Inco’s costs cause concern as nickel markets remain flat

Citing dismal prospects for the nickel market and Inco’s (TSE) high production costs, several analysts are issuing strong sell recommendations on shares of the world’s largest nickel producer.

Indeed, the company’s common shares fell to a new 52-week low of $31.38 recently after a major Canadian bond rating agency cut its credit rating on Inco’s debentures, notes, Eurobonds and preferred shares.

“We suspect that Inco is now facing a long-term decline,” says Peter Miller of Yorkton Securities.

Miller, who does not foresee any significant improvement in the nickel price until 1995, says escalating costs at Inco’s sulphide ore mines are making the Canadian company uncompetitive with the world’s laterite ore producers. “Perhaps more alarming for nickel is the unexpected development that the cost of processing laterite nickel ores into ferronickel is now less than that for sulphide ores.”

Miller says laterite nickel production is cheap, environmentally friendly and sustainable for more than 150 years based on known reserves. By contrast, Inco’s cash costs have risen by 121.5% over the past five years while its grades and production have fallen.

John Lydall of First Marathon Securities also points out that Inco’s increasing debt threatens the dividend on common shares. The nickel producer’s debt has climbed to $1.4 billion from $1 billion at the end of 1990.

Even if Inco does manage to reduce costs with the introduction of new, higher-grade mines, analysts say lower nickel prices will be around for a while.

“History suggests that there will be no significant improvement in nickel prices until inventories fall below 1.6 months’ consumption,” says analyst Raymond Goldie of Richardson Greenshields. “Such a prospect is currently at the far bounds of the realms of possibility. Indeed, for the foreseeable future, we appear to be stuck with today’s miserable nickel price.” Nickel dropped to US$3.25 per lb. recently.