RNS Number:1596R
Inco Ld
21 October 2003
INCO REPORTS RESULTS FOR THIRD QUARTER OF 2003
_______________________
(All dollar amounts are expressed in United States currency)
TORONTO, October 21, 2003 - Inco Limited today reported adjusted net
earnings((1)) of $16 million, or 7 cents per share, for the third quarter
of 2003, compared with adjusted net earnings of $52 million, or 25 cents per
share, for the third quarter of 2002. The adjustments made in arriving at
adjusted net earnings for the third quarter of 2003 reflected the exclusion
of (1) an after-tax expense of $46 million, or 25 cents per share, covering
costs incurred during the strike of the unionized workforce at our Ontario
operations which began on June 1, 2003 and ended when a new collective
agreement covering this workforce was entered into on August 28, 2003, (2)
unfavourable non-cash currency translation adjustments relating to changes in
the Canadian-U.S. dollar exchange rate of $6 million, or three cents per share,
(3) an after-tax credit of $8 million, or four cents per share, for currency
hedging gains net of suspension costs associated with the Goro nickel-cobalt
project, and (4) a net favourable adjustment of $1 million associated with
certain tax charges and income on accrued tax refunds covering prior periods.
For the third quarter of 2003, the net loss, in accordance with Canadian
generally accepted accounting principles ("Canadian GAAP"), was $27 million, or
16 cents per share, compared with net earnings of $91 million, or 46 cents per
share, in accordance with Canadian GAAP, for the third quarter of 2002. Adjusted
net earnings for the first nine months of 2003 were $142 million, or 71 cents
per share, compared with adjusted net earnings of $142 million, or 66 cents per
share, in the corresponding 2002 period. Net earnings for the first nine months
of 2003, in accordance with Canadian GAAP, were $63 million, or 20 cents per
share, compared with a net loss of $1,480 million, or $8.22 per share, in the
corresponding period. The adjustments made in arriving at adjusted net earnings
for the third quarters and first nine months of 2003 and 2002 are set forth
under "Reconciliation Between Adjusted Net Earnings and Net Earnings in
Accordance with Canadian GAAP" below.
Chief Executive Officer's Message
Our third quarter 2003 results were disappointing, reflecting the negative
impact of the strike at our Ontario operations and a slower than anticipated
ramp-up of those operations following the strike. At the same time, we benefited
from strong production at our PT Inco and Manitoba operations, and from rising
nickel prices in a nickel market that we believe will continue to strengthen. We
also made progress during the quarter on our growth projects at Voisey's Bay and
Goro.
Market conditions
Strong underlying market fundamentals helped to drive nickel prices higher in
the third quarter, with global production unable to keep pace with demand
growth. The resulting tight market conditions, reductions in reported producer
inventories and lower consumer inventories prompted the release of material that
had been pledged by a Russian producer to secure a loan, thereby enabling supply
to keep pace with demand.
We believe that the ongoing increase in demand for stainless steel in China is
driving large expansions in world stainless steel capacity and production, and
is pushing world nickel demand to new highs. We expect Western World plus China
demand for nickel to rise by about 7 per cent this year.
Operating issues
The key factors affecting our third quarter production and costs were the strike
at our Ontario operations and a slower than anticipated ramp-up of those
operations due to a number of unforeseen problems following the strike
settlement reached in late August. The ramp-up of Ontario's Copper Cliff smelter
was complicated by several problems which have been resolved, but which
adversely affected downstream processing and unit cash costs. This smelter is
now operating at close to plan levels. While the Stobie mine at our Ontario
operations had been experiencing an ore pass problem, we believe that this
problem has been resolved and should not affect production in Ontario. We
currently estimate that our nickel production from Ontario for the third and
fourth quarters of 2003 will leave us about 12 to 17 million pounds below our
three-month strike affected plan of 175 million pounds from our Ontario
operations for 2003. We currently estimate that our platinum-group metals
production for the year will be in the 205,000 to 210,000 troy ounces range,
significantly lower than our July 22 guidance of 280,000 troy ounces which was
based upon an assumed three-month strike at Ontario.
The nickel production shortfall from Ontario is expected to be partially offset
by better than planned production from Manitoba and PT Inco, both of which are
having very good years and should be ahead of plan for 2003. Our PT Inco
operations reached a new production record for the third quarter and are
expected to reach full nameplate annual production capacity of 150 million
pounds in 2003.
Third quarter nickel unit cash cost of sales after by-product credits rose to
$2.26 per pound as a result of the ramp-up problems experienced in Ontario
during September. We incurred an expense of $25 million for this quarter due to
lower than planned production of in-process and finished material due to these
problems. We also expect minimal production of platinum-group metals from our
Ontario ores for the final quarter of 2003. This PGM shortfall will adversely
affect our by-product credits and as a result we currently expect our nickel
unit cash cost of sales after by-product credits for the fourth quarter of 2003
to be in the $2.55 to $2.65 range based on the average of prevailing exchange
rates for the fourth quarter to date.
In late August, we reached a new three-year collective agreement in Ontario,
ending the three-month strike that began on June 1. We believe that we can
responsibly manage the cost of this settlement, which will raise Ontario's
all-in labour costs by a little under 1.8 per cent per year over the contract's
life. We do expect significant opportunities to offset at least some of these
costs through improved productivity and lower health care delivery costs.
Overall, our costs are unacceptably high and we intend to take actions to
address this very important issue. Our objective is to cut controllable costs
across our operations by 10 to 15 per cent over the next 12 to 18 months by
developing and putting in place new productivity programs and taking other
actions to improve the competitiveness of our operations.
Marketing developments
As a result of the strike at our Ontario operations, our regional marketing
units were forced to declare force majeure under certain sales contracts for
nickel, copper and cobalt. We lifted force majeure for our copper products on
October 1 and indicated on October 7 to our customers that we were lifting force
majeure for most products coming from the Copper Cliff nickel refinery in
Ontario. We have not yet lifted force majeure on products produced from our
Clydach, Wales refinery and our cobalt products as we continue to replenish our
supply chain. We expect to be in a position to lift force majeure for these
remaining products by mid-November.
On August 14, we announced a joint venture in Dalian, China to produce nickel
foam for the Chinese battery industry. This latest collaboration is part of our
ongoing strategy of increasing margins and enhancing our presence in China, the
world's fastest growing nickel market.
