inco presentation

Here is Scott Hand's Sydney speech avail.on Inco's website. Pres. slides are also avail. No info about the Heron JV - related to drumming up insitiutional investment in Inco. Hopefully some bright spark at the pres. will ask hime a few questions re: Heron.....


http://www.inco.com/investorinfo/presentations/other/default.aspx


Scott Hand, Chairman and CEO,
Inco Limited
RBC, Sydney, Australia
April 28, 2005
Last year was an exciting time for both the nickel market and Inco, with 2005
shaping up to be even better. In my view, the outlook is very positive not only for
this year but also well into the future. Today I’ll explain why I’m so bullish on
nickel – and how this translates into outstanding opportunity for Inco and its
shareholders.
I’ll start with the bottom line on why investors should have Inco front and centre
on their radar screens, then give you my take on the market and, finally, tie it all
together.
I believe there are three key reasons why investing in Inco is the best way to
capitalize on nickel’s excellent future.
First, we have strong existing operations. Inco is already the world’s largest
nickel producer outside of Russia – a formidable competitor with a great strategy.
Nickel represents approximately 82% of our sales. We’re highly leveraged to
nickel but our business transcends its basic uses. For instance, although about
68% of all nickel goes into stainless steel, just 42% of Inco’s sales are destined
for this use. I’ll have more to say about this later.
The second reason for Inco’s great investment profile is that we will grow
enormously – and profitably, in a world that will remain hungry for nickel. We’re
better positioned than any other nickel producer, in terms of project quality and
the strength of our financial resources.
And third, Inco has the number one marketing position in nickel – a position that
we believe is unassailable.
But before I go further, let me direct your attention to the screen for our Safe
Harbor Statement, and the compliance statements on our mineral reserve and
resource estimates. All currency references will be in U.S. dollars, unless
otherwise stated.
I can sum up in a few words what you can expect from the nickel market over the
next few years, namely: ongoing shortages; robust demand; and limited supply
growth.
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More specifically, our nickel outlook for 2005 is based on China’s resurgence,
strong nickel alloy demand, and limited nickel supply. Plants are running at or
above nameplate capacity and any hiccup will mean less nickel. Demand will
exceed supply and the balancing mechanism – the London Metal Exchange
nickel price – will adjust to the situation.
I’ve talked a lot to North Americans about how potent China’s impact will be –
and more and more people are buying into my message. Here in Australia, so
much closer to the massive Chinese market, you can perhaps best appreciate
my point.
In 2004, Chinese nickel consumption rose by over 20% to more than 160,000
tonnes, despite moves to cool the economy, slower than expected ramp-up at
Baosteel’s new stainless facility, substitution in plating, and higher local 200
series stainless steel production. Despite what Inco has said all along, this
growth in China’s nickel consumption was not generally recognized at the time,
as nickel stock movements created visible demand growth of just 6%.
In 2005, there will be no hidden demand, inventories are low, and destocking
can’t recur. Last year ended with four months of growth; fourth quarter demand
was up 36% year-over-year. And 2005 has started out even more impressively,
with the first quarter up 77% over last year’s levels.
Baosteel’s expansions should drive Chinese demand in 2005. Phase one is at
full capacity, with phase two ramping up later this year. Chinese stainless
production should climb by no less than 800,000 tonnes and account for at least
35,000-to-40,000 tonnes of additional nickel consumption. Based on strong
Chinese demand growth for stainless steel, domestic production should expand
for years to come. Chinese non-stainless nickel demand is also rebounding
sharply.
We’re all deluged by conflicting articles on China, with more opinions than you
can shake a stick at – but the simple fact is that the economy is growing. I’m told
that China needs to create 20 million jobs a year; does China want a slowing
economy with that challenge facing it?
Japan’s great leap a few decades ago fuelled world nickel demand growth of 7%
per year. With 13 times Japan’s population, China can stimulate even greater
demand, as it continues to industrialize. That’s not economic rocket science, but
it shows the way. And it indicates why Inco has built a great presence across
Asia; including China. Our Asian sales have jumped from 40% 10 years ago to
over 60% – and they’re still growing.
