RNS Number:9805U
Inco Ld
03 February 2004
INCO REPORTS RESULTS FOR FOURTH QUARTER AND FULL YEAR 2003
_______________________
(All dollar amounts are expressed in United States currency)
TORONTO, February 3, 2004 - Inco Limited today reported adjusted net earnings(1)
of $118 million, or 62 cents per share (57 cents per share on a diluted basis(2)
), for the fourth quarter of 2003, compared with adjusted net earnings of $25
million, or ten cents per share (ten cents per share on a diluted basis), for
the fourth quarter of 2002. The principal adjustments made in arriving at
adjusted net earnings for the fourth quarter of 2003 reflected the exclusion of
(1) a net unfavourable adjustment of $32 million, or 17 cents per share,
covering certain tax charges and the accrued tax associated with currency
translation adjustments relating principally to long-term debt, (2) unfavourable
non-cash currency translation adjustments relating to changes in the
Canadian-U.S. dollar exchange rate of $21 million, or 11 cents per share, (3)
after-tax income of $22 million, or 12 cents per share, representing a milestone
payment received as part of the terms of the sale of a non-core exploration
property in 1998, and (4) an after-tax charge of $15 million, or eight cents per
share, for estimated remediation costs for certain former industrial sites in
the United States we retained relating to a business sold in 1983. For the
fourth quarter of 2003, net earnings, in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP"), were $74 million, or 39 cents
per share (36 cents per share on a diluted basis), compared with a net loss of
$2 million, or five cents per share (five cents per share on a diluted basis),
in accordance with Canadian GAAP for the fourth quarter of 2002.
Adjusted net earnings for 2003 were $260 million, or $1.33 per share ($1.29 per
share on a diluted basis), compared with adjusted net earnings of $167 million,
or 75 cents per share (75 cents per share on a diluted basis), in 2002. Net
earnings for 2003, in accordance with Canadian GAAP, were $137 million, or 59
cents per share (58 cents per share on a diluted basis), compared with a net
loss of $1,482 million, or $8.27 per share ($8.27 per share on a diluted basis),
in the corresponding period. All of the adjustments made in arriving at adjusted
net earnings for the fourth quarters and years 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
Inco ended 2003 on a strongly upbeat note, with nickel prices hitting 14-year
highs and our share price up significantly since the beginning of 2003. For
2004, we intend to make the most of a strong nickel market, with plans to
produce every pound of nickel we can to meet our customers' needs. We will also
continue to work aggressively to reduce our controllable costs and enhance
margins. Longer term, we expect our leading nickel development projects at
Voisey's Bay and Goro will position us to benefit from future growth in nickel
demand.
Market conditions
Nickel prices rose dramatically in the fourth quarter of 2003, hitting 14-year
highs by December and finishing the year up 135 per cent from the end of 2002.
Our fourth quarter 2003 results also benefitted from higher prices for copper
and cobalt.
The strong nickel prices were driven by tight supply and increasing demand,
particularly as a result of ongoing growth in Asian stainless steel production
and demand and the lack of new sources of supply. The boom in the Asian market
validates Inco's strategy over many years of building a strong presence on the
ground across Asia and particularly in China. About 66 per cent of our 2003
sales were in Asia, as opposed to approximately 40 per cent ten years ago.
Our current outlook is for the nickel markets to remain strong through 2004,
with continued robust demand from Asia and increased demand in the traditional
markets of the United States and Europe.
Operations
Our Ontario operations resolved the ramp-up issues encountered following the
three-month strike and were back on track in the fourth quarter of 2003. In
2004, we plan to increase Ontario production above our 2003 pre-strike plan by
operating without a planned summer maintenance shutdown, processing more
external feed, and improving smelter throughput.
Given the effect on platinum-group metals (PGMs) that the strike and ramp-up
issues had on the Ontario operations, we produced only 207,000 troy ounces of
PGMs for the year. We expect a sharp improvement in PGMs production in 2004,
increasing such production to 400,000 troy ounces.
PT Inco experienced an exceptionally strong year in 2003 with record production
of 155 million pounds of nickel-in-matte, exceeding its annual design capacity
of 150 million pounds. We are targeting even higher matte production at PT Inco
in 2004.
Our Manitoba operations exceeded their production plan for 2003, despite the
challenge of lower ore grades, which requires mining more tonnes from more
locations. We expect a modest production increase in Manitoba in 2004 despite a
scheduled furnace rebuild.
Overall, we plan to produce 500 to 510 million pounds of nickel in 2004, an
increase of 7 1/2 per cent from our pre-strike 2003 plan of 470 million pounds.
We will be looking for every possible way to exceed this plan. Our goal is to
maximize production, not only to improve our bottom line but also to help meet
our customers' needs in a tight nickel market.
Fourth quarter 2003 nickel unit cash cost of sales after by-product credits
benefitted from lower employment costs in Ontario and lower natural gas and
electricity rates, but these positive factors were partially offset by the
stronger Canadian dollar, higher costs for external nickel feed as a result of
the increased nickel price and lower PGMs production.