Progress on growth projects
We continued to make good progress on our Voisey's Bay project during the third
quarter. We are on schedule this year to complete a permanent airstrip, expand
the project site camp, finish construction support facilities, and install the
concentrator building and equipments foundations. Meanwhile, we have begun
testing our pressure oxidative leaching process for Voisey's Bay at a mini-pilot
plant in Mississauga, Ontario. We produced our first cathode in June at this
mini-pilot plant and completed a very successful initial integrated pilot-plant
campaign in September.
We have made progress in identifying opportunities to reduce the capital cost
estimate for our Goro nickel-cobalt project in New Caledonia and we have moved
into the next phase of the overall project review process which began in
December 2002. We plan to report on the status of this next phase in the first
quarter of 2004.
Strengthening our financial position
We continue to maintain a strong balance sheet and improve our financial
position. During the quarter we completed a public offering of 5.70% Debentures
that will mature in 2015. We will be using the net proceeds from this offering,
estimated at $297 million, together with available cash, to redeem higher cost
debt, thus reducing our interest expense.
Strong nickel market
Nickel's recent price rise confirms our view that Inco is in the number one
non-ferrous metal and our leverage is based on a metal that we believe will
continue to do very well in the coming years.
While the nickel market remains strong, we cannot and we will not rely on the
market to meet our objectives. We intend to take actions to improve the cost
position of our existing operations, develop Voisey's Bay and Goro in a prudent
manner, and enhance our leading marketing position in the nickel industry. We
have challenges and great opportunities ahead of us - and we intend to succeed.
I look forward to reporting on our performance again next quarter.
Scott Hand
Chairman and Chief Executive Officer
Reconciliation Between Adjusted Net Earnings and Net Earnings in Accordance with
Canadian GAAP
We define adjusted net earnings and adjusted net earnings per share
as a calculation of net earnings that excludes items that, because of the
nature, timing or extent of such items, we believe do not reflect or relate to
our ongoing operating performance. Accordingly, the items that are excluded from
this calculation would include non-cash currency translation adjustments
relating principally to liabilities that are not expected to be discharged or
settled for a number of years, income tax benefits (charges) relating to
adjustments for tax rulings and other decisions and interpretations covering
transactions in prior periods and for revaluation of recorded future tax
liabilities due to changes in laws or regulations affecting future tax rates,
interest income associated with tax refunds, project suspension and similar
costs, including related project currency hedging gains and losses, asset
impairment charges, losses or gains on debt retirements, strike expenses and,
for earnings per share calculations, the premium payable on preferred share
redemptions. The determination of which items to exclude when calculating
adjusted net earnings involves the application of judgment by us.
The following table provides for the periods indicated a reconciliation
between our adjusted net earnings and net earnings (loss) as reported in
accordance with Canadian GAAP:
(in millions
except per
share
amounts) Net Earnings Earnings (1) Per Share
----------------------------------------------------------------------------
Third Quarter Nine Months Third Quarter Nine Months
September 30 2003 2002 2003 2002 2003 2002 2003 2002
---------------------------------------------------------------------------------------------
Adjusted net
earnings $ 16 $ 52 $ 142 $ 142 $ 0.07 $ 0.25 $ 0.71 $ 0.66
Strike expense (46) - (69) - (0.25) - (0.38) -
Income tax
benefits (charges) (8) - 126 - (0.04) - 0.69 -
Currency
translation
adjustments (6) 31 (156) (4) (0.03) 0.17 (0.85) (0.02)
Income on an
accrued tax refund 9 8 9 8 0.05 0.04 0.05 0.04
Goro project
suspension costs
and related
currency hedging
gains, net 8 - 13 - 0.04 - 0.07 -
Loss on
redemption
of 5 3/4%
convertible
debentures due
2004 - - (2) - - - (0.01) -
Asset impairment
charges - - - (1,626) - - - (8.90)
Redemption
premium
on Series E
Preferred
Shares - - - - - - (0.08) -
-----------------------------------------------------------------------------------------------
Canadian GAAP net
earnings (loss), as
reported $ (27) $ 91 $ 63 $ (1,480) $ (0.16) $ 0.46 $ 0.20 $ (8.22)
-----------------------------------------------------------------------------------------------
(1) For Canadian GAAP reporting purposes, the redemption premium of $15 million
paid in connection with the redemption of our Series E Preferred Shares in
May 2003 is treated only as a reduction in earnings per share since this
premium reduces retained earnings but does not affect earnings.
We believe that the reporting of adjusted net earnings, a calculation that,
as noted above, excludes non-cash currency translation adjustments and other
items that, given their nature, timing or extent, may obscure trends in the
performance of our operations or otherwise not be representative of our ongoing
operations, provides our shareholders and other investors with a potentially
useful picture that eliminates the volatility of such items, whether they are
favourable or unfavourable, and may assist them in assessing operating
performance.
Outlook
The Company's current estimates for its production for the fourth quarter
of 2003 and the full year 2003 of nickel, copper and platinum-group metals
(PGMs), including PGMs produced from purchased material, are as follows:
Fourth Quarter Full Year
2003 2003
_____ _____
Nickel - tonnes (thousands) 58 to 60 186 to 188
- pounds (millions) 128 to 133 410 to 415
Copper - tonnes (thousands) 30 to 32 88 to 91
- pounds (millions) 66 to 71 195 to 200
PGMs - troy ounces (thousands) 3 to 8 205 to 210
Our current estimate for PGMs production for 2004 is about 400,000 troy ounces.