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The next reason to be excited about 2005 is the recovery in the high nickel alloys
market – in the U.S. and also in Europe and Japan. Many customers report that
business is up 10-to-20% and order books are full through the end of the year.
Just as important, these are applications where substitution is really not an
option.
The aerospace recovery is gaining momentum, and should push high nickel alloy
demand to record levels. The energy market will also drive non-stainless growth,
creating real demand for high purity nickel that only a few producers, including
Inco, can provide.
World stainless steel production should rise 5.9% this year. The austenitic ratio
will fall slightly, with the scrap ratio up a bit. Both events will spur production
growth. And strong nickel demand will continue to force substitution – but only to
a point. For instance, growth in 200 series stainless steel for certain uses in
China last year produced some poor quality replacement for higher-grade
stainless, so the government is reviewing controls on imports and applications.
We’ve recently seen 200 series imports drop sharply and growth rates should
slow in 2005, leading to more suitable usage and less substitution.
Primary nickel production, secondary stainless scrap, and nickel inventories will
all be limited by physical constraints and unable to fill underlying demand.
Primary nickel production will rise, as producers aim to run at capacity, and three
brownfield expansions ramp up. Also, labour negotiations will overhang 10% of
world supply. Given this scenario, any production surprises will mean less output.
In the first quarter of 2005, LME stocks fell 52% – the largest drop in 15 years.
And LME stocks are down by over 2,800 tonnes so far in the second quarter, as
consumers take nickel from all available sources. Total LME plus reported
producer stocks are less than four weeks of demand, providing strong support to
the nickel price. Note that the 25-year average inventory level is more than eight
weeks of demand, making current stocks 100,000 tonnes below average.
And there won’t be salvation for the nickel market in scrap; it, too, will come up
short this year as a nickel source. Nickel-containing stainless steel scrap supplies
are finite and respond to price. High nickel prices drove unsustainable growth in
scrap collection and use last year. We conservatively see 5% growth in scrap in
2005, but conditions look increasingly tight. Discounts have dropped to 3-to-4%
from 7-to-8%.
Higher nickel production, combined with available LME stocks, could result in
only 55,000-to-60,000 tonnes of primary nickel available for growth in 2005.
Supply should hold world demand growth at 4.1%, with China needing 75% of
the extra nickel. This will cap world demand growth, excluding China, at less than
1%.
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Actual nickel deficits will be small this year. The only available stocks left are on
the LME and they won’t fall to zero. Strong underlying nickel demand – plus low
inventories, tighter scrap conditions and limited production growth – will create a
large buffer of unmet demand, able to absorb even a large upside supply
surprise, or downside demand surprise, without affecting the fundamentals.
There’s talk of a bow wave of new production. But the only new major supply for
a few years will be from Inco’s Voisey’s Bay and Goro projects, and BHP
Billiton’s Ravensthorpe. Yet a new Goro is needed nearly every year just to
match long-term demand growth. Only about half of Voisey’s’ Bay’s output will be
new nickel on the market; the other two projects will start producing in late 2007
and ramp up from 2008-to-2009.
There are many nickel projects in the feasibility stage but a number are now
delayed, due to higher capital costs than planned or financing challenges. There
will be a lot of slip between the cup and the lip and we’re seeing it today. So
study potential projects carefully – the challenges are large.
The flip side of the coin is that the time is ripe for a nickel producer with the
means and the moxie to seize the opportunity. Inco is that company. I believe
that’s clear from where we are today and where we will be tomorrow.
In the here and now, we have strong existing operations that performed well in
2004, with record production of 522 million pounds. This year we plan to produce
490-to-500 million pounds of nickel; still good but below last year’s level because
of planned furnace rebuilds at our existing operations in Canada – in Manitoba
and Ontario – and production limits due to low rainfall at our Indonesia operation,
PT Inco.