We will continue our focus on reducing costs, even in good times, and we are
working hard to find ways to offset the cost pressures we have experienced. We
have set a target of cutting $60 to 90 million, or 10 to 15 per cent, of our
total controllable costs over the next 12 to18 months and expect to realize
about $63 million in cost reductions in 2004. We have established a high-level
team to find immediate ways of offsetting cost increases, while also identifying
structural changes that will be implemented over the longer term.
Progress on growth projects
We are doing all we can to meet our customers' growing needs for nickel both by
maximizing production at our existing operations and by pursuing one of the most
aggressive growth plans in our Company's history with Voisey's Bay and Goro.
2003 was a year of progress on our Voisey's Bay project. Since March 2003, we
have completed 65 per cent of project engineering and 70 per cent of the
procurement for the Phase I open pit mine and the concentrator and related
facilities. We completed the airstrip and construction camp, nearly one-third of
the concentrator construction is complete, and we have begun work on the port
facility. Meanwhile, we continued testing our pressure oxidative leaching
process for treating Voisey's Bay material at our mini-pilot plant in
Mississauga, Ontario, and have met or exceeded metals recovery targets, a key
objective for this research and development program.
We have made progress in identifying opportunities to reduce the capital cost
estimate for our Goro nickel-cobalt project in New Caledonia. In the fourth
quarter of 2003, we announced the selection of a joint venture between
SNC-Lavalin and Foster Wheeler to work with us on the key deliverables for the
current second phase of the project review. We plan to report on the status of
this phase in May 2004. We continue to be optimistic on this project and are
committed to making it a success.
Maintaining our financial strength
Inco's financial position remains strong. Over the past three years, we have
reduced our cost of debt to about four per cent. Meanwhile, we have extended
average debt maturities to 15 years with no major outstanding debt securities
coming due until after the planned start-ups of our growth projects.
2003 was a better year than 2002 in terms of earnings and cash flow from
operating activities before changes in working capital, despite the strike at
Ontario. Our 2004 plan, based on higher production of nickel and PGMs and higher
realized prices, should deliver significant value to our shareholders, while
putting us in an excellent position to prudently develop Voisey's Bay and Goro.
Inco is positioned to succeed with nickel
Inco's strategic focus on nickel paid off in 2003 and we believe will continue
to produce very favourable results based upon the positive nickel markets
expected over the next few years.
We have a leading market position in nickel and we are in the right places -
including the booming markets of Asia. Our existing operations are among the
world's best and we will aggressively pursue productivity increases and cost
reductions to offset short-term cost pressures. We believe that we have the
world's two best nickel development properties, which are the only major
projects that can come on stream soon enough to benefit from the world's
expected increase in demand for nickel over the next few years.
We are confident that these advantages will translate into value for our
shareholders both in the near and longer term.
On the corporate governance front, Inco's Board today approved, subject to
shareholder confirmation in April, the declassification of Inco's Board so that
all directors will be elected annually by our shareholders.
I look forward to reporting on our performance for the first quarter of 2004.
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, gains
and losses of a non-recurring nature 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 Net Earnings Earnings (1) Per Share
except per
share
amounts)
Fourth Quarter Year Fourth Quarter Year
December 2003 2002 2003 2002 2003 2002 2003 2002
31, (Restated)2 (Restated)2 (Restated)2 (Restated)2
------- ------- ------- ------- ------- ------- ------- -------
Adjusted net $ $ $ $ $ $ $ $
earnings 118 25 260 167 0.62 0.10 1.33 0.75
Income tax (32) - 94 - (0.17) - 0.51 -
benefits
(charges)
Currency (21) (1) (177) (5) (0.11) (0.01) (0.96) (0.03)
translation
adjustments
Milestone
payment
relating to
sale of
property 22 - 22 - 0.12 - 0.12 -
Estimated (15) - (15) - (0.08) - (0.08) -
remediation
costs
Strike - - (69) - - - (0.37) -
expense
Goro project 2 (26) 15 (26) 0.01 (0.14) 0.08 (0.14)
suspension
costs and
related
currency
hedging
gains, net
Income on tax - - 9 8 - - 0.05 0.04
refund
Loss on - - (2) - - - (0.01) -
redemption
of 5 3/4%
convertible
debentures
due 2004
Asset - - - (1,626) - - - (8.89)
impairment
charges
Redemption - - - - - - (0.08) -
premium
on Series
E Preferred
Shares
Canadian GAAP $ $ $ $ $ $ $ $
net earnings 74 (2) 137 (1,482) 0.39 (0.05) 0.59 (8.27)
(loss), as
reported
_____________________
(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.
(2) The fourth quarter and full year 2002 results have been restated due to
the retroactive application of a change in accounting policy for asset
retirement obligations adopted in 2003.
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. In addition, management uses such a calculation internally for
operating, budgeting and financial planning purposes.
