Goro's a go, nickel prices still volatileGoro's a go, nickel prices still volatile
By: Dorothy Kosich
Posted: '20-OCT-04 03:00' GMT © Mineweb 1997-2004
RENO--(Mineweb.com) To no-one's astonishment, Inco executives Tuesday announced they are proceeding full speed ahead on the $1.875 billion Goro nickel project in New Caledonia.
Joining Inco on that venture will be Sumitomo Metals & Mining and Mitsui for a 21% ownership, the French Government under the auspices of BRGM, and eventually three provinces in New Caledonia. France is contributing $350 million to the project under the Giradin Act and will also provide financial support for a new power facility to serve the mine and local residents. Eventually, France will turn over its percentage of equity ownership to three provinces located in New Caledonia, according to Inco Chairman and CEO Scott Hand.
The project has already received a number of permits, and the government has "enhanced" its permitting process, said Peter C. Jones, President and COO. At Tuesday's meeting of Inco's Board of Directors, leaders from the South Province and New Caledonia expressed their support for the project. The Government of New Caledonia has passed legislation enacting a 15-year tax holiday and five years of taxes at 50% of normal levels.
Sumitomo Metals and Mitsui have already signed the Memorandum of Understanding concerning their involvement in Goro. During a conference call with analysts and reporters, Hand refused to respond to analysts' questions about what the companies are paying to get an interest in the project. Goro has some of the highest grade and largest leachable laterite deposits in the world, according to Inco executives. A "good neighbor" agreement was endorsed by community leaders in the area last month, Jones said. A workplace accord was signed in August and training programs and plans are already underway. Initial production is projected to begin in September 2007, eventually producing 60,000 tonnes annually of nickel and 4,300 to 5,000 tonnes of cobalt. Goro Project Manager Robin Marshall said the project will be constructed through a joint venture of Inco, Foster Wheeler, SNC Lavalin and CEG. The 35-month project development schedule, which includes the building and commissioning of three autoclaves in rapid succession, already exceeds the original estimate of $1.45 billion. Marshall said a $28 million increase has already been attribute to materials, labor, and the implementation of a new storage area.
The Goro project is already three years behind its original schedule, which was pulled due to cost over-runs. Jones explained that Inco had gotten "into the field too quickly" and hadn't performed adequate engineering when it announced the project the first time around and later pulled it.
Nevertheless, Hand insisted "Goro's potential is enormous. It can, and will, be expand many times." Goro has an estimated 57 million tonnes in proven and probable reserves and is currently being developed under a 20-year mine plan. Jones added that the "very, very strong nickel demand in China" will definitely make Goro worthwhile.
ENERGY WOES
If anything is giving Inco executives a degree of heartburn at its major projects, it is the raising cost of energy. Dwindling water supplies at PT Inco in Indonesia have prompted the company to develop risk mitigation plans to reduce the risk to hydroelectric power sources. Water inflows to PT Inco's hydroelectric reservoirs dropped 40% during the third quarter. A third dam is being constructed at a cost of $150 million and will raise the operation's hydroelectric capacity to 365 megawatts.
The Government of Ontario is compounding Inco's energy cost problems through a 20% to 25% increase in electricity rates, beginning this coming January. As a result, Sudbury's energy cost will increase $20 million annually, according to Jones. The operation is schedule for a maintenance shut-down in 2005, which will reduce production by 20 million pounds of nickel, 25 million pounds of copper, and 35,000 ounce of PGMs.
As a result of all of the above, Inco's energy cost are expected to add an additional 10-cents per pound of production next year.
NICKEL MARKETS
Will nickel prices justify the expenditures? Sort of... Peter Goudie, Executive Vice President of Marketing, said, "Do not mistake the current temporary period of high prices--due mainly to underinvestment in nickel capacity in the 1990s-- for the long-term environment."
In fact, he predicted that the current volatility in nickel prices will remain "until substantial new supply arrives. ...This volatility is not good for producers or consumers. It can also make it hard to assess how much `underlying demand' exists, because of the level of destocking and restocking that it causes from producer to ultimate end user."
"We have seen the end of nickel destocking in China," Goudie declared. "Overall, we see substantial room in China for restocking in both nickel and stainless; but high and volatile nickel prices could delay this development." Substitution for nickel has occurred in several key sectors, he added, which has reduced nickel demand by as much as 15,000 tonnes. Nevertheless, Goudie predicted, "Nickel demand should climb about 10% in the U.S. and China/Hong Kong this year," but remain flat or go down a bit in Europe, Japan, and Korea. As the aerospace industry starts to recover, Goudie said non-stainless nickel demand growth should increase by 5%. However, Inco still predicts a deficit of 19,000 tonnes in demand.
Voisey's Bay is expected to bring new nickel to market in the first quarter 2006. Pre-stripping of the Ovoid deposit is underway. Combined with small Australian deposits, Goudie forecast that they will add 20,000 to 25,000 tonnes of new nickel to the market over the next few years.
EARNINGS
Hand told analysts and reports that Inco had $869 million cash in the bank at the end of the third quarter, ending September 30, 2004. Net earnings for the third quarter in accordance with the Canadian GAAP were $148 million or $0.78 per share, compared with a net loss of $23 million or $.13 per share for the third quarter of 2003. Adjusted net earnings not in accordance with the Canadian GAAP were reported at $212 million of $1.12 for the third quarter of 2004, compared with $20 million or $0.10 per share for the same quarter of 2003.
While the average LME cash nickel price was $6.35 per pound, Hand said, "nickel prices were volatile due, we believe, in large measure to trading activities by hedge and other funds in nickel."
Inco produced 118 million pounds of nickel during the third quarter of 2004, 3 million pounds more than original predicted. Therefore, the current forecast is a record 505 million to 510 million pounds of nickel for the full year, according to Hand. The company produced 118,000 ounces of PGMs during the third quarter and expected to produce 405,000 ounces for the year. Inco also produced 76 million pounds of copper for the quarter and expects a full-year forecast of 265 million pounds, he added.
The company is still trying to achieve a goal of $63 million in cost reduction, but some of these are not expected to be achieved until 2005.
For the first nine months of 2004, Inco reported Canadian GAAP net earnings of $389 million or $2.04 a share, compared to a $74 million or 26-cents per share for the same period of 2003. Long-term debt was reported at 1.78 billion as of September 30, 2004, an increase from the $1.7 billion reported as of December 31, 2003.
"These are exciting time for Inco," Hand declared, "with great operations, great market position, and great growth in store for Voisey's Bay, Goro and PT Inco. Yes, we have challenges but also outstanding opportunities."