In 2006 we’ll fill our Canadian plants with feed from Inco’s mines, in contrast to
recent years when we used a lot of purchased concentrate, which adds to cash
flow but isn’t as profitable as our own ore. Our nickel output in 2006 should be
about 540 million pounds. External feed should drop by about 58 million pounds
and be replaced by Voisey’s Bay concentrate, resulting in improving costs and
cash flow. Our 2009 nickel production goal of 700 million pounds is about 35%
above 2004’s record.
Our copper output should be about 245-to-255 million pounds this year and we’ll
produce about 380,000-to-390,000 ounces of PGMs.
We expect nickel premiums of $0.05-to-$0.10 a pound; above 2004’s $0.03.
Nickel unit cash cost of sales, net of by-product credits, will be about $2.70-to-
$2.80 a pound – higher than $2.32 in 2004. Costs for our own mine production
will be about $2.15 a pound. Remember that 2005 is our last transition year
before Voisey’s Bay. When it is on line next year, nickel unit cash cost of sales
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should fall to $1.95 a pound – and to $1.70 a pound in today’s dollars, once Goro
is operating.
Rising costs are an industry-wide issue; particularly since most nickel companies
operate in countries, like Canada, where the currency has strengthened a lot
against the U.S. dollar. In 2004, Inco was at the low end of the Brook Hunt cost
curve despite higher external feed costs; a rising Canadian dollar; higher energy
costs; and increases in supplies, services and contracts – some of this to
maximize production. Our ore grades were also lower. The situation is similar in
2005, compounded by lower production volumes, an assumed Canadian dollar of
$0.82, more external feed and high energy costs.
We plan to offset these pressures somewhat through cost improvement and
productivity programs. We’re targeting savings in 2005 of $60 million, or $0.12 a
pound. Given the stronger Canadian dollar, productivity is a major focus.
Manitoba’s mine productivity rose 6.5% in 2004, and we are targeting a further
2% increase this year. PT Inco’s mine productivity rose 18% from 2002 levels
and we’re targeting a 4% increase this year. A 250-person reduction in the
workforce will help us reach this goal. Ontario’s mine productivity was a record
15 tonnes per work shift in 2004, up 14% from 2002. Our 2005 goal is 16.3
tonnes.
Inco’s second key strength is an unparalleled growth program. Our plans involve
spending $275-to-$280 million at PT Inco to raise production and power output.
We’ll build a third dam to get an extra 90 megawatts of power and prepare us to
expand to about 200 million pounds of nickel in matte by 2009, at unit cash costs
of $1.55-to-$1.60 a pound.
Our big Canadian project, Voisey’s Bay in the Province of Newfoundland and
Labrador, is on the way for 2006; bringing low costs and strong cash flow.
The 50,000-tonne-a-year, $920 million project remains six months ahead of
schedule. Money-forward returns from January 2003 should top 15% at $3 a
pound nickel.
Milestones include first ore mining, in July; first concentrate, in August; first
concentrate shipment, in November; and initial finished nickel production from
concentrate, in early 2006. About 50% of production will replace purchased feeds
and higher cost Canadian mine output; the rest will be new to the market.
Using March 2003 bankable feasibility assumptions, life-of-mine cash costs for
finished product in today’s dollars are about $1.10-to-$1.15 a pound of nickel.
The nickel unit cost to finished metal, including depreciation and amortization of
Phase One costs, should be about $1.70 per pound. That’s before an after-tax
charge of about $0.80 a pound for amortization of Voisey’s Bay acquisition costs
and about $0.20 a pound for amortization of pre-production costs for five years.
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Our mine/concentrator is 82% complete. Pre-stripping of the open pit has been
passed from a contractor to our own mine crews. Work is on schedule for a
demonstration plant in Argentia, Newfoundland, that will feature our hydromet
process.
Concentrate will be moved by a new ship from Voisey’s Bay to Quebec City. It
will then go by rail to Sudbury, Ontario; and by rail and truck to Thompson,
Manitoba.