Outlook
Our current estimates for production for the first quarter of 2004 and the full
year 2004 of nickel, copper and platinum-group metals (PGMs), including PGMs
produced from purchased material, are as follows:
First Quarter Full Year
2004 2004
Nickel - tonnes (thousands) 57 to 59 227 to 231
- pounds (millions) 125 to 130 500 to 510
Copper - tonnes (thousands) 28 118
- pounds (millions) 62 260
PGMs - troy ounces (thousands) 110 400
We currently project that our nickel unit cash cost of sales after by-product
credits for the full year 2004 will be about $2.35 to $2.40 per pound ($5,181 to
$5,291 per tonne). A reconciliation between our nickel unit cash costs of sales
both before and after by-product credits for the periods in 2002 and 2003 as
indicated and cost of sales in accordance with Canadian GAAP is set forth in the
table entitled "Reconciliation of Nickel Unit Cash Cost of Sales to Canadian
GAAP Cost of Sales" below. The premium on our nickel products for 2004 we
currently expect to realize over the London Metal Exchange (LME) cash nickel
prices will be between $0.00 and $0.06 per pound ($0 and $132 per tonne). Our
premiums are affected by fluctuations in the LME cash nickel price and the
effect this has on the price we receive for the matte product produced by PT
International Nickel Indonesia Tbk ("PT Inco"), the lag effect that changes in
the LME benchmark price have on the pricing of certain of our nickel products,
and how certain of our specialty nickel products are priced. As reflected in the
chart above, we have historically experienced, and expect to continue to
experience, some quarter-to-quarter variability in production levels of our
primary metals products due to planned maintenance shutdowns of operations and
other normal planned actions.
The current First Call consensus mean estimate for our adjusted net earnings per
share for 2004 is $3.39 on a diluted basis. The current First Call consensus
mean estimate for Inco's cash flow per share, which we understand is defined as
cash flow from operations before changes in working capital, investing and
financing activities, for 2004 is $5.48 on a diluted basis. Based upon the
latest Reuters' mean forecast in January 2004 for the average LME cash nickel
price for 2004, which we understand to be $6.15 per pound, and our understanding
of Reuters' latest mean forecasts for 2004 for the prices for our other metal
products, we are comfortable with the current First Call consensus estimate for
2004 for our adjusted net earnings per share of $3.39, on a diluted basis, and
with the current First Call consensus estimate for 2004 for our cash flow per
share, as defined above, of $5.48 on a diluted basis. We are not endorsing the
Reuters' mean forecasts for the LME cash nickel price and other benchmark metal
prices for 2004. Our policy continues to be that we do not publicly forecast
where nickel and other metal prices will be in the future given the historic
volatility of these prices and the level of economic uncertainty that currently
exists in at least some of our key geographic markets. The LME cash nickel price
averaged $6.96 per pound ($15,350 per tonne) for the January 2 - February 2,
2004 period. The LME cash nickel price on February 2, 2004 was $7.08 per pound
($15,600 per tonne).
The earnings per share consensus mean estimate above refers to an
estimate for adjusted net earnings and excludes certain adjustments that would
be made in the calculation of net earnings in accordance with Canadian GAAP.
Since such adjustments would include assumptions or forecasts relating to
changes in the Canadian-U.S. dollar exchange rate and other currency exchange
rate changes and other external factors that we do not believe we are in a
position to predict with any degree of certainty, we do not provide a
reconciliation between any adjusted net earnings estimate and a corresponding
net earnings estimate in accordance with Canadian GAAP.
In terms of the current estimated sensitivity of our earnings per
share to changes in nickel prices, for every change of 10 cents, up or down, per
pound in our realized nickel price over a full year, our Canadian GAAP basic net
earnings per share (EPS) over a full year would change, up or down, by about 12
cents. As reflected in the table below, while our financial results are most
sensitive to changes in (1) the Canadian-U.S. dollar exchange rate given that a
substantial portion of expenses are incurred in Canadian dollars and we have
substantial Canadian dollar-denominated liabilities and (2) nickel prices, our
results are also sensitive to changes in copper and other prices as well as, on
the cost side, changes in oil and natural gas prices and changes in our share
price given how we account for share appreciation rights granted in connection
with certain share options:
ESTIMATES OF CURRENT 2004 SENSITIVITY OF EPS(1) TO CERTAIN
METALS PRICES AND OTHER CHANGES
OVER ONE YEAR (IN U.S.$)
Amount of Change
(up or down) EPS Effect(1)
Realized nickel price $ 0.10/lb. $ 0.12
Realized copper price 0.10/lb. 0.09
Realized palladium price 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 0.12
Fuel oil price (West Texas Intermediate)
(2) (4) 1.00/bbl 0.006
Natural gas price(2) (4) 0.10/MM BTU 0.001
Share appreciation rights(4) (5) 1.00 0.006
(1) Canadian GAAP basic net earnings per share. Each sensitivity assumes other
factors are held constant.
(2) Includes the impact of hedging activities as of December 31, 2003.
(3) The EPS effect represents (a) $0.05 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 our common share price on our
expense 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. We currently project that our total capital
expenditures for 2004 will be $1.04 billion.
