Inco gets BBB minus ratings

Standard & Poor's today raised its corporate credit, senior unsecured debt, and bank loan ratings on Inco Ltd. to triple-B-minus from double-B-plus.

The preferred stock rating on the company was raised to double-B from single-B-plus.

The outlook is stable

The upgrade reflects the impact of the improvement in the nickel price on the company's financial results, the success of the ongoing restructuring of its operations to lower the cost structure, and the strengthening of the balance sheet through equity issuance and debt reduction.

Inco is one of the world's largest and lowest-cost integrated nickel producers with operations in Canada, Europe, and Asia, and development projects in Canada and New Caledonia.

The nickel price is strong, having averaged more than US$4.00 per pound year to date, and inventories are low, reflecting a nickel market in supply deficit and strong Asian demand for stainless steel. The company's profitability and cash flow are highly leveraged to the price of nickel and therefore are very volatile.

Inco has significantly lowered its cost structure to well within the first quartile of the industry curve by restructuring its operations and ongoing cost-cutting initiatives. Its cost structure is expected to benefit further from the recent completion of the 50% expansion at 59%-owned PT International Nickel Indonesia (PT Inco), and the development projects underway at its mines in Ontario and Manitoba.

Inco will also benefit from its low-cost Goro nickel-cobalt laterite project in New Caledonia, should the company reach a positive decision on a commercial plant by year-end. Inco's special nickel products, including nickel powder and foam used in batteries, help the company earn a premium over the London Metal Exchange price and also help to mitigate volatility given they are less price sensitive than primary metal.

The PT Inco expansion, however, increases Inco's exposure to Indonesian sovereign risk and the company's Voisey's Bay project in Newfoundland and Labrador remains at a standstill.

The company's financial policy is moderate. It completed a US$273 million equity issue in May 1999 and significantly reduced debt. Total debt to capitalisation is currently less than 20% but is expected to average about 25% over the cycle.

Cash flow protection measures also have shown improvement with EBITDA interest coverage expected to average at least 5 times over the cycle and funds from operations to total debt expected to average 30%.

Financial flexibility is adequate with a moderate debt maturity schedule and a US$700 million bank credit facility. Profitability remains weak with return on permanent capital expected to average around 5%-6%.

Standard & Poor's expects the nickel market to remain healthy for the near term, lending support to Inco's financial performance. Standard & Poor's also expects Inco to continue to focus on improving its profitability and reducing volatility.

Inco Indonesia

Listed on the Jakarta Stock Exchange, PT Inco reported $47.29m net income in the first semester of this year, soaring almost by 23x from $1.97m recorded during the same period a year ago. Inco managed to post $21.25m full-year net profits in 1999, due to better nickel prices in the world markets in the second half of that year.

In other words, Inco's net profits in the first semester of this year already far above, namely 122.54% above its 1999 full year's level.

Inco reported total revenue reached $202.35m in the first semester of this year, reflecting a 150.24% surge compared with $80.86m in the same period of last year. Even more, the first semester's revenue already reached 96.62% of the full year's revenue of $209.42m in 1999.

The sales price of nickel matte was on the average of $7,871 per ton or $3.57 per pound in the second quarter of 2000, much higher than $4.122 per ton or $1.87 per pound during the same period of last year.

During the second quarter of 2000, Inco produced 13,779 tons of nickel matte, reflecting a 28.78% surge compared with 10,700 tons in the same period last year. In the meantime, the second quarter sales revenue reached $111.2m, reflecting a 121.51% surge compared with $50.2m in the same period a year earlier.

PT Inco, recently announced plans to pay $80m out of its total $500.05m debts this September.

Inco's president Rumengan Musu elaborated that his company should pay the debt through 13 installments. The payment should be made every semester.

He said further that Inco has paid $40m as its first installment in last March. The September payment would be the second payment, "which is of installment of principal plus interests."

Indofinance notes that Inco's liabilities were totaling at $600.72m at end of June this year, which in itself represents an 11.38% decrease from $677.87m a year earlier.

In the meantime, its total equity stood at $695.28m, reflecting a 10.59% increase from $628.70m a year earlier.

Thereby, the nickel producer actually has solid capital structure. The debt to equity ratio, in this regard, stood at 86.40%, much better compared with 107.82% a year earlier.

According to Musu, Inco has $421.15m debts indebted to Export Development Corporation of Japan's Export-Import Bank. In addition, it also borrowed $78.8m from its principal Inco Ltd. of Canada.

Actually, the principal company had agreed to lend $200m to Inco Indonesia, in order to increase the production capacity of its plant in Soroako, South Sulawesi, from present rate of 45,000 metric tons/year to around 68,000m.t./year. The planned expansion, which consists of construction of a new production line and development of a 93MW hydropower plant, estimated to cost around $650m.

Once the expansion has been completed, then Inco's investments in the nickel-mining project in South Sulawesi would be totaling at $2.2bn, said Musu.

At the initial stage, the nickel-mining firm invested around $845m in 1978.

At present, its nickel-mining project in Indonesia supplies around 6% of the world demand for nickel. Meanwhile, if combined with its principal and subsidiary companies, overall Inco currently dominates around 20% of the world's nickel output. (*)