Principally as a result of the adverse effect of the unanticipated problems
experienced in the ramp-up of our Ontario operations after the three-month
strike on planned production of PGMs for the fourth quarter, the Company
currently projects that its nickel unit cash cost of sales after by-product
credits for the fourth quarter of 2003 will be about $2.55 to $2.65 per pound
($5,623 to $5,843 per tonne) based upon the average of prevailing exchange rates
for the fourth quarter of 2003 through October 20 and for the full year 2003
will be about $2.20 to $2.25 per pound ($4,851 to $4,961 per tonne) based upon
this average of prevailing exchange rates. Our production of PGMs for the fourth
quarter of 2003 will also be limited by our commitments to process third party
PGMs material under certain tolling arrangements. In view of the recent rapid
rise in the London Metal Exchange (LME) cash nickel price and the effect this
development has had on the price we receive for the matte product produced by PT
International Nickel Indonesia Tbk ("PT Inco"), the lag effect that changes in
this benchmark price have on the pricing of certain of our nickel products, and
how certain of our specialty nickel products are priced, the premium we
currently expect to realize over the LME cash nickel prices for the fourth
quarter of 2003 will be about $0.02 to $0.08 per pound ($44.10 to $176.40 per
tonne) and $0.08 to $0.12 per pound ($176.40 to $264.60 per tonne) for the full
year 2003. The Company has historically experienced, and expects to continue to
experience, some quarter-to-quarter variability in production levels of its
primary metals products due to planned maintenance shutdowns of operations and
other normal planned actions.
Based upon the average LME cash nickel price for the October 1 - October
20, 2003 period, $4.92 per pound ($10,847 per tonne), the average COMEX first
position benchmark price for this same period for copper, $0.86 per pound
($1,900 per tonne), and the Bank of Canada average Canadian dollar-U.S. dollar
noon exchange rate for the October 1 - October 20, 2003 period of approximately
$0.75, the Company currently expects that its fourth quarter 2003 adjusted net
earnings per share will be in the range of $0.20 to $0.25 per share. The
Company's policy continues to be that it does not publicly forecast exchange
rates and where nickel and other metals prices will be in the future given the
historic volatility in these prices and the level of economic uncertainty that
currently exists in at least certain of our key geographic markets. The LME cash
nickel price averaged $4.02 per pound ($8,854 per tonne) for the January 2 -
October 20, 2003 period.
The Company's earnings per share estimate represents its estimate for
adjusted net earnings and excludes certain adjustments that would be made in
the calculation of net earnings in accordance with Canadian GAAP. Since such
adjustments would include assumptions or forecasts relating to changes in the
Canadian-U.S. dollar exchange rate and other currency exchange rate changes and
other external factors that the Company does not believe it is in a position to
predict with any degree of certainty the impact that they will have, the Company
does not provide a reconciliation between its adjusted net earnings estimate and
a corresponding net earnings estimate in accordance with Canadian GAAP.
In terms of the current sensitivity of the Company's earnings per share
to changes in nickel prices, for every change of 10 cents, up or down, per
pound in Inco's realized nickel price over a full year, Inco's Canadian GAAP net
earnings per share (EPS) over that year would change, up or down, by about 14
cents. The sensitivities set forth in the table below exclude the effect of the
three-month strike at our Ontario operations. As reflected in the table below,
while Inco's financial results are most sensitive to changes in (1) the
Canadian-U.S. dollar exchange rate given that a substantial portion of expenses
are incurred in Canadian dollars and the Company has substantial Canadian
dollar-denominated liabilities and (2) nickel prices, our results are also
sensitive to changes in copper and other prices as well as, on the cost side,
changes in oil and natural gas prices and changes in our share price given how
we account for share appreciation rights granted in connection with certain
share options:
CURRENT 2003 SENSITIVITY OF EPS(1) TO CERTAIN
METALS PRICES AND OTHER CHANGES
OVER ONE YEAR (IN U.S.$)
Amount of Change
(up or down) EPS Effect(1)
Realized nickel price $ 0.10/lb. $ 0.14
Realized copper price 0.10/lb. 0.10
Realized palladium price(2) 50.00/troy oz 0.03
Realized platinum price(2) 50.00/troy oz 0.02
Realized cobalt price 1.00/lb. 0.01
Cdn.-U.S. exchange rate(3)(4) 0.01 0.13
Fuel oil price (West Texas Intermediate) (2)(4) 1.00/bbl 0.005
Natural gas price(4) 0.10/MM BTU 0.002
Share Appreciation Rights(4)(5) 1.00 0.01
(1) Basic Canadian GAAP net earnings per share
(2) Includes the impact of hedging activities as of September 30, 2003
(3) The EPS effect represents (a) $0.06 for a non-cash balance sheet
translation effect relating to Canadian dollar-denominated liabilities, (b)
$0.02 relating to accrued taxes for Canadian dollar currency translation
gains associated with U.S. dollar-denominated liabilities and (c) $0.05 for
operating cost translation effect
(4) Increases in these costs, exchange rates and our share price have a
negative effect on EPS
(5) Reflects the effect on EPS of a change in the Company's common share price
on our accrual for share appreciation rights granted in connection with
certain share options
Our capital expenditures for our existing operations and growth projects
are also sensitive to changes in exchange rates depending upon the currency in
which such expenditures are incurred.
These sensitivities update the information provided under "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risks
and Uncertainties - Sensitivities" in our 2002 Annual Report to Shareholders.
Commentary on Results for the Third Quarter and First Nine Months of 2003
(Tabular amounts are in millions of United States dollars
except per share amounts)
Results of operations
The following table summarizes our results in accordance with Canadian GAAP
for the periods indicated:
Results Summary Third Quarter Nine Months
2003 2002 2003 2002
Net sales $ 450 $ 536 $ 1,642 $ 1,633
Operating earnings (loss) (22) 141 (34) (2,117)
Net earnings (loss) (27) 91 63 (1,480)
Net earnings (loss) per common share
- basic (0.16) 0.46 0.20 (8.22)
- diluted (0.16) 0.45 0.20 (8.22)
Cash provided by operating activities 19 267 2 466
Our net loss was $27 million, or 16 cents per share (16 cents per share on a
diluted basis), for the third quarter of 2003, compared with net earnings of $91
million, or 46 cents per share (45 cents per share on a diluted basis), in the
corresponding 2002 period. Results for the third quarter of 2003 included an
after-tax expense of $46 million, or 25 cents per share, associated with the
strike of the unionized workforce at our Ontario operations which began on June
1, 2003 and ended on August 28, 2003 when we entered into a new three-year
collective agreement. Strike expenses are those ongoing costs, such as salaries
and certain employment benefits, depreciation, property taxes, utilities and
maintenance incurred during the strike period which would normally be treated as
production costs and charged to inventory but, in the absence of production,
have been expensed. Third quarter 2003 results also included (1) unfavourable
non-cash currency translation adjustments of $6 million, or three cents per
share, (2) an after-tax credit of $8 million, or four cents per share, to accrue
for currency hedging gains of $14 million, partially offset by additional costs
of $6 million related to the suspension of certain development activities and
other actions concerning the Goro project in New Caledonia, and (3) a net
favourable adjustment of $1 million associated with certain tax charges and
income on accrued tax refunds covering prior periods. Currency translation
adjustments of $6 million in the third quarter of 2003 were due to the effect of
a strengthening of the Canadian dollar relative to the U.S. dollar during the
quarter on Canadian dollar-denominated liabilities. The income tax charges of $8
million referred to in the "Reconciliation Between Adjusted Net Earnings and Net
Earnings in Accordance with Canadian GAAP" table above related to decisions on
tax matters regarding the tax treatment of certain prior period transactions.
