Investment Comment Nickel-driven Inco, a speculative buy

With nickel prices rising and expected to rise still further, a British brokerage house says the time could be right for investors to include the shares of a major nickel producer in their portfolio.

Production of 357 million lb of nickel during 1986 made Inco Ltd. the world’s largest producer and in a recent investment appraisal Barclays de Zoete Wedd has recommended the company as a speculative buy.

“Although we expect copper prices to level off, nickel prices may continue to rise, say analysts Alan Richards and Jane MacKelvie in a recent investment appraisal.

Much of the impetus for a price increase, they say, will come from a nickel shortage which became apparent earlier this year after a number of mine closures.

The initial casualties were Amax’s Port Nickel refinery (55 million lb) and Kavadarci in Yugoslavia (6 million lb). Nonoc (Philippines) has remained shut since March, 1986, (75 million lb). Agnew (Australia) (20 million lb), Nippon Mining (Japan) and Hanna Mining (US) (24 million lb) also shut down in 1986.

Production cutbacks have been made by Larco (Greece), Falconbridge (Canada), Sherritt Gordon (Canada), SLN, and Aneka Tambang (Indonesia).

While many of those shutdowns and production cutbacks were initiated in 1986, the impact on supply wasn’t felt until early in 1987 after inventories were exhausted. Stainless Steel

Inventories are currently at a low level, according to the report and demand has increased recently, particularly for stainless steel production in Europe and the Far East.

While Inco is the world’s largest nickel producer with a market share of 29%-30%, the company produces 14 elements in addition to nickel, primarily from its Canadian ores. In addition to 251 million lb of copper, the company produced 132,000 oz platinum, 164,000 oz palladium, 1,350,000 oz silver and 58,000 oz gold during 1986.

As reported (N.M., Aug 17/87), Inco Ltd. recently spun off its gold assets into a new vehicle known as Inco Gold. A wholly-owned subsidiary of its parent, Inco Gold is forecasting gold production of 115,000 oz by 1991. That figure will rise to more than 400,000 oz by the late 1990s making the company a very substantial contributor to Canada’s gold inventory. Primary metals business main production is based on its underground mines at Sudbury, Ont., and Thompson, Man. Inco also has a mine and production facilities in Indonesia.

As a result of lower nickel prices, Inco’s average price realization for primary nickel dropped 16% to the lowest level since 1974 and, in real terms, since the early 1950s. Price decline

It held at $2.09 per lb for the first nine months of 1986, then dropped to an average of $1.86 per lb in the fourth quarter. According to the company’s latest annual report, this sharp price decline alone reduced revenues and pretax profits by $126 million as compared to 1985.

However, Inco’s price realizations are higher than the London Metal Exchange where the price of nickel has increased progressively from $1.60 per lb at the beginning of 1987 to $1.70 per lb, $1.90 on May 1, $2.00 per lb in mid-June, $2.00 per lb in mid-July and $2.40 per lb in mid-August. Inco price changes lag the lme by 6-8 weeks due to the effect of quarterly sales contracts. If, as expected, nickel prices continue to increase, Inco’s share price will rise along with them, say Mr Richards and Ms MacKelvie.

Since the beginning of 1987, Inco’s share price has nearly doubled in response to nickel prices. It traded recently on the Toronto Stock Exchange at $29.63 in a 52-week range of $16 and $30.63.

With 104.5 million shares outstanding, Mr Richards and Ms MacKelvie see per-share earnings of 55 cents by the close of fiscal 1987 with a price-earnings ratio of 39.

However in the longer term Mr Richards and Ms MacKelvie say Inco will be burdened by nearly $1 billion in debts. “Until this is reduced substantially, there is little prospect of the net dividend (20 cents in 1987) being increased,” they say.