Goro is another outstanding greenfield project. Located in New Caledonia, it is
among the world’s highest grade and largest leachable laterite deposits. We’ve
cleared substantial hurdles to develop a reliable, cost-effective plant.
While we are experiencing input cost pressures, like all projects worldwide, we
are taking actions to mitigate or offset them. Our total escalated capital cost
estimate for Goro is $1.878 billion, with a minus 5%-to-plus 15% confidence
level. The projected cost includes $42 million in escalation. We expect returns
equal to our long-term weighted average cost of capital of 9-to-10%, at $3 a
pound nickel and $7 a pound cobalt. Cash cost per pound of nickel made, after
by-product credits, should be about $1.10-to-$1.15 per pound, at $7 per pound
cobalt. At a long-term nickel price of $3 a pound, Goro will generate strong cash
flows, given its low-cost position and 15-year tax holiday, with a 50% cut in taxes
for another five years. Our total nickel unit cost will be about $2 per pound,
including depreciation and amortization.
The screen shows returns, operating cost leverage and timing for the expected
$1.59 billion forward capital for the mine, process plant and infrastructure.
Our schedule calls for initial production in the latter part of 2007. We plan a 13-
month commissioning period and a three-year ramp up.
Production after one year should be about 75% of the annual capacity of 60,000
tonnes of nickel and 4,300-to-5,000 tonnes of cobalt. At the end of year two,
plant capacity will be 90%.
We have a great team, with clear authority and accountability. It includes
leadership from the owners and a Foster Wheeler SNC Lavalin joint venture.
We have assembled a strong group of permanent local employees and a
seasoned support team – adept in process plant operations – that will remain in
place until the project is running well.
Detail engineering is 35% completed. This quarter we will award contracts for the
port and process plant earthworks and we anticipate beginning construction
activities on schedule in May. Preparatory work has already begun on site. We
have agreements in principle with major fabrication yards in the Philippines for
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the construction and pre-assembly of modules, which will reduce peak workforce
on-site, enhance quality and scheduling, and reduce currency risk.
We are hedging to cut foreign exchange impact. Forward spending will be mostly
in U.S. dollars, with the rest mainly in Australian dollars, Euros, and Pacific
francs. We have Australian dollar forward contracts. The French government has
committed $510 million in Girardin tax-advantaged financing, which is a natural
hedge for about half our Euro exposure and means about $130 million in net
benefits to Goro.
In mid-February, as part of an ownership realignment for Goro, the three
Provinces of New Caledonia acquired a 10% interest in Goro Nickel – the Goro
project company – through agreements with Inco and the French Government’s
agency, Bureau de Recherches Géologiques et Minières, or BRGM. It is likely
that Inco will make the Provinces’ pro rata capital contributions to the project
during at least some of the construction phase and this is reflected in our fiveyear
capex funding requirements.
Just this month, Sumitomo Metal Mining Co. and Mitsui & Co. acquired a 21%
interest in Goro for about $150 million. They will be obliged to purchase 21% of
Goro’s production. Inco retains a 69% interest in Goro Nickel. We are
enthusiastic about our solid partnerships.
Nearly all of the Goro technology is already used in processing nickel, except
pyrohydrolysis, which has been effectively applied to other metals. After years of
pilot plant testing, we are sure that our acid pressure leach and solvent extraction
processes will work. There have been a number of high profile laterite project
failures – not because of technology but due to how it was used. We have every
resource that we need – and we will succeed. We’ve hired veterans of all the
laterite projects here in Australia. Our front-end screening facility even draws on
knowledge of wet laterites that we obtained from our PT Inco operations.
We are already thinking about a brownfield expansion. Our leaching facility could
house a fourth autoclave; adding 15,000-to-20,000 tonnes of nickel capacity. We
can – and I believe we will – expand Goro many times.
We estimate Inco’s 2005 capex at $1.45 billion, with Voisey’s Bay at $410 million
and Goro at $560 million, before partner and government funding.