The currency hedging gains related to forward currency contracts which had been
entered into to reduce exposure to exchange rate changes associated with certain
planned Goro project expenditures to be incurred in certain currencies. A
portion of these contracts was closed out in October 2003 since they no longer
matched the timing of such expenditures. The third quarter 2002 results also
included after-tax interest income of $8 million, or four cents per share,
associated with a tax refund and favourable non-cash currency translation
adjustments of $31 million, or 17 cents per share.
Net earnings for the first nine months of 2003 were $63 million, or 20 cents
per share (20 cents per share on a diluted basis), compared with a net loss of
$1,480 million, or $8.22 per share ($8.22 per share on a diluted basis), in the
corresponding 2002 period. Results for the first nine months of 2003 included
the following items: (1) unfavourable non-cash currency translation adjustments
of $156 million, or 85 cents per share, (2) income tax benefits of $126 million,
or 69 cents per share, (3) after-tax income of $9 million, or five cents per
share, associated with an accrued tax refund, (4) currency hedging gains net of
suspension costs relating to the Goro project of $13 million, or seven cents per
share, (5) a loss of $2 million, or one cent per share, realized on the
redemption of certain convertible debt securities, (6) an after-tax expense of
$69 million, or 38 cents per share, associated with the three-month strike at
our Ontario operations, and (7) with respect to only the calculation of net
earnings per share, a premium of $15 million, or eight cents per share, paid on
the May 1, 2003 redemption of our Series E Preferred Shares. Currency
translation adjustments of $156 million in the first nine months of 2003 were
due to the effect of a significant strengthening of the Canadian dollar relative
to the U.S. dollar during the period on Canadian dollar-denominated liabilities.
The income tax benefits of $126 million consisted of the deferred income tax
benefit referred to above, a benefit of $38 million recorded in the first
quarter of 2003 relating to favourable rulings and other decisions on tax
matters from Canadian and other jurisdictions regarding the tax treatment of
certain prior period transactions and other issues and, in the second quarter of
2003, an income tax benefit of $96 million which was primarily due to the
revaluation of deferred income tax liabilities for reductions in future tax
rates and the overall favourable effect of certain other changes in Canadian tax
legislation affecting mining companies. Results for the first nine months of
2002 included non-cash after-tax asset impairment charges of $1,626 million, or
$8.90 per share, to reduce the carrying value of the Voisey's Bay project and
certain other assets, after-tax interest income of $8 million, or four cents per
share, associated with a tax refund and unfavourable non-cash currency
translation adjustments of $4 million, or two cents per share.
Net sales
Net sales decreased substantially to $450 million in the third quarter of
2003, compared with $536 million in the corresponding 2002 period, primarily as
a consequence of lower Inco-source deliveries given the three-month strike which
began on June 1, 2003 at our Ontario operations and lower deliveries of
platinum-group metals. This strike-affected lower production in Ontario was
partially offset by significantly higher average realized prices for nickel and
a significant increase in the deliveries of purchased finished nickel.
In the first nine months of 2003, net sales were $1,642 million, up slightly
from $1,633 million in the corresponding 2002 period. The increase was due to
significantly higher average realized prices for nickel which were mostly offset
by lower deliveries of Inco-source nickel, platinum, palladium, copper and
cobalt, and lower realized prices for certain platinum-group metals. The
decrease in deliveries was primarily due to lower production at the Ontario
operations as a result of the strike which was partially offset by higher nickel
deliveries from our Manitoba operations and an increase in the deliveries of
purchased finished nickel.
Costs and expenses
Cost of sales and operating expenses
Cost of sales and operating expenses increased 7 per cent and 17 per cent in
the third quarter and first nine months of 2003, respectively, compared with the
corresponding 2002 periods, reflecting the adverse impact of a strengthening of
the Canadian dollar relative to the U.S. dollar, higher energy costs and
employment expenses, and increased costs and operating expenses for purchased
intermediates. Operating results included a pre-tax expense of $72 million and
$107 million in the third quarter and first nine months of 2003, respectively,
associated with the three-month strike at the Ontario operations. During the
third quarter of 2003, our Ontario operations experienced a series of
unanticipated problems principally at its smelter and related facilities which
were associated with the ramp-up of those facilities after the strike. These
problems, which have been resolved, included outages or curtailments of
operations at the Ontario operations' oxygen plants and acid plant. These
problems resulted in lower than planned production of in-process and finished
material and an expense of $25 million was incurred during the third quarter of
2003 due to this production shortfall. In addition, deliveries of purchased
finished nickel in the third quarter and first nine months of 2003 increased by
84 per cent and 52 per cent, respectively, compared with the corresponding 2002
periods. The cost of these purchases is based upon LME and other benchmark
prices and is included in cost of sales.
Nickel unit cash cost of sales after by-product credits increased to $4,983
per tonne ($2.26 per pound) in the third quarter of 2003 and $4,498 per tonne
($2.04 per pound) in the first nine months of 2003 from $3,263 per tonne
($1.48 per pound) and $2,998 per tonne ($1.36 per pound), respectively, in the
corresponding periods of 2002. These increases were principally due to the
unfavourable effect of a strengthening of the Canadian dollar relative to the
U.S. dollar, the ramp-up problems noted above, higher energy costs at PT Inco
and employment and pension costs and lower contributions from by-products,
primarily resulting from lower deliveries of PGMs. For the first nine months of
2003, these unit costs were also adversely affected by higher costs for and
processing of larger volumes of purchased intermediates. The average value of
the Canadian dollar, the currency in which a substantial portion of our
operating expenses is incurred, strengthened against the U.S. dollar by 13 per
cent in the third quarter of 2003 and by 10 per cent in the first nine months of
2003 relative to the corresponding 2002 periods. Excluding the costs associated
with purchased intermediates, nickel unit cash cost of sales after by-product
credits was approximately $4,740 per tonne ($2.15 per pound) in the third
quarter of 2003 and approximately $4,101 per tonne ($1.86 per pound) in the
first nine months of 2003.
