in Sudbury.
Environmental approvals and agreements with the province and Innu population are needed before Inco can proceed to build a nickel mine and smelter in Newfoundland.
"But let me state that we cannot agree to any deal; it has to be the right deal," Inco president Scott Hand said.
Sopko and Hand were on the hot seat as they fielded questions, insults - and even threats - from audience members, the most vocal of whom were representatives from labour, environmental and aboriginal groups.
"You know the track record of the Innu in terms of protesting," said Penote Michel, a representative of the Innu Nation in Labrador.
"If progress isn't made (in environmental talks), rest-assured you are going to lose money," he said shaking his fist at Sopko, adding: "Be careful. This is a clear warning."
Union representatives - some of whom travelled from Thompson, Man., to criticize Sopko - said the recent job cuts of 1,300 (many of which will be through retirements) from Inco's work force were cruel and would only backfire in the long run since employee morale is at an all-time low.
"They (workers) feel betrayed and productivity will suffer for it," said Wayne Fraser, Sudbury's area co-ordinator for the United Steelworkers of America.
Sopko, who briefly donned a miner's hard hat before questions got under way, said he sympathized with workers but reminded them that cutbacks are a reality of the changing economy.
"I can understand why you're lashing out at everyone around you," he said. "It (the restructuring) is difficult for you and it's difficult for me.
"The world has changed, Inco must change and so must Sudbury," he said, adding changes will result in the company mining in the area for another 100 years.
But Sopko was on the spot as accusations flew about everything from the lack of women and minorities on Inco's board of directors and environmental concerns pinned to Earth Day to queries about takeovers and also Sopko's 22 per cent raise in base salary last year. But he explained his over-all pay packet was actually cut by 50 per cent because of the company's poor performance.
Inco's first quarter results show the company lost $41 million, or 29 cents a common share, in the three months ended March 31. (Financial reports are in U.S. dollars).
That compares with a loss of $4 million, or 7 cents a share, in the fourth quarter of 1997 and net earnings of $58 million, or 29 cents a share, in the first quarter of 1997.
The latest losses were due to an after-tax charge of $32 million associated with the company's restructuring and lower prices for nickel and copper.
Inco had an annual profit of $75 million for 1997, down from $179 million in 1996.
Starting next year, Inco expects to save $165 million annually through a broad range of cuts to its work force and some of its overseas exploration projects along with the closing of several mines and its New York office.
The market reacted favourably to the get-tough message that came from the meeting. Inco shares rose 65 cents (Canadian) to close at $27.35 in Toronto trading.
Despite an atmosphere of doom and gloom at the nickel giant, it's still too early to throw in the towel on both Voisey's Bay and Inco, said Fred Ketchen, senior vice-president and managing director of equity trading at ScotiaMcLeod Inc..
"While things are on the difficult side right now, I think Inco's long long history isn't going to fade into the sunset any time soon," he said, adding he expects some activity in Voisey's Bay by 2000 as nickel prices start to rebound.
"They're in a commodity that's cyclical in nature when it comes to price," he said. "It takes patience. Along the way, nickel will go up in price and Inco will benefit accordingly," Ketchen added.
Just as Sopko adamantly dismissed takeover rumours - saying no one to date has approached Inco with an offer - so too did Ketchen, saying: "You have to have pretty deep pockets to take over Inco."
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St. John's Evening Telegram
Wed 22 Apr 1998
Final
Editorial
Page 6
Is Voisey's Bay viable?
Last Saturday's Telegram told the story of a report by the investment banking and securities firm, Goldman Sachs, which questioned the viability of the Voisey's Bay nickel project.
The Voisey's ore body itself is of high enough quality to be exploited, and the location of the ore on tidewater makes it viable to mine (even at the presently depressed price for nickel).
What the report questions is whether the current price of ore can sustain the size of a nickel project as previously envisioned, the smelter at Argentia, and the substantial demands being placed on the entire operation by the province, the environmental assessment and the various native groups. The Goldman Sachs study says the huge project that was planned two years ago is not viable given the current depressed price of nickel.
Of course, the price of nickel today is less critical than the price of nickel when it eventually goes to market. If nickel prices increase by 50 per cent between now and the time the ore is mined, the mine will be not only viable, but extremely valuable. The problem lies in getting that ore shipped to market in a few years.
Between now and market day, Inco is going to have to invest $1 billion into the mine, mill and smelter development, and unfortunately they will have to do that while their nickel is selling at bargain basement prices and the company revenues are being squeezed. Any company with a cash flow problem like that is not particularly well situated to invest in a massive new development like Voisey's Bay.
Compounding the company's problems is a number of questions that must be answered before Inco can get a firm estimate on its costs. What will the company have to pay to meet the requirements of the environmental assessment process? What will it have to pay to the Innu and the Inuit, and what royalty will the company have to pay to the province? These payments will affect the viability of the operation.
Since most people in the province want the mine and smelter to go ahead, what can be done to move the project ahead? The environmental process is already under way, and on May 1 the environmental panel will rule on the company's environmental assessment. If the company's 6,000-page environmental report is satisfactory to the panel, the assessment will go into the hearing stage, and the process will move forward. If the panel requires further work on the assessment report, however, the process will be further delayed.
The discussions with the native groups are another matter. The Inuit have a framework for their land claim; the Innu do not. But that process, while important, still leaves Inco in a position where they have to come to terms with the native groups and pay them for the loss of their land. That may take months to negotiate and may cost many millions of dollars in the face of today's low nickel prices.
And finally the province must now establish a royalty regime for Inco that gives the company some certainty about what proportion of its profits will be shared with the people of the province. Clearly, the current mining royalty regime with the 10-year tax holiday will not do, but some sort of graduated royalty scheme similar to the province's generic oil royalty regime and the royalty scheme being put in place for the lower Churchill developments might be appropriate.
And what about the smelter at Argentia? We'll have a look at that tomorrow.
St. John's Evening Telegram |
