Overview: Inco at 100
The International Nickel Company, now known as Inco Limited, was incorporated in 1902, merging the interests of seven mining companies. It is therefore celebrating its centenary in April this year.
The occasion is commemorated in this issue. We offer readers an overview of the range of Inco’s activities today, as well as a glimpse into its future.
The men in this early 1900’s photograph from Copper Cliff, Ont., worked hard for a living. Their labour laid the foundations of the mining industry in the Sudbury Basin, arguably North American’s finest system of base metal deposits. At the same time, they placed the cornerstone for Inco.
People still work hard, but they also have to be efficient, responsible and smart. Today’s workplace is a far cleaner, safer and more productive place than these men had. But yesteryear’s employees had one advantage: they sure knew how to wear a hat.
Inco is big. It’s the world’s second largest nickel company, producing 207 million tonnes in 2001 (with plans to make 213 tonnes in 2002). It has among the world’s lowest cash operating costs, at around US$1.35 per pound (US$2,976 per tonne) of nickel. Inco is one of Canada’s largest mining companies, generating net sales (revenue) of US$2,066 million and net earnings of US$305 million in 2001.
With the Goro nickel laterite operation under construction in New Caledonia, the company is on a path of aggressive growth, anticipating a 50% increase in profitable nickel production five years from now. That figure will be higher if the Voisey’s Bay deposit in Labrador kicks in. Much of Inco’s production and marketing network is nicely located to feed the world’s fastest-growing economies–in Asia. With nickel inventories low, worldwide demand increasing by about 4% per annum and scant new production coming onstream, the nickel price is likely to rise. Inco is well-positioned to benefit.
In January, CMJ spoke with Inco’s senior executives about the company’s current status and future directions, in its Toronto head office.
Distinguishing Characteristics
“The price of entry in the mining business is you’ve got to be low cost. If you’re not low cost, you don’t have your ticket in the first row of the mining industry,” says Inco CEO Scott Hand. “We are a low cost producer of nickel.”
Scott M. Hand was born in San Franscisco and studied law. He joined Inco’s legal department in 1973. In April 1992 he was appointed president. Hand became CEO in April 2001, as well as deputy chairman.
Inco president Peter Jones adds: “Where we want to be is the lower quartile on the nickel cost curve. In a downturn in the market, people in the top quartile are the ones that stop operating. We don’t want to be there.”
Peter C. Jones was born in Wales, and studied engineering. He has over 30 years of international mining experience, including being CEO of Hudson Bay Mining & Smelting Co. Ltd. He joined Inco in 1997 as executive vice-president, technology and project development. In April 2001, Jones was appointed president and COO.
Hand continues: “But, if we really want to be something that people want to invest in, we’ve got to be more than simply low cost. We have to somehow distinguish ourselves from other base metal producers.
“So how do we differentiate ourselves? We’re in nickel, we’ve got the best profitable growth prospects in the industry, and we’re focused on high-margin products.
“It’s pretty hard to find anyone with growth prospects as good as Inco’s. When we bring these new developments onstream, our cash costs should hit $1.15 per pound of nickel. So our costs will go down even further.
“We consistently get prices for nickel that are higher than the LME commodity price, because we focus on products that get higher prices than commodity nickel. In 2000, over two-thirds of the nickel used in the western world was consumed by the stainless steel and alloy steel industries. But at Inco we sold only 39% of our nickel into these commodity markets. We are one of the biggest sellers of nickel in the plating market, which gets premium prices. We sell into the high nickel alloy market, which demands very pure nickel, and we get premium prices for that. We also make special products (such as powders that go into nickel batteries) using the carbonyl process, which is unique to Inco.
“One of our principles is that we should never borrow money to run our current operations at any stage in the cycle. When we get lower nickel prices–$2 or $2.20 a pound–we should be able to generate enough cash to meet all our requirements including the capital expenditure needed for our existing operations. Because we have applied that kind of thinking, we’re in very good financial shape right now.”
Long-term Strategy
“Our strategic plan is not just about growth for Goro and Voisey’s Bay. It’s also about having really effective strong operations today,” says Hand. “By doing what we needed to do in the down cycle, we have not had to modify our long-term plan.