We use purchased intermediates to increase processing capacity utilization
at our Canadian operations. While the cost of purchased intermediates is higher
than processing our own mine production and increases as the prevailing prices,
LME cash nickel or other benchmark prices, on which this material is purchased
by us increases, the price realizations are also higher, resulting in margins on
these purchases remaining relatively unchanged.
Nickel production decreased by 28 per cent to 32,072 tonnes (71 million
pounds) in the third quarter of 2003, compared with 44,300 tonnes (98 million
pounds) inthe corresponding 2002 period, reflecting reduced production at the
Ontario operations due to the strike and the ramp-up problems noted above,
partially offset by higher production at our Manitoba operations. Nickel
production decreased by 20 per cent to 127,497 tonnes (281 million pounds) in
the first nine months of 2003, compared with 159,292 tonnes (351 million pounds)
in the corresponding 2002 period, reflecting lower production at the Ontario
operations due to the strike, the ramp-up problems noted above and seismic
activity at the Creighton Mine during the first quarter of 2003, partially
offset by higher production at our Manitoba operations and the processing of
higher volumes of purchased intermediates and higher ore grades at PT Inco.
Selling, general and administrative
Selling, general and administrative expenses were $44 million and
$104 million in the third quarter and first nine months of 2003, compared with
$22 million and $91 million for the same periods in 2002. The increases for
both periods are primarily due to higher accruals for common share appreciation
rights expense in connection with certain share option grants.
Research and development
Research and development expenses decreased to $4 million and increased to
$18 million in the third quarter and first nine months of 2003, respectively,
from $5 million and $13 million in the respective 2002 periods. The increase
for the first nine months of 2003 is primarily due to higher spending on the
hydromet research program relating to the Voisey's Bay project.
Given the current stage of this program, we are currently expensing a portion of
the costs associated with the hydromet research program.
Exploration
Exploration expenses were $6 million and $18 million in the third quarter
and first nine months of 2003, respectively, compared to $5 million and
$14 million in the corresponding 2002 periods. The increase for the first nine
months of 2003 is primarily due to higher exploration activities relating to our
properties in New Caledonia.
Currency translation adjustments
Currency translation adjustments represented primarily the effect of
exchange rate movements on the translation of Canadian dollar-denominated
liabilities, principally post-retirement benefits, accounts payable, asset
retirement obligations and deferred income and mining taxes, into U.S. dollars.
Unfavourable currency translation adjustments of $6 million and $156 million in
the third quarter and first nine months of 2003, respectively, were due to the
significant strengthening of the Canadian dollar relative to the U.S. dollar
during these periods.
Non-operating items
Interest expense
Interest expense for the third quarter and first nine months of 2003 was $10
million and $36 million, respectively, which did not change significantly
compared with $12 million and $35 million for such expenses in the respective
periods of 2002. Although interest paid in 2003 was higher due to the increased
level of debt, this was offset by an increase in capitalized interest associated
with our development properties and by lower interest rates on our outstanding
debt during the third quarter and first nine months of 2003 compared to the
corresponding periods in 2002. Interest expense excluded capitalized interest of
$16 million and $40 million in the third quarter and first nine months of 2003,
respectively, compared with $8 million and $14 million, respectively, in the
corresponding 2002 periods.
Other income, net
Other income of $20 million for the third quarter of 2003 did not change
compared with the third quarter of 2002. Interest income decreased by $7 million
as a result of lower interest received in connection with reduced tax refunds
during the third quarter of 2003 compared to the interest received in connection
with tax refunds during the corresponding period in 2002. Partially offsetting
the decrease in interest income was the reversal of a provision in respect of
certain receivables. Other income increased by $34 million to $61 million in the
first nine months of 2003, compared with $27 million in the corresponding period
of 2002, due to gains of $35 million realized from the sale or transfer of
shares and other interests contributed to or received in conjunction with
strategic and other collaborations relating to our primary metals operations. In
addition, currency hedging gains of $11 million were realized on the closing out
of certain forward currency contracts. These favourable occurrences were
partially offset by a loss of $2 million on the May 1, 2003 redemption of our
53/4% Convertible Debentures due 2004 and lower interest income as a result of
interest from a tax refund which was lower during the first nine months of 2003
compared to the interest on tax refunds received during corresponding period in
2002. Certain forward currency contracts, which had been entered into to reduce
exposure to exchange rate changes associated with certain planned Goro project
expenditures to be incurred in certain currencies, were closed out in early
January 2003 since they no longer matched the timing of such expenditures due to
their deferral as a result of the comprehensive review of the Goro project which
began in December 2002.
Income and mining taxes
The effective income and mining tax rates for the third quarter and first
nine months of 2003 were affected by non-deductible currency translation
adjustments primarily due to the translation of Canadian dollar-denominated
liabilities into U.S. dollars. These rates were also affected by a significant
appreciation of the Canadian dollar in 2003 which resulted in a gain subject to
Canadian income taxes. In addition, the effective tax rates for both periods
were impacted by higher earnings of PT Inco, which earnings are taxed at a
relatively lower rate.
The effective income and mining tax rate in the first nine months of 2003 was
also significantly affected by the recognition of income tax benefits of $38
million recorded in the first quarter of 2003 relating primarily to favourable
tax rulings and other decisions on tax matters from Canadian and other
jurisdictions concerning the tax treatment of certain prior period transactions
and, in the second quarter of 2003, an income tax benefit of $96 million which
was primarily due to the revaluation of deferred income tax liabilities for
reductions in future tax rates and the overall favourable effect of certain
other changes in Canadian tax legislation applicable to mining companies. We
also had taxable gains from the sale or transfer of shares and other interests
as well as currency hedging gains, which were not subject to tax as a result of
available capital losses. The effective income and mining tax rate in the first
nine months of 2002 was adversely affected by asset impairment charges where a
portion of that charge was not deductible for tax purposes.
