Soaring cost projections delay Inco’s Goro project

Soaring cost projections delay Inco’s Goro project

Based on new, sharply higher engineering estimates for project costs, Inco is reviewing key aspects of its 85%-owned Goro nickel-cobalt project in New Caledonia. The company said that the new estimates could be as much as 30% to 45% above the original estimate of $1.45 billion. Inco has curtailed construction and started a comprehensive review that probably will not be completed before mid2003. Work continues, though, on permitting and local approvals. The earliest possible startup date for the project has been pushed back at least six months into the second half of 2005.

Geotechnical conditions and evolving design and infrastructure requirements were the main source of cost overruns. The review will look specifically for possible cost savings in scope or design changes, modifications to construction plans, modifications to contractual arrangements, as well as alternative execution strategies, though not process technology.

The project has a planned initial capacity of about 5,500 mt/year of nickel and 4,500 mt/year of cobalt. Through the end of November, Inco spent $350 million on the project and has a similar amount budgeted for 2003 despite curtailing some construction activity. “The Goro project remains a fundamental part of Inco’s growth strategy,” Inco Chairman and CEO Scott Hand said.

Goro’s project review will not affect the current schedule for its Voisey’s Bay project in Newfoundland, though in light of the setback, Inco has revised its view of the nickel market Executive Vice-President Peter Goudie told a group of analysts in Toronto that nickel demand is expected to exceed new supply at least through 2005. Delaying the startup of Goro, while not a primary cause of this supply shortfall, will likely prolong a period of tight nickel markets and, in all probability, higher nickel prices. The project review will determine what the revised schedule will be, including when initial production might be expected.

In charting the likely course of nickel supply and demand over the next few years, Goudie noted that stainless steel – nickel’s primary market – has grown at a rate of 6%/year over the last 50 years. Going forward, stainless steel demand growth will remain strong as demand in China traces a sharply rising curve previously seen during the modernization of the economies of Japan, Korea, and Taiwan.

On the supply side, most nickel producers are already operating at capacity, very little capacity is shut down, and the latest round of expansions is ending, Goudie said. No new projects are in the works that will contribute significantly to supply before 2005. Nickel inventories, both producer and LME, are at very low levels relative to prior cycles. Viewed from any perspective, there will be a limited amount of additional nickel supply to meet demand growth before 2006.

“Nickel fundamentals going forward will be quite strong. This appears to be emerging as the consensus view, but it has not yet translated into consensus nickel price forecasts. At the moment, few forecasts are greater than $8,000 per mt, or $3.60 per pound, over the next few years, despite the fact that average prices have exceeded this figure in six of the last fifteen years,” Goudie concluded.

Copyright PRIMEDIA Business Magazines & Media Inc. Jan 2003

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