Healthy third quarter masks industry concerns

A combination of productivity gains and federal government initiatives to stimulate the Canadian economy has paid off for base metal miners, but analysts say the party will be short-lived.

A survey of eight of Canada’s top base metal producers conducted by The Northern Miner shows that third-quarter earnings rose by an average of roughly 80% from 1991 to 1992.

Company officials have attributed the rosy performance to improvements at the mine site, where operating costs have been slashed and more efficient mining methods introduced.

And since mining companies export most of their production, the drop in the Canadian dollar prompted by lower interest rates has led to better returns. Every 1 cents decline in the dollar boosts Noranda’s (TSE) annual earnings by $22 million and Inco’s (TSE) profits by US$14 million.

“Our results . . . are better than in 1991 because of productivity gains, a weaker Canadian dollar, lower interest rates, as well as some improved commodity prices,” said Noranda President David Kerr.

The dollar slipped to an average of 83.2 cents in terms of U.S. currency during the third quarter from 87.4 cents during the same period last year. A 3% decline in the prime rate also had a positive impact on the balance sheets of debt-ridden producers. For example, servicing Noranda’s ballooning debt cost $12 million less in the third quarter of 1992.

On the whole, base metal prices held firm. Third-quarter copper prices remained virtually unchanged at about US$1.05 per lb. while zinc jumped by 14 cents to 61 cents per lb. Nickel was lower at US$3.31, compared with about US$3.80 per lb.

But the three months ended Sept. 30 have become a distant memory for some analysts as the reality of rising London Metal Exchange (LME) inventories and plummeting base metal prices sets in.

“It was another world out there during the summer,” says John Lydall of First Marathon Securities. “We’re headed for some really, really bad quarters. Next year is going to be a rough year.”

Any productivity gains made earlier in the year, says Lydall, will be offset by production cuts already under way in the base metal sector. Inco, Falconbridge and Curragh (TSE) have all announced temporary shutdowns for 1993.

“The day that you have to stop running at full capacity, you get nailed,” he says.

Prospects look just as bad from the demand angle, says Julian Baldry of Nesbitt Thomson. “The United States is the only economy showing signs of a recovery, whilst Europe has been flat and Japan has fallen,” he says. “Metal inventories have accumulated to such a level that even a 2% growth in industrial production is unlikely to bring higher metal prices for 1993.” By presstime, zinc had dropped to 46 cents per lb., copper to 96 cents and nickel to US$2.40.

Third-quarter earnings (loss)

Company 1992 1991 Change

$000’s $000’s %

Brunswick 8,414 (6,571) nc

Cominco 51,800 (22,100) nc

Curragh (2,745) (11,058) nc

Falconbridge 7,900 3,700 + 114%

Gibraltar 1,119 904 + 24%

Inco 10,600 4,500 + 136%

Minnova 4,165 2,634 + 58%

Noranda 26,000 (57,000) nc

Average 83% nc = not calculated