Happy days are here again - Stan Sudol (02/17/06)

Last Tuesday in the heart of Toronto's financial district, I attended Inco Ltd.'s presentation to the investment community on the company's past year and its current outlook for 2006. Senior management attended and spoke, including chair and CEO Scott Hand, and Mark Cutifani, president North America/Europe.

By any measurement, 2005 was record setting year for the company. Nickel experienced the highest annual average price in the history of the metal at $6.68 US. The company announced its highest annual net profit ever of $836 million, compared with $619 million the previous year.

Voisey's Bay achieved commercial production in December 2005, six months ahead of schedule, and the Sudbury and Thompson operations are ready to handle the feed. Intensive exploration around the Voisey's Bay deposit will likely discover more reserves. Half of the workforce of about 300 is aboriginal, making Inco one of the country's largest private sector employers of First Nations people.

The Indonesian operation, PT Inco, had a record output of 168 million pounds of nickel in matte and is expecting a 33 percent increase in production by 2009. Goro is on track, is expected to start-up in late 2007 and can be easily expanded.

Ontario mine productivity went up 13 percent, Manitoba increased five percent and PT Inco bounced up 12 percent. The entire Canadian mining sector is one of the most productive in the world. The company met or exceeded all their production estimates producing 487 million pounds of nickel, 287 million pounds of copper and 419,000 ounces of PGMs (Platinum Group Metals).

And the icing on the cake is the friendly takeover of Falconbridge that will bring enormous cost savings of about $350 million, much of which can be found in the Sudbury Basin. The new Inco will be the largest nickel producer in the world, a $24 billion world-class mining company with some of the most promising new nickel and copper deposits in its development pipeline.

One can almost get dizzy from all the good news and information overload. Does it get any better than this? Well, yes, but there are a few bumps.

With the recent decline in commodity shares on the TSX many are wondering if there is no where to go but down. Not so, says Hand.

"I know many are saying we have seen the high for nickel. Be cautious. Nickel demand remains strong across the board in China. Every year the soothsayers say that China's economic growth - which generates improving living standards and demand - cannot continue. Well, 1.3 billion people in China beg to differ."

Hand continues, "The 'bloom' is not off the rose. Bet against nickel at your peril."

There is a consensus among senior Inco executives who spoke that this commodity boom can't be judged by past cycles.

One strange new bump aside from increased energy costs, shortages of skilled labour, a rising Canadian dollar that affects profits - all of which the company seems to be successfully dealing with - is the issue over strategic nickel-based alloys that came out of left-field. Super nickel-based alloys are used predominately in jet engines and power station gas turbines.

Earlier this week, a Dow Jones Newswire story stated that the Inco-Falconbridge merger is facing antitrust problems because of a potential stranglehold over a "nickel alloy" used in jet engines. Defense contractors are the main users and national security issues are being highlighted. One of the companies that complained about this issue, France's Eramet SA recently lost a court battle with Falconbridge over control of the exceptionally rich nickel laterite deposits in northern New Caledonia at Koniambo. Some of the Dow Jones article is factually wrong. Inco and Falconbridge do not manufacture the super-nickel alloys. They just supply the pure nickel needed to produce this strategic product.

"The market for nickel used to make the alloys for these particular jet engine parts is very small - it represents less than one per cent of the total demand for primary nickel. There are at least six other companies in the world that produce the kind of pure nickel that can be turned into these alloys.

And the amount of nickel produced, that could quality for this particular application is at least 10 times the size of the actual market," said Inco spokesperson Steve Mitchell.

However, judging by the questions, some analysts are concerned, and a few suggest the merger may experience further delays. Hand feels there are no serious competitive concerns but he adds, "in the end it will be up to the regulatory authorities to make that decision." He expects a response from the United States Department of Justice shortly.

Both Inco and Falconbridge have a long history of supplying nickel to the U.S market, including the strategic American stockpile during the 1950s and 1960s. It was American entrepreneurs who first provided the capital to develop the Sudbury Basin. Hand is an American by birth. Notwithstanding our federal politicians, the Canadian corporate class is solidly and historically connected to their American counterparts through many business and personal links. United States defense contractors and the American military should be more concerned about Falconbridge falling under non-Canadian control, Swiss-based Xstrada, where they would have very little influence or in a worse case scenario, Chinese government ownership through China Minmetals!

The only other significant problem is possible labour disruptions. Inco's labour agreement with the Sudbury Steelworkers Union expires on May 31st and there may still be bitterness from three years ago when the union when on strike. However, the Thompson workforce came to an agreement without a strike last September.

On this issue, Cutifani was prepared to say, "We have the best trained workers in the mining industry. Management is solidly committed to better relations with all employees. We have all made mistakes in the past and hold ourselves accountable to improve these relationships into the future."

One key observation during my conversation with Cutifani is that over the past five years, one third of Inco's workforce are new employees.

"Inco is aggressively hiring and on the lookout for skilled employees. We are just barely keeping up with the retiring workforce," Cutifani stated.

In 2005, Inco spent $330 million in the Sudbury Basin, while this year that figure increases to $365 million. Currently, the company has plans for about $1.5 billion to be spent on new mine development over the next five years. The green light for the development of the Tottem mine is expected later this year. And an aggressive $20 million exploration program is continuing throughout the Sudbury Basin for new deposits and advancing the feasibility studies for the Kelly Lake and the deep deposits of the Copper Cliff offset - including Copper Cliff North and South mines.

Last year, Inco expanded the acid plant capacity for a fluid bed roaster that will be tied in this year. Combined with other changes, including the converter upgrade project, sulphur dioxide emissions will be cut by about 30 percent. This project, completed by 2007, will boost process rates about two percent.

Rapid global growth and modernization is causing a new age of metal demand that has not been seen for a least a quarter century. According to the Australian Institute of Mining and Metallurgy, over the next 50 years the world will use five times all the mineral supplies that have ever been mined up to the year 2000. Inco's growth pipeline is enormous and over the next decade a significant part of that expansion will be in the Sudbury Basin.

"Sudbury has one of the greatest resource positions in the world. Inco is committed to understanding and developing the Basin's potential in conjunction with all our stakeholders long into the future," Cutifani says. "We would like to think we are in a new phase of development and growth in which we are creating the next 100 years in Sudbury. To achieve that vision we must work together, with all our stakeholders, to create a future for our children and their children. We can only achieve this by working together."