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TABLE OF CONTENTS Jan 30 - Feb 5, 1989 Volume 74 Number 47 - 0 comments

Takeover threat doesn't alter Falconbridge's optimism

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By: by Peter Kennedy
1989-01-30
For Falconbridge Ltd. (TSE) and its inimitable chairman, Bill James, 1988 was one of those years when the gods appeared to be smiling.

Riding on record high copper and nickel prices the Toronto base metals giant reported its first cash flow in six years and the highest earnings ever for a single quarter. In July, Falconbridge temporarily regained its independence from any controlling shareholder by outbidding Noranda Inc. for a 24.7% controlling block of its own shares previously held by Placer Dome Inc.

And, even though the $960 million purchase price left Falconbridge with over $1 billion in long term debt, the hot base metals climate enabled the company to reduce that debt load down to $850 million by Christmas.

In fact the only spoiler in an otherwise sterling 12 months was a takeover bid instigated by Noranda shortly after Falconbridge had secured the Placer Dome block. By early December, Noranda had acquired a 19.9% interest on the open market and it promised to buy an additional 10% through normal course purchases. Noranda takeover

James declined to discuss the Noranda takeover bid although it was obviously on his mind when The Northern Miner talked to him about the prospects for Falconbridge going into 1989.

"It was our best year ever and next year will be even better," said James who also succeeded in tidying up a couple of other niggling issues including a tax dispute with the government of the Dominican Republic.

The disagreement was over a 25% export duty placed on ferronickel shipments from the Falconbridge Dominicana, C. por A. operation which produces 70 million lb annually or 5% of non-communist demand for primary nickel.

With its Dominican operations back on track (after a 6-week stoppage) and a new 3-year wage settlement in place at Falconbridge's Timmins and Sudbury, Ont., operations, James sees no major changes in the company's strategy going into 1989.

Although Falconbridge is planning to spin off to shareholders a publicly listed gold subsidiary -- Falconbridge Gold -- the world's second largest nickel producer will continue to focus on its core operations in Sudbury and Timmins, Ont.

In 1987, Falconbridge sold 77,335 tonnes of nickel, 176,522 tonnes of copper 117,158 of tonnes of zinc metal and 116,098 tonnes of zinc concentrates from various operations. To keep those operations running at full speed, the nickel miner will set aside $230 million for capital expenditures this year. Production increase

"During the recession, we cut ourselves to the bone so we are not in a position to increase production of either copper or nickel," said James.

However, a stable production rate is not necessarily bad news for a company which has looked into its crystal ball and decided that a deficit on the nickel supply side will prevent prices from slipping back to the $2 range where it stood in 1986. Falconbridge's debt reduction forecasts are based on $4 nickel, 95 cents copper and a zinc price of just above 60 cents .

"If nickel prices were to stay at around the $6 level, the company would be debt free by 1990," he told The Northern Miner.

Of the $32 million which Falconbridge has earmarked for mineral exploration in 1989, roughly 95% will be spent in Canada and at least 60% in Ontario.

A priority for 1989 is development of the Craig orebody which produced about 70,000 tons of ore last year. It is expected to account for between 40% and 60% of Falconbridge's nickel production by 1993. Situated about 6,000 ft east of the company's Onaping mine in Sudbury, the Craig orebody is known to host about 10 to 15 million tons of proven and probable ore grading 2% nickel and 0.9% copper. The decision to sink a second shaft is predicated on an additional five million tons being placed in the proven category. Bore contract

Earlier this year as part of the preproduction activity, Falconbridge let a 4,000-ft raise bore contract which involves driving two raise bores from the 4,000 ft and 2,000 ft levels.

Also on the priority list is the Lindsley base/precious metals project in Sudbury where the company is increasing its budget to $44 million from a previously announced $32 million. Over the next three years, the nickel miner will sink a 5,450-ft exploration shaft and drive off on the 4,300 ft and 5,000-ft levels.

The Lindsley property has been in the Falconbridge exploration inventory for at least 30 years but it is only in the past 18 months that the company has been looking seriously at it. The decision to go underground was based on a 255-ft intersection which assayed 2.3% nickel, 4.4% copper, 0.12% cobalt, 0.11 oz silver, 0.07 oz gold, 0.08 oz platinum and 0.27 oz palladium per ton.

Shaft sinking is also being contemplated at the Kidd Creek operation in Timmins which supplied 117,178 tonnes of zinc and 130,220 tonnes of the copper which Falconbridge sold in 1987. Kidd Creek's mine No 2 workings extend down to the 4,600-ft level but Falconbridge is planning to drive a decline down below 5,200 ft and truck ore up to the No 2 shaft. Shaft budget

The company has set aside $37 million in 1989 for the "No 3 mine" program which will probably take three years to complete. Sufficient funds are contained in the budget to commission a shaft.

It is a well known fact in Falconbridge circles that the company retains one of the world's finest high grade nickel reserves in remote Ungava, Que. Held by the nickel miner's 73.8%-owned subsidiary, New Quebec Raglan Mines (TSE), the deposit consists of 12 million tons of grade 3.11% nickel and 0.79% copper.

But "it will be a day or two" before anyone decides to spend the $235 million in capital costs needed to bring the property on stream, said James. "All we need is a gutsy president to put it into production," joked the Falconbridge chairman who was referring to the fact that nickel prices would have to average $4 per lb during the eight years needed to build a mine and recoup the company's investment.

At the moment, no-one at Falconbridge is bullish enough on nickel to take that gamble.

As part of the Placer Dome purchase, Falconbridge agreed to spin off to its own shareholders a new gold producing subsidiary. Ironically, Falconbridge has made the move at a time when Inco is looking for enough ore to justify taking its own gold wing public. Hoyle Pond

Scheduled to produce a little better than 65,000 oz this year, Falconbridge Gold will consist of the Owl Creek, Hoyle Pond mines, and a number of exploration properties in the Timmins area including a former producer called the Falconbrige Hoyle. James said $1.5 million will be spent on surface exploration at Falconbridge Hoyle which has an 1,800-ft shaft and 5.4 million tons of 0.08 oz gold per ton in place. An additional $3.5 million will finance exploration under the Owl Creek and $1 million has been earmarked for an underground program at Hoyle Pond.

However, the company's commitment to base metals is reflected in the fact that only 15% of the exploration budget will go towards gold. That represents a significant decrease from 50% two years ago.

For a company which took 38% of its 1987 revenues from the United States, the free trade agreement is good news.

"It will give us better access to the U.S. market and we won't get caught in the regular grab bag of quotas which are often placed on resource products," said James.

Falconbridge will spend around $1.5 million to look for additional copper reserves around the Ortega mine in the Dominican Republic. However, the company can maintain its current output at the Caribbean Island through the year 2000. Silver substitute

Looking ahead to 1990, the company is planning to add a silver substitute called Indium to its line of products. Used in electronics as a soldering agent, Indium sells at about $10(US) per oz and it will be mined as a byproduct from Kidd Creek.

Meanwhile the world's second largest nickel producer will be hoping that the soothsayers who are predicting strong metal prices this year prove to be correct.



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