Commentary on Results for the Fourth Quarter and Full Year 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 Fourth Quarter Year
2003 2002 2003 2002
(Restated) (Restated)
Net sales $ 832 $ 528 $ 2,474 $ 2,161
Net earnings (loss) 74 (2) 137 (1,482)
Net earnings (loss) per common share
- basic 0.39 (0.05) 0.59 (8.27)
- diluted 0.36 (0.05) 0.58 (8.27)
Cash provided by operating
activities 129 133 131 599
Our net earnings were $74 million, or 39 cents per share (36 cents per share on
a diluted basis), for the fourth quarter of 2003, compared with a net loss of $2
million, or five cents per share (five cents per share on a diluted basis), in
the corresponding 2002 period. Results for the fourth quarter of 2003 included
(1) a net unfavourable adjustment of $32 million, or 17 cents per share, in
respect of certain tax charges and the accrued tax associated with currency
translation adjustments relating principally to long-term debt, (2) unfavourable
non-cash currency translation adjustments relating to changes in the
Canadian-U.S. dollar exchange rate of $21 million, or 11 cents per share, (3)
after-tax income of $22 million, or 12 cents per share, representing a milestone
payment received as part of the terms of sale of a non-core exploration property
in 1998, (4) an after-tax charge of $15 million, or eight cents per share, for
estimated remediation costs for certain former industrial sites in the United
States we retained relating to a business sold in 1983, and (5) an after-tax
credit of $2 million, or one cent per share, to accrue for currency hedging
gains of $7 million, partially offset by additional costs of $5 million related
to the suspension of certain development activities and other actions concerning
our Goro project in New Caledonia. Currency translation adjustments of $21
million in the fourth quarter of 2003 were due to the effect of a strengthening
Canadian dollar relative to the U.S. dollar during the quarter on Canadian
dollar-denominated liabilities. The currency hedging gains were related to
forward currency contracts which had been entered into to reduce our exposure to
exchange rate changes associated with certain planned Goro project expenditures.
A portion of these contracts ceased to be effective since they no longer matched
the timing of such expenditures. The income tax charges of $32 million referred
to in the "Reconciliation Between Adjusted Net Earnings and Net Earnings in
Accordance with Canadian GAAP" table above related to a net charge which was
primarily due to the revaluation of deferred tax liabilities due to an increase
in the tax rate by the Province of Ontario and the tax impact of currency
translation adjustments.
Net earnings for 2003 were $137 million, or 59 cents per share (58 cents per
share on a diluted basis), compared with a net loss of $1,482 million, or $8.27
per share ($8.27 per share on a diluted basis), in 2002. Results for 2003
included the following items: (1) income tax benefits of $94 million, or 51
cents per share, (2) unfavourable non-cash currency translation adjustments of
$177 million, or 96 cents per share, (3) after-tax income of $22 million, or 12
cents per share, representing a milestone payment received as part of the terms
of the sale of a non-core exploration property in 1998, (4) an after-tax charge
of $15 million, or eight cents per share, for estimated remediation costs for
certain former industrial sites in the United States we retained relating to a
business sold in 1983, (5) after-tax expense of $69 million, or 37 cents per
share, associated with the three-month strike of the unionized workforce at our
Ontario operations, (6) currency hedging gains net of suspension costs relating
to the Goro project of $15 million, or eight cents per share, (7) after-tax
income of $9 million, or five cents per share, associated with a tax refund, (8)
a loss of $2 million, or one cent per share, realized on the redemption of
certain convertible debt securities, and (9) 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.
The currency translation adjustments of $177 million in 2003 referred to above
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 $94 million are discussed under "Income
and mining taxes" below. The strike expenses referred to above 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. Results for 2002 included non-cash
after-tax asset impairment charges of $1,626 million, or $8.89 per share, to
reduce the carrying value of the Voisey's Bay project and certain other assets,
suspension costs relating to the Goro project of $26 million, or 14 cents per
share, 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 $5 million, or three cents per share.
Net sales
Net sales increased by 58 per cent to $832 million in the fourth quarter of
2003, compared with $528 million in the corresponding 2002 period, primarily due
to a significant increase in the average realized selling price for nickel and
copper and higher nickel and copper deliveries partially offset by lower
deliveries of PGMs.
Net sales were $2,474 million for the full year 2003, up 14 per cent from $2,161
million in 2002. This increase was due to significantly higher average realized
prices for nickel which were partially offset by lower deliveries of nickel,
platinum, palladium, copper and cobalt, and lower realized prices for certain
PGMs. 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 PT Inco and 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 by 53 per cent and 26 per cent in
the fourth quarter and full year 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, higher
employment and pension costs, and increased costs for purchased intermediates
processed. In addition, deliveries of purchased finished nickel in the fourth
quarter and full year 2003 increased by 63 per cent and 54 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. Operating results for the full year 2003 included a pre-tax expense of
$107 million associated with the three-month strike at our Ontario operations.
In addition, as previously indicated, during the third quarter of 2003 our
Ontario operations experienced a series of unanticipated problems associated
with the ramp-up of certain facilities after the strike.