Minority interest
Minority interest increased by $6 million and $16 million in the third
quarter and first nine months of 2003, respectively, compared with the
corresponding 2002 periods, primarily due to the higher earnings of PT Inco.
Cash Flows and Financial Condition
Net cash provided by operating activities in the third quarter of 2003 was
$19 million, compared with $267 million in the corresponding quarter of 2002.
The decrease in net cash provided by operating activities in the third quarter
of 2003 relative to the corresponding 2002 period was due to lower earnings and
an increase in non-cash working capital during the third quarter of 2003
principally attributable to increased inventory costs. Net cash provided by
operating activities in the first nine months of 2003 was $2 million, compared
with $466 million in the corresponding 2002 period. The change was primarily due
to lower earnings, excluding asset impairment and other non-cash items, higher
tax payments in 2003 and an increase in non-cash working capital principally
attributable to higher inventories, and lower accounts payable and accrued
liabilities.
Net cash used for investing activities decreased to $123 million and
increased to $400 million in the third quarter and first nine months of 2003,
respectively, compared with $190 million and $343 million in the corresponding
periods of 2002. The decrease in the third quarter of 2003 was primarily due to
lower capital spending, mainly in respect of the Goro project, compared to the
same period in 2002. The increase in the first nine months of 2003 was primarily
due to higher capital spending, mainly in respect of the Voisey's Bay project,
compared to the same period in 2002.
Net cash provided by financing activities was $276 million in the third
quarter of 2003. In September 2003, we completed an underwritten public offering
in the United States of $300 million aggregate principal amount of 5.70%
Debentures due 2015 (the "5.70% Debentures"). The net proceeds from this
offering were approximately $297 million after underwriting commissions and
other expenses and will be used, together with available cash, to redeem our
73/4% Convertible Debentures and our 9.60% Debentures as discussed below.
Net cash provided by financing activities was $36 million in the first nine
months of 2003. In addition to the September 2003 offering of 5.70% Debentures,
in March 2003 we also issued and sold in concurrent private offerings (i) $273
million amount payable at maturity of Convertible Debentures due March 14, 2023,
representing $249 million in gross proceeds to us, and (ii) $227 million
aggregate principal amount of Subordinated Convertible Debentures due March 14,
2052. The total combined gross proceeds were $476 million from these two issues
of convertible debt securities. The net cash proceeds of $470 million received
from the concurrent private offerings, after commissions and other expenses,
were used to redeem, as discussed below, in the second quarter of 2003 (i) our
Series E Preferred Shares and (ii) $173 million aggregate principal amount of
our 53/4% Convertible Debentures due 2004. For Canadian reporting purposes,
these convertible securities had been recorded as $114 million of debt and $356
million of equity. For United States reporting purposes, these convertible
securities had been recorded as debt.
On March 28, 2003, we announced that we would exercise our optional right to
redeem all of our issued and outstanding Series E Preferred Shares having a $472
million aggregate liquidation preference and which were subject to mandatory
redemption in 2006, with such redemption to be effective May 1, 2003. We also
announced the redemption of all of our outstanding $173 million aggregate
principal amount of 53/4% Convertible Debentures due 2004. These redemptions
were completed on May 1, 2003. The total aggregate redemption price for the
Series E Preferred Shares was $487 million, including a total redemption premium
of $15 million based upon the $50 issue price per Series E Preferred Share. The
total aggregate redemption price for the $173 million aggregate principal amount
of 53/4% Convertible Debentures due 2004 was $178 million, including $3 million
in accrued interest.
On September 26, 2003, we announced that we would exercise our optional right to
redeem on October 27, 2003 all of our currently outstanding 73/4% Convertible
Debentures due 2016 ("73/4% Convertible Debentures") at a redemption price of
100% of the aggregate outstanding principal amount thereof plus accrued interest
to the October 27, 2003 redemption date. Interest will cease to accrue on the
73/4% Convertible Debentures on and after that redemption date. The conversion
price for each 73/4% Convertible Debenture is $38.25 per Common Share.
On September 26, 2003, we announced that we would also exercise our optional
right to redeem on October 27, 2003 all of our currently outstanding 9.60%
Debentures due 2022 ("9.60% Debentures") at a redemption price of 104.32% of the
aggregate outstanding principal amount thereof (or $1,043.20 per $1,000 in
principal amount) plus accrued interest to the October 27, 2003 redemption date.
Interest will cease to accrue on the 9.60% Debentures due 2022 on and after that
redemption date.
At September 30, 2003, cash and marketable securities were $725 million,
down from $1,087 million at December 31, 2002, reflecting the cash used to fund
capital expenditures of $417 million and the redemptions of our Series E
Preferred Shares and 53/4% Convertible Debentures due 2004 in the second quarter
of 2003, partially offset by the net cash proceeds of $470 million received from
the two concurrent private offerings of convertible debt in the first quarter of
2003 and the $297 million in net proceeds from the issuance of our 5.70%
Debentures in September 2003. Total debt was $1,807 million at September 30,
2003, up from $1,643 million at December 31, 2002. Total debt as a percentage of
total debt plus shareholders' equity was 33 per cent at September 30, 2003,
compared with 30 per cent at December 31, 2002. Under Canadian GAAP, a
substantial portion of our convertible debt is recorded as equity and not debt.
Accounting changes
(a) Expensing cost of stock options
Effective January 1, 2003, we changed our accounting for stock options from
the intrinsic value method to one that recognizes as an expense the cost of
stock-based compensation based on the estimated fair value of new stock options
granted to employees in 2003 and in future years. The fair value of each stock
option granted is estimated on the date of the grant using the Black-Scholes
option-pricing model. As a result of this change in accounting, which was
applied prospectively, an expense of $1 million and $3 million was recorded in
the third quarter and first nine months of 2003, respectively, to reflect the
fair value of stock options granted to employees in 2003.
(b) Asset retirement obligations
Effective January 1, 2003, we adopted a new accounting standard relating
to asset retirement obligations. Under this new standard, retirement obligations
are recognized when incurred and recorded as liabilities at fair value. The
liability is accreted over time through periodic charges to earnings.