“We’re very focused on maintaining financial strength for the company, but in our business, you’ve got to look out five, six or seven years, and it takes three or four years to get one of these properties going. You’ve got to position yourself so you can effectively execute that plan. We’ve been able to take ourselves through a difficult time without having to compromise what we really want to do with this company. If we had to stop everything and lay off people, that would very adversely affect all the things that we’ve achieved in our existing operations.
“Clearly we’ll be adding a lot of employees–800 to New Caledonia. And we’ll be adding people in Newfoundland and Labrador for Voisey’s Bay. The challenge we have in Ontario and to a lesser degree in Thompson is that a lot of people are retiring, so we’re actually hiring in Sudbury right now. We have great challenges with bringing in new people, training them, and having the people who are retiring act as mentors. We have become more of a high technology company in every aspect. So we have a real human resource challenge to make that transition over the next five to seven years.”
Empowering People
Jones describes the importance of making the best use of the workforce. “Traditionally Inco has been operated as separate divisions that sort of operated in their own silos. There was not a lot of transfer of knowledge or information or even people between divisions, and yet there was a huge amount of knowledge. It was very clear that our costs were going up. If we carried on this way we would no longer be competitive.
“There are a number of initiatives that I started with the operations group the end of 1997. We essentially chose four platforms to keep it simple.
“We wanted to concentrate on safety in its broadest terms. Inco didn’t have a bad safety record, but it wasn’t a world leader.
“Secondly, we wanted to have management that was accountable. One of the things that happens in a siloed organization is people find room to blame one another for what’s happened rather than taking accountability for it. So we said we wanted to change our culture so that we really become a very accountable organization on every level.
“The third thing that we adopted was something that we call understanding our business. If you want employees at every level to contribute to the business, they’ve got to understand what the business is all about. We put together a program to teach people about the business from a high level to begin with, and then talked about how their department fits into that. And then how does their job fit into that? We’re not finished, but everybody already has an overall understanding of the nickel business and why we’re in it.
“In 1998 when we started looking at rationalizing our mining operations, we had some mines that weren’t doing very well. We shut some of them down. There were others that were not making money or were marginal, certainly at low nickel prices, where we saw some opportunity, so we put out a challenge to employees. We said, ‘If you want this mine to survive, here’s what it would tak
e in terms of your costs, and here’s the challenge.’
“We got people in teams to take that on–at Garson and Birchtree–and it was amazing what they did. When you can take 25% or 30% of costs out of an operation in six months with the same people, you’ve got to ask yourself what was missing. What was missing was an environment that encouraged people to question what they did, and empowered them to be involved in changing it.
“The fourth platform is breakthrough: producing results that are discontinuous with the past. Most businesses are used to making incremental improvements where you get a 1% or 1.5% improvement by just being a little bit better at this or a little bit better at that. Breakthroughs make improvements of 15% or 20%, and that requires people to look at things fundamentally differently.
“At the Sudbury copper operations, we used to take the molten metal from the smelter and move it in a special rail car to the refinery where we cast the anodes ready for refining in the copper refinery. There were a lot of gases that were given off that we knew we had to capture for environmental reasons. We were looking at a pretty considerable bill, in the order of maybe $7 million plus a significant ongoing cost for maintaining those systems. Faced with that, we said, ‘We don’t want to have a project that’s got a negative payback,’ so we challenged our people to come up with something better.
“What they came back with was a project to move the casting and the final finish for copper back into the smelter, so you didn’t have to move the rail cars to the refinery. You could have all your gas capture in one place where it was already set up. We brought some equipment to automate the process. We brought the final hot metal refining step into the 20th century, and we put in place other things like much closer weight tolerances for the anodes that would allow us to make improvements downstream in the copper refinery.
“Now it was a much bigger project–it was much more expensive at Cdn$27 or $28 million–but it had a significant payback that was going to have lower ongoing costs. That’s just the kind of thought process that we’re really trying to get people to deal with.”