Nickel unit cash cost of sales after by-product credits increased to $5,379 per
tonne ($2.44 per pound) in the fourth quarter of 2003 and $4,740 per tonne
($2.15 per pound) in the full year 2003 from $3,814 per tonne ($1.73 per pound)
and $3,197 per tonne ($1.45 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, higher
energy costs at PT Inco and our Ontario operations, higher employment and
pension costs, and lower contributions from by-products, primarily resulting
from lower deliveries of PGMs. These nickel unit cash costs were also adversely
affected by higher costs for purchasing and processing larger volumes of
purchased intermediates. For the full year 2003, nickel unit cash cost of sales
were also affected by the previously disclosed ramp-up problems experienced in
Ontario. 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 19 per cent in the fourth quarter of 2003 relative to the
fourth quarter of 2002 and by 12 per cent for the full year 2003 relative to
2002. Excluding the costs associated with purchased intermediates, our nickel
unit cash cost of sales after by-product credits was approximately $4,630 per
tonne ($2.10 per pound) in the fourth quarter of 2003 and approximately $4,299
per tonne ($1.95 per pound) in the full year 2003.
A reconciliation of our nickel unit cash cost of sales before and after
by-product credits to cost of sales under Canadian GAAP is shown in the table
"Reconciliation of Nickel Unit Cash Cost of Sales to Canadian GAAP Cost of
Sales" below.
We use purchased intermediates to increase processing capacity utilization at
our Canadian operations. While the cost of purchased intermediates is higher
than that for 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 increased by 18 per cent to 59,676 tonnes (131 million pounds)
in the fourth quarter of 2003, compared with 50,436 tonnes (111 million pounds)
in the corresponding 2002 period, primarily reflecting higher production at PT
Inco as a result of higher ore grades and higher production at our Ontario
operations due to a higher volume of external feed processed. Nickel production
decreased by 11 per cent to 187,173 tonnes (413 million pounds) in the full year
2003, compared with 209,728 tonnes (462 million pounds) in 2002, reflecting
lower 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, the processing of higher volumes of purchased intermediates at both
the Ontario and Manitoba operations and higher ore grades at PT Inco. The 2002
fourth quarter and full year results were also negatively impacted by a furnace
rebuild at PT Inco which resulted in lower production for this operation.
Selling, general and administrative
Selling, general and administrative expenses totalled $65 million and $169
million in the fourth quarter and full year 2003, respectively, compared with
$45 million and $136 million for the same periods in 2002. The increases for
both periods are primarily due to higher common share appreciation rights
expense in connection with certain share option grants as a result of the
significant increase in the price of our common shares in 2003. These expenses
included certain expenditures totalling approximately $10 million in both 2003
and 2002 in support of the Goro and Voisey's Bay projects. Common share
appreciation rights expense was $25 million and $36 million for the fourth
quarter and full year 2003, respectively, compared with $8 million and $7
million for the corresponding periods in 2002.
Research and development
Research and development expenses increased to $9 million and $27
million in the fourth quarter and full year 2003, respectively, from $4 million
and $17 million in the corresponding 2002 periods. The increases in 2003 were
primarily due to higher spending on the hydromet research program relating to
our Voisey's Bay project.
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 and deferred
income and mining taxes, into U.S. dollars. Unfavourable currency translation
adjustments of $21 million and $177 million in the fourth quarter and full year
2003, respectively, were due to the significant strengthening of the Canadian
dollar relative to the U.S. dollar during these periods.
Interest expense
Interest expense for the fourth quarter and full year 2003 was $8 million and
$44 million, respectively, compared with $15 million and $50 million in the
respective periods of 2002. Although interest paid in 2003 was higher due to the
increase in outstanding debt during the year, this was offset by an increase in
capitalized interest associated with projects under development and by lower
interest rates on our outstanding debt for the fourth quarter and full year 2003
compared with the corresponding periods in 2002. Interest expense excluded
capitalized interest of $14 million and $54 million in the fourth quarter and
full year 2003, respectively, compared with $13 million and $27 million,
respectively, in the corresponding 2002 periods.
Other income, net
Other income of $43 million for the fourth quarter of 2003 increased by $30
million compared with $13 million for the fourth quarter of 2002 primarily due
to receipt of a milestone payment under the terms of sale of a non-core
exploration property referred to above. In addition, we recorded net gains of
$12 million in other income in the fourth quarter of 2003 in connection with
certain derivative positions in metals intended to meet future customer
requirements. Other income increased to $104 million in the full year 2003,
compared with $40 million in 2002, due to, in addition to the above, 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 during the first quarter as a consequence of the Goro project
suspension. These gains 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 being lower during 2003
compared to the interest on tax refunds received during 2002.
Income and mining taxes
Income and mining taxes for the fourth quarter of 2003 were affected by $22
million attributable to currency translation adjustments as a result of the
strengthening of the Canadian dollar, an additional tax cost of $20 million
related to the revaluation of deferred income tax liabilities due to an increase
in the future corporate tax rates in the Province of Ontario and the recognition
of $10 million in tax benefits as a result of decisions on tax matters from
Canadian and other jurisdictions concerning the tax treatment of certain prior
period transactions. In addition, there was a favourable impact in the 2003
fourth quarter of net gains taxed at a relatively low rate and higher earnings
of PT Inco, which are also taxed at a relatively lower rate than earnings in
other jurisdictions.
