Inco Updates Phase 2 of Goro Project Review
Goro, nickel-cobalt project in New Caledonia, has proceeded in two phases, began following the decision made in December 2002 to suspend the project. Inco Limited, which owned approximately 85 per cent of the project, announced today the key preliminary findings reached to date as part of Phase 2 of the comprehensive review.
Inco’s Chairman and CEO Scott Hand stated that, Phase 2 review has progressed well, and expressed thanks to the project review teams for their skills and the experience. He added that, the company has made good progress toward confirming an operation that will add value to itself, will be efficient and low-cost and meet relevant environmental health and safety standards and will represent a significant contributor to New Caledonia.
He also added that, Goro nickel-cobalt project, one of the world’s best undeveloped ore-bodies, and a very key part of the company’s growth strategy in nickel and has the clear capabilities to be expanded significantly beyond its initial nameplate capacity in the future.
The Phase 2 review is currently, expected to be completed in the late summer of 2004. This Phase has implicated a structured process to further develop opportunities to reduce the project capital cost estimate that had been identified in the first phase of the project review completed in July 2003. Phase 2 includes the development of an updated project cost control estimate, an updated project schedule and an optimized and clearly defined scope and execution plan. It also has a value improvement program and continuation of appropriate engineering work with the assistance of the joint venture of the SNC-Lavalin and Foster Wheeler organizations and other firms retained to assist in this review.
The impact of this review on the project’s preliminary capital cost estimate, taking into account the expected non-cash charge discussed below, has been reduced to approximately $1.85 billion (U.S.), within a plus 20 percent to minus 5 percent reliability range and is within approximately three per cent of the $1.8 billion (U.S.) capital cost estimate objective for the project that Inco had established in August 2003. This includes a favorable impact of approximately $500 million (U.S.) in reductions in the capital cost estimate, offset by approximately $250 million (U.S.), relating principally to unfavorable currency adjustments due to changes in exchange rates associated with certain expenditures which would be expected to be incurred in foreign exchange and cost escalation in construction materials.
Mr. Hand added that the preliminary cost estimate developed shows signs to continue to move in the right direction to achieve our goal of a viable project. Due to the progress made to date, the project’s overall operability has been enhanced and increased its production capacity. At a capital cost of U.S. $1.85 billion and using long-term prices for nickel of U.S. $3 a pound and U.S. $7 a pound for cobalt, the project returns would meet our long-term after-tax weighted average cost of capital of 9 to 10 percent. Mr. Hand notified that, while, a number of key milestones are to be accomplished, and remained optimistic that the company would reach a decision to proceed later this year.
The Phase 2 review has also reduced Goro’s planned process plant footprint by approximately 50 percent from phase 1. This development will enhance the plant’s operability and maintainability, and also result in considerable savings on concrete, structural steel, piping and electrical requirements. It also identified certain process improvements, including a move to direct heating from indirect heating of the ore feed for the process plant autoclaves.
The work undertaken has also increased the nameplate annual capacity for the planned process plant, from approximately 55,000 tonnes of nickel and 4,500 tonnes of cobalt to approximately 60,000 tonnes of nickel and 5,100 tonnes of cobalt. The Phase 2 review will continue to evaluate opportunities to increase the nameplate capacity further based upon appropriate incremental capital investments.
The principal changes in the Goro project configuration, intended to reduce the capital cost estimate and enhance the operating efficiency of the planned process plant and the process itself are expected to result in a material non-cash charge. As a result, capitalized expenditures incurred to date in the range of $180 to $210 million (U.S.) are currently anticipated to be written off and the precise amount of this non-cash charge will be finalized as of the end of the second quarter of 2004. This results in no substantial difference between pre-tax and after-tax amount.
Peter Jones, Inco’s President and Chief Operating Officer said that, the company is managing to increase production and efficiency in a plant with a significantly smaller footprint, without cutting any corners in the areas that will produce revenue without any compromise its design. The company made a number of design enhancements, particularly with respect to the engineering of the process, and environmental improvements.
The Phase 2 review, has evaluated the project schedule to start in early 2007, keeping in the following view. The additional time required in completing the Phase 2 review and assuming that decisions to restart the project were made in October 2004. Initial plant would start-up around mid-2007. Jones stated that, delay in completing our review in the right way, has allowed us to identify
important improvements and to develop a more reliable project, and will look for ways to improve on this schedule but only if we can ensure the proper construction and start-up of the plant.
Certain preliminary mining and civil construction work at the Goro site at a cost of about $6 million (U.S.) has been completed early 2004. Inco expects to undertake additional engineering and other works at an estimated cost of $25 million (U.S.) during the balance of the Phase 2 review.
Discussions between Inco and the French Government has continued for covering $350 million (U.S.) in tax advantaged financing which the later had agreed to provide to the project. These discussions continue to examine ways in which the French Government can provide additional financial support directly or indirectly to the project, including support for a power generating facility to be constructed in New Caledonia by a third party which would meet the Goro project’s anticipated external power requirements.
Inco and the Goro project company, Goro Nickel S.A., have also continued discussions with the Japanese consortium led by Sumitomo Metal Mining Co., Ltd. concerning their interest in acquiring up to a 25 percent in the Goro project and also detailed the terms and conditions of its future participation in the project that is expected to restart by the end of the second quarter of 2004.
Inco and Goro Nickel continue to make progress in developing a good neighbor agreement that will set out Goro Nickel’s commitments to local communities in New Caledonia. Mr. Jones has expressed his concern to ensure that local communities would benefit from this project in terms of employment, training programs, and business and service development opportunities. The company will also explore ways for community members to serve as advisors on key aspects of our operations, such as environmental safety matters.
The key milestones to be met to and which will enable Inco to make a decision in the late September - October 2004 period to proceed with the project include
Having achieved good neighbor agreement and having reached other appropriate understandings or arrangements with local labor unions and other key stakeholders in New Caledonia to enable any restart of the project, including construction, to proceed on a basis that avoids any potential labor or other disruptions,
Finalizing the terms of the tax-advantaged financing and other support to be provided to the project by the French Government
Reaching a satisfactory agreement on the disposition of the interest in Goro Nickel held by the French Government agency, Bureau de Recherches Geologiques et Minieres, as part of a required realignment of the equity ownership in the project to enable a new partner to be brought into the project and provide for New Caledonia’s equity participation in Goro.
Mr. Hand expressed his belief in the project, which is economically feasible and can be implemented in a financially prudent manner. of Inco’s clear and firm objective is to set right all the significant challenges which major projects like Goro confront.