Vale Inco’s Bottom Line – How Much Does it Cost to Produce a Pound of Nickel in Sudbury, Canada? – by Kelly Louiseize

This article was orginally published in Northern Ontario Business on March 18, 2010. Established in 1980, Northern Ontario Business provides Canadians and international investers with relevant, current and insightful editorial content and business news information about Ontario’s vibrant and resource-rich North.

Differing opinions on Sudbury’s costs

When Brazil’s Vale SA snapped up Inco for $19 billion in 2006, there was plenty of buzz as to what the mining giant would do with the 107-year old Canadian miner.

Traumatic restructuring fears were quickly put to rest by Murilo Ferreira, the Brazilian in charge of the nickel division who spoke at a Sudbury luncheon. He said there would be very little change with this “successful company.”

Less than a year later, Ferreira stepped down and was replaced by Tito Martins, a former Vale communications executive who together with CEO Roger Agnelli began a series of strategies to make Sudbury more globally competitive.

Agnelli stated that based on current price levels the Sudbury operations was one of the “highest cost operations” Vale Inco owns.

Change was needed to make Sudbury more sustainable.

Productivity and bonuses were red-flagged five years ago when Mark Cutifani was the helmsman at Inco Ltd. Under his direction the intent was to increase productivity by 30 per cent and take another look at the nickel bonus when negotiations came around.

“We knew we all had to work together,” Cutifani said in a phone interview with Northern Ontario Business this past month.

New discoveries were in the making that could sustain and secure the company’s long-term future. They were all part of the capital plan, but the focus first was on “improving productivity between the management and the people,” Cutifani said.

“Neither side can do it without the other.”

Sudbury’s mineral composition still holds a competitive price, but new infrastructure is needed, he said.

“The challenge for all is to agree to get there together,” Cutifani said.

So, what might working together look like?

Vale will be spending billions on infrastructure upgrades ($1.3 to $1.5 billion) trying to meet government-mandated environmental standard compliance for ground level emissions by 2015.

Problem is, the technology to reduce emission down to the finite particulate has not been developed yet.

“We are not trying to skirt the issue here. Sometimes those requests from the government are in advance of what technology can allow us to do,” said Steve Ball, communication director for Vale Inco Sudbury operations.

In the meantime, Sudbury “has been living off the benefits of the (existing infrastructure) for years, beyond the point where we should have been doing so and without the benefits of new projects,” Ball said.

“So, new infrastructure funding is necessary if the operations are to exist longer.”

Vale also has numerous capital projects still on the books including the Coleman Mine, Copper Cliff Deep project, Creighton Mine and Totten operations that are expected to cost billions of dollars and are a huge bonus to the community.

But first they have to get their production and operation costs in line, he said. Stacked against other sulphide mines it is not the most cost productive because the “gravy is gone and it is not replaceable,” meaning the large deposits of yesteryear are done, Ball said. What is left are deposits that are deeper, thinner and harder to reach, which means more infrastructure is required, so the value of the production of ore goes up.

Sudbury needs to stand alone and be able to generate its own revenues for the above projects, not ask for handouts from Voisey’s Bay or the Manitoba operations, Ball said.

“Right now we are living off what we have done in the past. The future here is bright, but we have to make changes to fund future initiatives. That is the challenge to help people see 10 years into the future. This is something that needs to happen so we are here 40 years from now.”

Ball was not at liberty to discuss cost production for the Sudbury operations.

In fact, Vale no longer provides guidance on its nickel operations cash costs of production in Canada as Inco did previously, said Andrew Mitchell principal nickel analyst with Brook Hunt, the metals research division of Wood Mackenzie in the U.K.

“As a result it is now much more difficult to estimate operating costs at its Sudbury, Manitoba and Voisey’s Bay divisions,” he said in an exclusive interview with Northern Ontario Business.

Vale provides a statement for its global nickel division and PT Inco (Vale’s Indonesian nickel operations) reports separately. Therefore, it is possible for Mitchell to estimate cash costs for the Manitoba, Ontario and Voisey’s Bay divisions.

“For 2008, our analysis suggests their costs (Sudbury) were very low. They were producing nickel at about US$1 a pound (based on a normal or by-product costing method).”

Under normal costing methodology, all mining, processing, smelting and refining costs are allocated to nickel streams only, Mitchell said. Then one deducts credits for other metals such as copper, platinum group metals (PGMs), gold, cobalt and so forth.

“Before those credits are deducted the estimate would have been somewhere in the region of US$6.70 a pound in 2008.”

In 2009, Mitchell said nickel production cost was around US$3.70 a pound after by-product credits.

The downturn in copper, PGMs, and cobalt prices compared to 2008 resulted in significantly lower by-product credits. Combine this with Vale Inco’s four-month operation in 2009 and the current strike pay costs and one obtains a better understanding of why production costs are higher.

Mitchell heard the numbers in the media for Sudbury to be at US$4.50 per pound, which to him, does not seem plausible, given the by-product credits they are receiving. However, if the number indicated is based on a pro-rata costing methodology, in which operating costs are allocated proportional to metal net revenues then indeed cash costs of production would be in the US$4-4.50/lb range.

“Brook Hunt’s Nickel Cost Service compares all operations on a normal costing basis, in which case Vale Inco would be US$2.50 per pound for 2009, a far more attractive figure than $4 or $5 per pound.”

As for the Sudbury operations, Mitchell said, “I believe that it is a very competitive operation. Manitoba is less so, but produces far less revenue from by-product metals.”

There are a lot more by-products in Sudbury and therefore the costs fluctuate much more widely than at Manitoba, he said.

“Sudbury should not under normal operating conditions make cash operating losses, even with the nickel price downturn experienced in the back end of 2008.”

This echoes the sentiment of two other analysts Northern Ontario Business spoke with.

Steve Ball would not comment on the mentioned numbers.

“We do not provide this kind of information publicly and have no intention in doing so,” he stated in an email to Northern Ontario Business.

Tony Robson differs with Mitchell. As co-head of BMO Capital Markets, he does believe Vale Inco is a high cost operation and is living off the credits of PGMs, copper and radium.

The cost of operation is anyone’s guess, but when one looks at the grades in Manitoba and Sudbury it amounts to approximately US$5.50 excluding Voisey’s Bay which is estimated to sit at $2.30 in 2009, Robson said.

Coupled with the infrastructure investments and Robson says,“Sudbury is not making any money.”

The challenges facing the Sudbury operations should have been addressed 10-15 years ago, Ball said.

“We haven’t had a great deal of mine investment in the last decade. The value is in the ground.”

However the focus has turned from underground value to above-ground value and “we must grab a hold of our operating costs” if we are to move forward in a global competitive world, Ball said.

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