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Friday, January 23, 1998
INCO Ltd.
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Phone: 416-361-7511
Website: http://www.incoltd.com
Price (1/22/98): $15 11/16
HOW DID IT FIND TROUBLE?
Some companies really do get nickel and dimed to death. For nickel producer INCO, flat sales were bad enough. Add to that the wild cost swings when dealing in commodities such as precious and semi-precious metals, and INCO got swung on from every direction. Production costs rose while the realized prices of INCO's mainstay metals were lower.
If it costs more to make something while the buyer is only willing to pay less than before, a few things get squeezed -- margins, profits, and, ultimately, the share price.
BUSINESS DESCRIPTION
INCO is the world's largest nickel producer. The Newfoundland company also produces copper, cobalt, and precious metals. Last January the company spun off its engineered product division -- which manufactures alloy components for industrial applications -- as Doncasters plc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DCS)") else Response.Write("(NYSE: DCS)") end if %>.
FINANCIAL FACTS
Income Statement
12-month sales: $2790 million
12-month income: $105 million
12-month EPS: $0.34
Profit Margin: 3.8%
Market Cap: $2618.2 million
Balance Sheet
Cash: $43 million
Current Assets: $1365 million
Current Liabilities: $618 million
Long-term Debt: $1322 million
Ratios
Price-to-earnings: 46.1
Price-to-sales: 0.94
HOW COULD YOU HAVE SEEN IT COMING?
Nickel got buffaloed and INCO was caught in the ambush. The source, presumably Eastern Europe flooding the nickel market, was irrelevant. In commodities it is just another day in the trading pits. The fluctuations will happen -- the prices will rise and fall.
But in May Bre-X happened. In a huge mining scam, investors had bid up shares of Bre-X on bogus gold deposit claims in Indonesia. A year earlier INCO had won a $3.2 billion bidding war for Diamond Fields, whose claim to fame was Voisey Bay in Canada -- a mine projected to produce 270 tons of nickel a month.
Voisey Bay, which will apparently turn out to be the world's largest nickel mine and account for 13% of the global output, is no Bre-X. However, investor skepticism about mining discoveries has been awakened since then.
Adding to the complexity of Voisey Bay are production delays stemming from two aboriginal communities that claim territory around the proposed mine. The Innus and Inuits were first negotiating with the company over revenue-sharing and jobs but now environmental and social issues are holding up the mine's development. While the company had initially hoped to begin production by the end of next year, the conservative start-up date is now late 2000.
In May INCO was immune to the Bre-X news with its share price holding in the low $30s. An investor who would have thrown the baby out with the bathwater would have won -- but only by a fluke since the eventual downfall of INCO was due to the then unforeseen falling metal prices and the Voisey Bay delays.
WHERE TO FROM HERE?
Newfoundland needs Voisey Bay. With unemployment hovering just below 20% and its cod-fishing industry in a rut, the government and even the Inuits and Innus are welcoming the development of the huge nickel deposit. The difference is that the aboriginal communities want a thorough environmental study of the ramifications once the mining begins -- as well as a piece of the action.
INCO is more than willing to negotiate, and there could be some upside if the resolution is quick and mutually satisfying.
That does not begin to address the issues of nickel pricing itself, or even what the added capacity of the new mine will mean -- that is clearly fodder for the commodity traders where every new day brings new circumstances to dig through.
However, a market can get flooded for only so long -- and if production costs remain high there is no reason to believe that smaller players won't buckle under pressure and cut back nickel production. That would suit INCO just fine, and unlike Bre-X, whose top geologist took his own life as the investigation intensified, INCO will survive -- without having to take any wooden nickels.
-Rick Aristotle Munarriz
([email protected])
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