Income and mining taxes for the full year 2003 include a benefit of $106 million
resulting from a reduction in the Canadian federal tax rate, partially offset by
a $20 million charge for an increase in the future tax rates in the Province of
Ontario. We also benefitted from favourable tax rulings and other decisions on
tax matters from Canadian and other jurisdictions concerning the tax treatment
of certain prior period transactions in the amount of $56 million as well as the
favourable impact of net non-taxable gains and higher earnings of PT Inco, which
are taxed at a relatively lower rate than earnings in other jurisdictions.
Partially offsetting these tax benefits was the accrual for additional tax
expense of $48 million due to the strengthening of the Canadian dollar.
Minority interest
Minority interest increased by $17 million and $33 million in the
fourth quarter and full year 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 fourth quarter of 2003 was $129
million, compared with $133 million in the corresponding quarter of 2002. A
significantly higher portion of cash was provided from higher earnings in the
fourth quarter of 2003 which was partially offset by an increase in working
capital balances as a result of the resumption of production at our Ontario
operations in September 2003 after the three-month strike. Net cash provided by
operating activities in 2003 was $131 million, which decreased significantly
compared with $599 million in 2002 primarily due to higher accounts receivable
and higher tax payments in 2003 compared with the prior year.
Net cash used for investing activities decreased to $165 million and $565
million in the fourth quarter and full year 2003, respectively, compared with
$266 million and $609 million in the corresponding periods of 2002. The
decreases were primarily due to lower capital spending, mainly in respect of the
Goro project which was partially offset by higher capital spending in respect of
the Voisey's Bay project, compared with the same periods in 2002.
Net cash used by financing activities was $271 million in the fourth quarter of
2003. This was primarily related to the redemption of our 73/4% Convertible
Debentures and our 9.60% Debentures in the aggregate amount of $302 million.
Such use of cash was partially offset by the cash provided from the issuance of
common shares of $33 million upon the exercise of employee stock options.
Net cash used by financing activities was $235 million in 2003. In addition to
our September 2003 offering of 5.70% Debentures in the amount of $300 million,
in March 2003 we also issued and sold in concurrent private offerings (1) $273
million amount payable at maturity of Convertible Debentures due March 14, 2023,
representing $249 million in gross proceeds to us, and (2) $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 these concurrent private offerings, after commissions and other expenses,
were, together with available cash, used to redeem (i) our Series E Preferred
Shares in the amount of $487 million, including a total redemption premium of
$15 million based upon the $50 issue price per Series E Preferred Share, and
(ii) $173 million aggregate principal amount of our 53/4% Convertible Debentures
due 2004. The net cash proceeds from the offering referred to above of the 5.70%
Debentures of $297 million were, together with available cash, used to redeem
(a) $143 million aggregate principal amount of our 73/4% Convertible Debentures
due 2016 and (b) $159 million aggregate principal amount of our 9.60% Debentures
due 2022.
At December 31, 2003, cash and cash equivalents were $418 million, down from
$1,087 million at December 31, 2002, reflecting the cash used to fund capital
expenditures of $591 million for 2003 and the redemptions of our Series E
Preferred Shares, 53/4% Convertible Debentures due 2004, 73/4% Convertible
Debentures due 2016 and 9.60% Debentures due 2022, 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 referred to
above. Total debt was $1,512 million at December 31, 2003, down from $1,643
million at December 31, 2002. Total debt as a percentage of total debt plus
shareholders' equity was 28 per cent at December 31, 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 an option-pricing
model. As a result of this change in accounting, which was applied
prospectively, an expense of $nil million and $3 million was recorded in the
fourth quarter and full year 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 $8 million was recorded in the fourth quarter and full
year 2003, respectively, for accretion and depreciation for asset retirements.
Access to Webcast of Annual Presentation to Investment Community
As previously announced, interested investors can listen to our annual
presentation to the investment community covering our 2003 financial and
operating results on a live, listen-only basis, or access the archival webcast
or the recording of the presentation through the Internet or by calling the
toll-free telephone call in North America as indicated below.
The presentation is scheduled for February 3, 2004 beginning at 4:00 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 presentation. Slides or
other statistical information to be used for the presentation can be accessed
and will be available for online viewing through www.newswire.ca/webcast on the
event title or through our website, www.inco.com, under the heading "February 3,
2004 - Annual Presentation to the Investment Community" by clicking on the
"Latest Presentations" link on the homepage.
The archival webcast of the presentation can be accessed via the Internet
through www.newswire.ca/webcast. A recording of the presentation can be listened
to until 11:59 p.m. (Toronto time) on February 17, 2004 by dialling
1-800-558-5253 in North America and by entering the reservation number 21175709.