In addition, the asset retirement cost is capitalized as part of the asset's
carrying value and depreciated over the asset's useful life. This change in
accounting policy was applied retroactively and, accordingly, the consolidated
financial statements of prior periods were restated. As a result of this change,
the deficit increased by $18 million at January 1, 2003, property, plant and
equipment increased by $37 million at December 31, 2002, deferred income and
mining taxes decreased by $12 million at December 31, 2002, and the asset
retirement obligation increased by $67 million at December 31, 2002. A pre-tax
expense of $2 million and $6 million was recorded in the third quarter and first
nine months of 2003, respectively, for accretion and depreciation for asset
retirements.
Access to Webcast of Quarterly Conference Call
As previously announced, interested investors can listen to our third
quarter 2003 results conference call with the investment community on a live,
listen-only basis, or access the archival of the call through the Internet or
toll-free telephone call in North America.
The conference call is scheduled for October 21, 2003 beginning at 3:00 p.m.
(Toronto time) and can be accessed by visiting the website of a third-party
webcasting service we will be using, Canada NewsWire Ltd., at www.newswire.ca/
webcast, at least five minutes before the start of the call. Slides or other
statistical information to be used for the conference call can be accessed and
will be available for online viewing through www.newswire.ca/webcast by clicking
on the event title or through our website, www.inco.com, by clicking on the
"Latest Quarterly Webcast" link on the homepage.
The archival webcast of the conference call can be accessed via the Internet
through www.newswire.ca/webcast. A recording of the conference call can be
listened to until 5:00 p.m. (Toronto time) on November 4 by dialling
1-800-558-5253 in North America and by entering the reservation number 21161196.
This recording is also available outside North America by dialing (416)
626-4100.
This news release contains forward-looking statements regarding the
Company's costs, its position as a low-cost producer of nickel, production of
nickel, copper and platinum-group metals in 2003 and platinum-group metals in
2004 at its Canadian, Indonesian and other operations, nickel demand, premiums
realized on its metals prices, the lifting of force majeure on certain
contractual arrangements relating to nickel and other products, the sensitivity
of financial results to changes in nickel and other metals prices, exchange
rates, interest, energy and other costs and its common share price, cost
reduction objectives, its Goro and Voisey's Bay projects and other issues and
aspects relating to its business and operations. Inherent in those statements
are known and unknown risks, uncertainties and other factors well beyond the
Company's ability to control or predict. Actual results and developments may
differ materially from those contemplated by these statements depending on,
among others, such key factors as business and economic conditions in the
principal markets for the Company's products, the supply and demand for metals
to be produced, purchased intermediates and nickel-containing stainless steel
scrap and other substitutes and competing products for the primary metals and
other products the Company produces, developments concerning labour relations,
the Company's deliveries, production levels, production and other anticipated
and unanticipated costs and expenses, metals prices, premiums realized over LME
cash and other benchmark prices, tax benefits and charges, changes in tax
legislation, hedging activities, the Canadian-U.S. dollar and other exchange
rates, changes in the Company's share price, the completion and results of a
comprehensive review of the capital costs, scope, schedule, and other key
aspects of the Goro project, the timing of receipt of all necessary permits and
governmental, regulatory and other approvals, and engineering and construction
timetables, for the Voisey's Bay and Goro projects, the necessary financing
plans and arrangements for, and joint venture, partner or similar investments
and other agreements and arrangements associated with, the Goro project,
political unrest or instability in countries such as Indonesia, risks involved
in mining, processing and exploration activities, market competition and labour
relations and other risk factors listed from time to time in the Company's
reports filed with the U.S. Securities and Exchange Commission. The forward-
looking statements included in this release represent the Company's views as of
the date of this release. While the Company anticipates that subsequent events
and developments may cause the Company's views to change, the Company
specifically disclaims any obligation to update these forward-looking
statements. These forward-looking statements should not be relied upon as
representing the Company's views as of any date subsequent to the date of this
release.
October 21, 2003
IN 03/37
For further information:
Media Relations: Steve Mitchell (416) 361-7950
Investor Relations: Sandra Scott (416) 361-7758
or www.inco.com
Inco Limited
Key Financial and Operating Statistics
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Average Realized
Prices 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------
Nickel(1) - per tonne $ 9,614 $ 7,262 $ 8,902 $ 7,018
- per pound 4.36 3.29 4.04 3.18
Copper - per tonne 1,329 1,575 1,684 1,636
- per pound 0.60 0.71 0.76 0.74
(1) Including intermediates
LME Average Cash Prices
Nickel - per tonne 9,375 6,837 8,699 6,664
- per pound 4.25 3.10 3.95 3.02
Copper - per tonne 1,753 1,516 1,686 1,561
- per pound 0.80 0.69 0.76 0.71
Deliveries
Nickel in all forms (tonnes)
- Inco-source 35,779 53,437 131,894 163,352
- Purchased finished 8,531 4,640 23,494 15,486
--------- --------- --------- ---------
44,310 58,077 155,388 178,838
--------- --------- --------- ---------
Copper (tonnes) 355 19,852 59,114 82,564
--------- --------- --------- ---------
Cobalt (tonnes) 85 338 680 1,098
--------- --------- --------- ---------
(in thousands)
Platinum-group metals
(troy ounces) 19 116 203 327
--------- --------- --------- ----------
Gold (troy ounces) 3 17 33 55
--------- --------- --------- ----------
Silver (troy ounces) - 380 910 1,210
--------- --------- --------- ----------
Nickel Production and Unit
Costs
Nickel production
in all forms (tonnes) 32,072 44,300 127,497 159,292
--------- --------- --------- ----------
Nickel unit cash cost
of sales
before by-product
credits
- per tonne $ 4,851 $ 3,704 $ 4,344 $ 3,351
- per pound 2.20 1.68 1.97 1.52
Nickel unit cash cost of
sales
after by-product credits
- per tonne 4,983 3,263 4,498 2,998
- per pound 2.26 1.48 2.04 1.36
Finished nickel
inventories
at end of period
(tonnes) 18,304 20,798 18,304 20,798
--------- --------- --------- ----------
Operating Earnings
(Loss) (in
millions)
Canadian and U.K.