This Little Ingot Goes to Market
Inco makes a lot of metal. In fact, it was the world’s second largest nickel producer last year, trailing behind only Norilsk Nickel of Russia. It also produces large quantities of copper and cobalt, and sizable sweeteners of the precious metals.
The high quality of its products and value-added features allow the corporation to tack on a premium to the sales price above LME prices. In 2001, Inco’s average realized price for nickel was US$6,468 per tonne, versus the LME average of $5,948 per tonne (a $520 per tonne premium), and its average price of copper was US$1,668 per tonne versus an LME average of $1,578 (a premium of $90 per tonne). But when demand for nickel and copper is mediocre, how does Inco move its goods?
The company has helped to create a demand for its product by slowly and carefully building a worldwide marketing network. Inco’s executive vice-president of marketing, Peter Goudie, explains. “We have a larger number of sales offices than other nickel producers have–in New Jersey, California, London, Dusseldorf, Tokyo, Hong Kong, Bangkok, Kaohsiung (Taiwan) and Shanghai–because we are involved in a wider range of end markets. We need to have very close relationships and to work together with customers of our value-added products. Also, as part of the marketing network, we have a series of joint-venture companies in Asia that are tied very closely with the markets in those countries.”
Earlier than other nickel companies, Inco recognized the growth potential of the Asian market and made its move. In the early 1970s it formed a joint venture in Japan to treat the nickel matte that would soon be coming from the PT Inco operations in Indonesia. It opened its first Asian marketing office (in Hong Kong) in the mid-1970s. The company now has joint-venture smelters and refineries in Japan, Korea and Taiwan to supply the stainless steel makers in those countries. It also has a specialty nickel salts joint venture in Kunshun, China to supply the plating industry there. “Being involved in local operations has enhanced the way we’re seen, as being a local supplier. It’s been a successful strategy,” concludes Goudie.
Inco works with its customers to pack as much value as possible into the product–the type of product, its form, packaging, and supply–trying to see all of its product as value-added in some way. The specialty nickel products are a unique advantage. Some commodity nickel products, such as the pellet products from Sudbury and Clydach, have especially high purity and are particularly suitable for high-nickel alloys. The major advantages that Inco enjoys in byproduct metals are product purity, reliability of supply and shipment, and a good reputation.
“Our size and our reliability of supply are enhanced by having multiple production locations around the world,” Goudie adds. “This gives us the advantage of having production near the customers, and the flexibility of moving production between different facilities when required.”
Inco Ltd. production and reserves summary, year-end 2001
| Mining | Proven & Probable Reserves | Metals Produced | Metals Delivered | Capital | Number of | |||||||
| Operations / | sulphide | laterite | Ni | Cu | Ni | Cu | Co | Precious metal | expenditures | employees | ||
| Projects | (million | grade | (million | grade | (tonnes) | (tonnes) | (tonnes) | (tonnes) | (tonnes) | (000 troy oz) | (US$ millions) | |
| tonnes) | tonnes) | |||||||||||
| Ontario | 196 | 1.32% Ni, 1.30% Cu | 97,000 | 97 | 6,404* | |||||||
| Manitoba | 40 | 2.23% Ni, 0.14% Cu | 49,000 | 33 | ||||||||
| PT Inco** (59%) | 97 | 1.70% Ni | 61,000 | 29 | 2,951 | |||||||
| Voisey’s Bay | 31 | 2.88% Ni, 1.69% Cu | 9 | |||||||||
| Goro*** (85%) | 54 | 1.53% Ni, 0.12% Co | 84 | |||||||||
| Other | 11 | 903 | ||||||||||
| TOTAL | 267 | 1.64 Ni%, 1.17% Cu | 151 | 1.64% Ni | 207,077 | 116,255 | 230,049 | 116,751 | 1,454 | 2,021 | 263 | 10,258 |
* includes employees from the Ontario, Manitoba and United Kingdom operations
** Reserves figure for PT Inco indicates 100% of the operation’s reserves; production figure is Inco’s 59% of PT Inco’s production.
*** Reserves figure for Goro indicates 100% of the project’s reserves.
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