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 levels for
nickel, copper and platinum-group metals in 2004 at its Canadian, Indonesian and
other operations, nickel demand and supply both globally and for certain
markets, premiums realized on its metals prices, nickel unit cash cost of sales
after by-product credits, its financial results, including cash flow from
operations, the sensitivity of financial results to changes in nickel and other
metal prices, exchange rates, energy and other costs and its common share price,
cost reduction objectives, its Goro and Voisey's Bay projects, process research
and development programs, capital expenditures, planned shutdowns 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, demand and
prices 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 common 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 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.
February 3, 2004
IN 04/02
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 December 31, Year Ended December 31,
Average Realized 2003 2002 2003 2002
Prices
Nickel(1) - per tonne $ 12,403 $ 7,565 $ 9,860 $ 7,143
- per pound 5.63 3.43 4.47 3.24
Copper - per tonne 2,087 1,610 1,832 1,629
- per pound 0.95 0.73 0.83 0.74
(1) Including intermediates
LME Average Cash Prices
Nickel - per tonne 12,437 7,107 9,633 6,775
- per pound 5.64 3.22 4.37 3.07
Copper - per tonne 2,059 1,554 1,779 1,559
- per pound 0.93 0.70 0.81 0.71
Deliveries
Nickel in all forms (tonnes)
- Inco-source 52,216 48,895 184,110 212,247
- Purchased finished 6,286 3,857 29,780 19,343
--------- --------- --------- ----------
58,502 52,752 213,890 231,590
--------- --------- --------- ----------
Copper (tonnes) 34,221 30,552 93,335 113,116
--------- --------- --------- ----------
Cobalt (tonnes) 223 484 903 1,582
--------- --------- --------- ----------
(in thousands)
--------- --------- --------- ----------
Platinum-group metals
(troy ounces)
6 104 209 431
--------- --------- --------- ----------
Gold (troy ounces) 17 16 50 71
--------- --------- --------- ----------
Silver (troy ounces) 530 360 1,440 1,570
--------- --------- --------- ----------
Nickel production
in all forms (tonnes) 59,676 50,436 187,173 209,728
Nickel unit cash cost
of sales
before by-product
credits $ $ $ $
- per tonne 4,718 3,968 4,453 3,483
- per pound 2.14 1.80 2.02 1.58
Nickel unit cash cost
of sales
after by-product
credits
- per tonne 5,379 3,814 4,740 3,197
- per pound 2.44 1.73 2.15 1.45
--------- --------- --------- ----------
Finished nickel
inventories
at end of period 25,604 23,126 25,604 23,126
(tonnes) --------- --------- --------- ----------
Inco Limited
Reconciliation of Nickel Unit Cash Cost of Sales to
Canadian GAAP Cost of Sales
(in millions of United States dollars except pound and per pound data)
Three Months Ended December 31, Year Ended December 31,
2003 2002 2003 2002
(restated) (restated)
Cost of sales
and other
operating
expenses,
excluding
depreciation
and
depletion $ 546 $ 358 $ 1,735 $ 1,378
By-product (132) (113) (383) (415)
costs
Purchased (77) (27) (279) (130)
finished
nickel
Delivery (8) (6) (25) (24)
expense
Other (7) (6) (25) (22)
businesses
Strike
expense,
excluding
depreciation - - (88) -
Non-cash (10) (4) (24) (17)
items1
Remediation,
demolition
and other (37) (7) (55) (23)
related
expenses
Other (29) (1) (36) (7)
Nickel cash
cost of sales
before
by-product
credits2 246 194 820 740
By-product net (97) (120) (330) (476)
sales
By-product 132 113 383 415
costs --------- --------- --------- ----------
========= ========= ========= ==========
Nickel cash
cost of sales
after
by-product
credits2 $ 281 $ 187 $ 873 $679
========= ========= ========= ==========
Inco-source
nickel
deliveries
- pounds 115 108 406 468
(millions)
Nickel cash
cost of sales
before
by-product
credits
- per pound 2.14 1.80 2.02 1.58
Nickel cash
cost of sales
after
by-product
credits
- per pound 2.44 1.73 2.15 1.45
Inco Limited
Consolidated Statement of Earnings
(unaudited)
Three Months Ended December 31, Year Ended
December 31,
(in millions of United 2003 2002 2003 2002
States dollars except per
share amounts) (Restated) (Restated)
Net sales $ 832 $ 528 $2,474 $ 2,161
Costs and operating expenses
(income)
Cost of sales and other 546 358 1,735 1,378
operating expenses,
excluding depreciation and
depletion
Depreciation and depletion 72 62 265 255
Selling, general and 65 45 169 136
administrative
Research and development 9 4 27 17
Exploration 9 10 27 24
Currency translation 21 1 177 5
adjustments
Goro project suspension (2) 25 (4) 25
costs
Asset impairment charges - - - 2,415
----------------------------
Total costs and operating 720 505 2,396 4,255
expenses
----------------------------
Interest expense 8 15 44 50
---------------------------- ------- ------- ------- -------
Other income, net (43) (13) (104) (40)
---------------------------- ------- ------- ------- -------
Earnings (loss) before 147 21 138 (2,104)
income and mining taxes and
minority interest
Income and mining taxes 54 21 (49) (639)
---------------------------- ------- ------- ------- -------
Earnings (loss) before 93 - 187 (1,465)
minority interest
Minority interest 19 2 50 17
---------------------------- ------- ------- ------- -------