Operations $ (50) $ 84 $ 45 $ 248
PT Inco 42 20 99 44
Corporate and other (14) 37 (178) (2,409)
--------- --------- --------- ----------
$ (22) $ 141 $ (34) $ (2,117)
========= ========= ========= ==========
Inco Limited
Consolidated Statement of Earnings
(Unaudited)
Three Months Nine Months Ended
Ended September September 30,
30,
(in millions of United States dollars except per 2003 2002 2003 2002
share amounts)
----------------------------------------------------------------------------------------------------------
Net sales $ 450 $ 536 $1,642 $ 1,633
----------------------------------------------------------------------------------------------------------
Costs and operating expenses (income)
Cost of sales and operating expenses 358 336 1,189 1,020
Depreciation and depletion 62 58 193 193
Selling, general and administrative 44 22 104 91
Research and development 4 5 18 13
Exploration 6 5 18 14
Currency translation adjustments 6 (31) 156 4
Goro project suspension costs (8) - (2) -
Asset impairment charges - - - 2,415
----------------------------------------------------------------------------------------------------------
Total costs and operating expenses 472 395 1,676 3,750
----------------------------------------------------------------------------------------------------------
Operating earnings (loss) (22) 141 (34) (2,117)
Interest expense 10 12 36 35
Other income, net (20) (20) (61) (27)
----------------------------------------------------------------------------------------------------------
Earnings (loss) before income and mining taxes and
minority interest (12) 149 (9) (2,125)
Income and mining taxes 2 51 (103) (660)
----------------------------------------------------------------------------------------------------------
Earnings (loss) before minority interest (14) 98 94 (1,465)
Minority interest 13 7 31 15
----------------------------------------------------------------------------------------------------------
Net earnings (loss) (27) 91 63 (1,480)
Dividends on preferred shares - (6) (6) (19)
Accretion of convertible debt (2) (1) (5) (3)
Premium on redemption of preferred shares - - (15) -
----------------------------------------------------------------------------------------------------------
Net earnings (loss) applicable to common shares $ (29) $ 84 $ 37 $ (1,502)
----------------------------------------------------------------------------------------------------------
Net earnings (loss) per common share
Basic $ (0.16) $ 0.46 $ 0.20 $ (8.22)
----------------------------------------------------------------------------------------------------------
Diluted $ (0.16) $ 0.45 $ 0.20 $ (8.22)
----------------------------------------------------------------------------------------------------------
Inco Limited
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
(in millions of United States dollars) 2003 2002
--------------------------------------------------------------------------------
(Restated)
ASSETS
Current assets
Cash and marketable securities $ 725 $ 1,087
Accounts receivable 268 251
Inventories 665 576
Other 94 73
--------------------------------------------------------------------------------
Total current assets 1,752 1,987
Property, plant and equipment 6,787 6,382
Deferred charges and other assets 267 208
--------------------------------------------------------------------------------
Total assets $ 8,806 $ 8,577
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Long-term debt due within one year $ 403 $ 97
Accounts payable 209 338
Accrued payrolls and benefits 122 118
Other accrued liabilities 222 210
Income and mining taxes payable 29 167
--------------------------------------------------------------------------------
Total current liabilities 985 930
Deferred credits and other liabilities
Long-term debt 1,404 1,546
Deferred income and mining taxes 1,552 1,352
Post-retirement benefits 581 475
Asset retirement obligation 141 119
Minority interest 399 368
--------------------------------------------------------------------------------
Total liabilities 5,062 4,790
--------------------------------------------------------------------------------
Shareholders' equity
Convertible debt 602 238
--------------------------------------------------------------------------------
Preferred shares - 472
--------------------------------------------------------------------------------
Common shareholders' equity
Common shares issued and outstanding 185,360,547
(2002 - 183,238,351 shares) 2,816 2,771
Warrants 62 62
Contributed surplus 562 559
Deficit (298) (335)
--------------------------------------------------------------------------------
3,142 3,057
--------------------------------------------------------------------------------
Contingently issuable equity - 20
--------------------------------------------------------------------------------
Total shareholders' equity 3,744 3,787
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,806 $ 8,577
--------------------------------------------------------------------------------
Inco Limited
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Nine Months Ended
Ended September September 30,
30,
(in millions of United States dollars) 2003 2002 2003 2002
----------------------------------------------------------------------------------------
Operating activities
Earnings (loss) before minority interest $ (14) $ 98 $ 94 $ (1,465)
Charges (credits) not affecting cash
Depreciation and depletion 62 58 193 193
Deferred income and mining taxes - 24 (58) (763)
Asset impairment charges - - - 2,415
Other 1 (25) 73 3
Decrease (increase) in non-cash working
capital related to operations
Accounts receivable 10 54 (17) (30)
Inventories (39) (10) (89) (13)
Accounts payable and accrued liabilities 3 7 (50) 20
Income and mining taxes payable 24 58 (138) 124
Other (28) 3 (6) (18)
----------------------------------------------------------------------------------------
Net cash provided by operating activities 19 267 2 466
----------------------------------------------------------------------------------------
Investing activities
Capital expenditures (126) (181) (417) (338)
Other 3 (9) 17 (5)
----------------------------------------------------------------------------------------
Net cash used for investing activities (123) (190) (400) (343)
----------------------------------------------------------------------------------------
Financing activities
Long-term borrowings 308 428 308 846
Repayments of long-term debt (53) (41) (269) (79)
Convertible debt issued - - 470 -
Preferred shares redeemed - - (487) -
Common shares issued 23 - 27 12
Preferred dividends paid - (6) (6) (19)
Dividends paid to minority interest - - (2) (1)
Other (2) - (5) -
-----------------------------------------------------------------------------------------
Net cash provided by financing activities 276 381 36 759
-----------------------------------------------------------------------------------------
Net increase (decrease) in cash and
marketable securities 172 458 (362) 882
Cash and marketable securities at
beginning of period 553 730 1,087 306
-----------------------------------------------------------------------------------------
Cash and marketable securities at end
of period $ 725 $ 1,188 $ 725 $ 1,188
-----------------------------------------------------------------------------------------
- 30 -
((1)) The adjusted net earnings reported in this release have not been calculated
in accordance with Canadian GAAP, the accounting principles under which our
consolidated financial statements are prepared, and there is no standard
definition in such principles for such adjusted net earnings or loss.
Accordingly, it is unlikely that comparisons can be made among different
companies in terms of such adjusted results reported by them. A reconciliation
of adjusted net earnings to net earnings in accordance with Canadian GAAP
appears below as well as an explanation of why we believe adjusted net
earnings is useful information.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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