Metal Miners welcome the pressures of prosperity

The coffers are full and the outlook is generally for more of the same. But with the new-found prosperity have come problems — and responsibilities — that have to be dealt with while the good times last. Metal miners are well aware of the historical trend that puts them near the end of the economic cycle.

Essentially, the question is: What are these companies going to do with all their money? The pages of this Corporate Report are devoted to the opinions of senior executives from Canada’s major mining companies on what they foresee for 1989 and beyond. Their observations indicate a challenge in meeting all the demands they face.

Shareholders feel they deserve to get a piece of the pie after waiting through years of negligible or “negative” earnings; politicians are expecting action on environmental concerns in response to increasing public demand; unions want better wages for their members; management wants to modernize equipment.

On top of all that, many companies have mixed feelings about fashioning too strong a balance sheet for fear of becoming too visible a target for a takeover bid. The controversy over Inco’s recently approved “poison pill,” designed to fend off unwanted suitors, is an example of weakening a balance sheet to buy protection.

Some, like Rio Algom or Metall Mining, have little to fear in this area. Subsidiaries of larger companies, they are beyond the reach of open market bids despite their very strong cash positions. They are, however, subject to the whims of their parent company’s board of directors. Witness British Petroleum’s recent sale of its international minerals division to Rio Tinto Zinc Corp.

Still, worries about how to spend money are the kind of problems that are almost a pleasure to face when one considers the alternative. It’s like worrying about a daughter who attracts the attention of too many boyfriends whose intentions are less than honorable. Would it be better to have an unattractive daughter? For mining companies at the end of this decade, it’s better to have to suffer because of a shortage of skilled help, to name just one problem that arises from prosperity, than to have to lay off long-time employees. No one wants to return to 1982.

Inco knows the feeling. It earned more money in the first nine months of 1988 than it did in any full year of its existence. It spent the first half of the 1980s improving productivity to the point where it could scrape by with nickel prices of $2(US) per pound and still stay in the black, barring any unforeseen difficulties. With nickel at $6(US) a pound and better, it’s making money faster than it can count it. And that doesn’t take into account the price of copper, an important byproduct of Inco’s nickel operations, which has more than doubled in the past year.

So it’s not surprising that governments, unions, shareholders and company management are watching closely to see what Inco’s corporate thinkers do with the money.

So far, the company has done a remarkable job of running that gauntlet of sometimes conflicting interests. Shareholders were happy with the special dividend of $10 (US); the government should be pleased with its $500-million plan to modernize smelting operations resulting in a drastic reduction in sulphur dioxide emissions; the United Steelworkers of America which represents Inco’s hourly- rated employees, seems satisfied with a contract that sets new standards for miners; and management is getting updated smelting facilities to go along with the constantly improving mining operations that were instrumental in boosting productivity in the first half of the decade.

Now all Inco needs to keep everybody happy is continued high metal prices. According to most analysts, they’re likely to get their wish, at least through 1989 and probably into early 1990.

But one of the curious things about this rally in base metal prices is that very few investors believe it’s for real, despite market experts predicting sustained high prices. That mentality from the market is, ironically, one of the factors that is helping sustain prices. Despite strong demand and low inventories for virtually all major metals, investment is scarce to bring on new capacity to produce more.

It could well be, however, that higher prices are not just a “blip” coming a t the end of the business cycle. Given the strong trends in the Soviet Union and China towards market-based economies and the implicit demand from consumers that go along with that, we could be witnessing a structural change in the demand for base metals that will sustain development and rival the growth seen after the Second World War.

That, of course, remains to be seen. Government debt levels everywhere are high and, with an aging economic cycle, a long- awaited recession could be in the cards before the year is out. If so, metal miners will feel the pinch, although its unlikely to be as severe as eight years ago.

Whatever happens in 1989, the mining industry has gained some respite from the almost unrelieved gloom of the early and mid-1980s. It is a rejuvenated industry, more efficient, more competitive, more realistic about its shortcomings, but also more confident about its ability to take on the challenge of the 1990s.

But that’s for tomorrow. Today Canadian mining companies are simply doing their best to make hay while the sun shines.

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