Net earnings (loss) 74 (2) 137 (1,482)
Dividends on preferred - (7) (6) (26)
shares
Accretion of convertible (2) (1) (7) (4)
debt
Premium on redemption of - - (15) -
preferred shares ------- ------- ------- -------
Net earnings (loss) $ 72 $ (10) $ 109 $ (1,512)
applicable to common ------- ------- ------- -------
shares
----------------------------
Net earnings (loss) per
common share
Basic $ 0.39 $ (0.05) $ 0.59 $ (8.27)
---------------------------- ------- ------- ------- -------
Diluted $ 0.36 $ (0.05) $ 0.58 $ (8.27)
---------------------------- ------- ------- ------- -------
Inco Limited
Consolidated Balance Sheet
December 31, December 31,
(in millions of United States dollars) 2003 2002
(Restated)
ASSETS
Current assets
Cash and cash equivalents $ 418 $ 1,087
Accounts receivable 435 251
Inventories 746 576
Other 112 73
------------------------------- ---------- -----------
Total current assets 1,711 1,987
Property, plant and equipment 6,976 6,382
Deferred charges and other assets 319 208
------------------------------- ---------- -----------
Total assets $ 9,006 $ 8,577
------------------------------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Long-term debt due within one year $ 103 $ 97
Accounts payable 253 338
Accrued payrolls and benefits 165 118
Other accrued liabilities 332 210
Income and mining taxes payable 27 167
------------------------------- ---------- -----------
Total current liabilities 880 930
Deferred credits and other liabilities
Long-term debt 1,409 1,546
Deferred income and mining taxes 1,696 1,352
Post-retirement benefits 603 475
Asset retirement obligation 141 119
Minority interest 415 368
------------------------------- ---------- -----------
Total liabilities 5,144 4,790
------------------------------- ---------- -----------
Shareholders' equity
Convertible debt 606 238
------------------------------- ---------- -----------
Preferred shares - 472
------------------------------- ---------- -----------
Common shareholders' equity
Common shares issued and outstanding 2,858 2,771
186,915,865
(2002 - 183,238,351 shares)
Warrants 62 62
Contributed surplus 562 559
Deficit (226) (335)
------------------------------- ---------- -----------
3,256 3,057
------------------------------- ---------- -----------
Contingently issuable equity - 20
------------------------------- ---------- -----------
Total shareholders' equity 3,862 3,787
------------------------------- ---------- -----------
Total liabilities and shareholders' equity $ $
------------------------------- 9,006 8,577
---------- -----------
Inco Limited
Consolidated Statement of Cash Flows
(unaudited)
Three Months Ended December 31, Year Ended
December 31,
(in millions of United States 2003 2002 2003 2002
dollars) -------- -------- -------- --------
Operating activities (Restated) (Restated)
Earnings (loss) before $ 93 $ - $ 187 $ (1,465)
minority interest
Charges (credits) not
affecting cash
Depreciation and depletion 72 62 265 255
Deferred income and mining 84 18 26 (745)
taxes
Asset impairment charges - - - 2,415
Other 8 38 81 41
Decrease (increase) in
non-cash working capital
related to operations
Accounts receivable (167) 22 (184) (8)
Inventories (81) (64) (170) (77)
Accounts payable and accrued 174 78 124 98
liabilities
Income and mining taxes (2) (18) (140) 106
payable
Other (17) (3) (35) (26)
Other (35) - (23) 5
------------------------------ -------- -------- -------- --------
Net cash provided by operating 129 133 131 599
activities -------- -------- -------- --------
Investing activities
Capital expenditures (174) (262) (591) (600)
Other 9 (4) 26 (9)
------------------------------ -------- -------- -------- --------
Net cash used for investing (165) (266) (565) (609)
activities -------- -------- -------- --------
------------------------------
Financing activities
Long-term borrowings 6 46 314 884
Repayments of long-term debt (305) (10) (574) (81)
Convertible debt issued - - 470 -
Preferred shares redeemed - - (487) -
Common shares issued 33 3 60 15
Preferred dividends paid - (7) (6) (26)
Dividends paid to minority (5) - (7) (1)
interest
Other - - (5) -
------------------------------ -------- -------- -------- --------
Net cash provided by (used (271) 32 (235) 791
for) financing activities -------- -------- -------- --------
------------------------------
Net increase (decrease) in (307) (101) (669) 781
cash and cash equivalents
Cash and cash equivalents at 725 1,188 1,087 306
beginning of period -------- -------- -------- --------
------------------------------
Cash and cash equivalents at $ 418 $ 1,087 $ 418 $ 1,087
end of period -------- -------- -------- --------
------------------------------
(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.
(2) For the fourth quarter and full year 2003, the calculation of adjusted net
earnings per share on a diluted basis takes into account the dilutive effect of
our outstanding warrants, share options and convertible debentures. The amount
of dilution per share due to these items is dependent on our level of earnings
and the price of our common shares.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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