Sustaining capital will be about $330 million. Depreciation and amortization
should be $275 million this year; and about $495 million in 2006 based on
Voisey’s Bay’s 2006 output. This year our net capex funding will be under $900
million after Girardin financing, contributions from Goro partners and government
support for Voisey’s Bay. Our net capex funding needs will rise in 2006 to about
$1 billion; fall below $500 million in 2007, and drop to $240 million in 2008. At
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$6.58 per pound nickel, we can fund 2005 capex from internal cash flow and
cash on hand.
Inco’s future looks very bright. We are not just talking about growing, we’re doing
so. The best new major projects – and PT Inco’s output – mean 35% growth from
2004 to 2009. Inco is resource rich and our orebodies are a great growth pipeline
well beyond that time.
Our existing nickel operations stack up very well against others and our asset
base remains a sustainable competitive advantage. All producers are fighting
cost pressures but this is our last transition year before Voisey’s Bay. Yes, we’ve
had some pain but there are real gains coming soon; in 2006 our nickel unit cash
cost of sales is expected to drop to $1.95 a pound.
Our financial position is very attractive and we have the financial strength to
implement our growth plan, with a 28% debt-to-capitalization ratio and over $1
billion cash in the bank. Low-cost Voisey’s Bay and Goro are cash machines; at
First Call consensus nickel prices, we should generate $1.3 billion of cash in
2005, or cash flow per share of $5.85. With Voisey’s Bay on stream, we should
generate $1.5 billion of cash next year, or $6.75 per share. This month our Board
reinstated a quarterly dividend of $0.10 per share, based on Inco’s strong cash
flow and financial position, our confidence in our growth program, and the
positive outlook for both the Company and the nickel market. So expect value
creation for our shareholders.
Inco’s third primary strength is the number one marketing position. This is a
competitive advantage that virtually can’t be duplicated. It results from our longterm
focus, which will lead to even more growth. We have a leading presence
across the world – especially in Asia – that enables us to move our products from
areas of weaker demand to stronger ones. Our presence is greatest – and still
increasing – in the best markets.
In the metals industry it’s important to pay attention to costs, and we do, but our
portfolio allows us to focus on margins, too. Earlier I mentioned that just over
40% of our nickel goes into stainless steel. We continue to sell an above market
average share of our products at premium prices – into higher margin, nonstainless
segments such as batteries, powder metallurgy, high nickel alloys and
plating.
In August of last year, we announced a joint venture in China to make nickel
foam, used in the battery industry. The plant began delivering nickel foam to the
market in the third quarter of 2004. In February, we acquired a 77% interest in
the nickel foam business of Shenyang Golden Champower New Materials
Corporation, a major Chinese producer of nickel foam. This acquisition makes
Inco the largest producer of nickel foam worldwide.
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I’m sure you can see where I’m headed. It is in value-added applications that
Inco best distinguishes itself from other nickel producers. For instance, foam is
sold by the cubic metre, where value is measured per gram of nickel. This very
high-end application converts commodity nickel to a high margin, high return
product.
I’ll wrap up by returning to where I began – to Inco and the nickel market. Inco’s
prospects are closely tied to market needs and yet transcend them. That is
because we are focused on taking the best opportunities the market offers and
maximizing their value for shareholders. We do so by drawing on the strengths
we’ve developed – like value-added production, unrivalled marketing know-how,
and the most impressive portfolio of nickel assets in the world. These strengths
are the firepower we are using to build our future.
We do not buy the accepted wisdom in some quarters that nickel prices have
peaked. The revival of China’s appetite for nickel, the urgency of high nickel alloy
demand, and limited nickel supplies, will be key drivers for 2005. And the bloom
is not off the rose by any means – supply will chase demand for years longer
than many think.
I hope I’ve convinced you that Inco has a tremendous hand to play in the global
nickel market – and it’s no accident that we are in this position. We have the right
cards, the right skills and the right attitude to remain winners – now and for the
long term. We expect to earn the rewards that are well within our grasp.