CVRD Inco and Xstrata Nickel

The excitement and uncertainty surrounding the battle for Canada’s nickel giants is subsiding. It slowed last fall when Swiss-based Xstrata won the battle for Falconbridge Ltd., and Brazilian Companhia Vale do Rio Doce beat out the other bidders for Inco Ltd. That was not the outcome industry watchers had predicted when the merger of Falconbridge and Inco was first contemplated in October 2005 (see CMJ January 2006). Neither of the ultimate winners had been involved in bidding at that time.

While some people find it sad to see control of Inco and Falconbridge fall into foreign hands, neither Xstrata, nor CVRD, is unknown to the global mining industry. Both are among the world’s largest mining companies, operate globally and produce a wide range of minerals, but neither had a presence in Canada until the recent takeovers.

CVRD Inco snapshot

CVRD is the world’s largest producer of iron ore as well as a producer of copper, manganese, ferro-alloys, bauxite, industrial minerals and, now, nickel. It was founded in 1942 by the Brazilian government and privatized in 1997. The government still holds 5.5% of the outstanding shares, but Valepar (a consortium of companies formed to hold an interest in CVRD) is the largest single shareholder with 32.5%.

A look at CVRD’s Q4 2006 sales revenue figures shows just how important the acquisition of Inco was. Previously CVRD had no nickel sales, and the sales credited to Inco added US$5.3 billion dollars to the company’s coffers. That’s over 23% of the total of US$18.2 billion. At a stroke, CVRD has become the world’s second largest nickel producer, and is aiming to be No.1. The Ontario operations alone produced 104,200 tonnes of nickel in 2006.

CVRD Inco (the new name of the former “Inco” entity) owns and operates the Coleman/McCreedy East mine on the northwest rim of the Sudbury Basin and the Garson, Frood-Stobie, Copper Cliff North, Copper Cliff South and Creighton mines as well as the Clarabelle mill and Copper Cliff smelter and refinery, all of the latter located along the southeast rim of the basin. The company estimates that its proven and probable reserves in the Sudbury area stood at 163 million tonnes grading 1.22% Ni and 1.31% Cu (year-end 2005). That will feed the mill at a planned rate of 9.6 million tonnes for 2007 and for many more years.

CVRD Inco has two possible new mines near Sudbury in the pipeline. First is the Totten project, originally drilled in 1969-70. It is close to the now-closed Crean Hill mine and is believed to have resources of 8.4 million tonnes. The other possibility is the Kelly Lake deposit near the Copper Cliff South mine. It has been investigated for several years by drilling under the lake. Both deposits are high-grade and contain significant PGMs. They are tentatively on the calendar for production in late 2009 (Totten) and early 2015 (Kelly Lake).

Xstrata briefly

Xstrata is a major producer of coal, copper, aluminum, nickel and zinc. With the purchase of Falconbridge it has beefed up its nickel division. The company says it is now the world’s fourth largest nickel producer, with annual output of more than 110,000 tonnes of refined nickel from fully integrated operations.

The company was founded in 2002 when Xstrata AG took over the coal assets of Glencore International. A year later, Xstrata mounted a successful takeover bid for MIM Holdings, the Australian owner of the Mount Isa polymetallic mine. Xstrata failed in its attempt to take over WMC Resources in 2005, before turning its sights on Falconbridge.

Xstrata puts the 2007 throughput target for the Strathcona mill at 2.0 million tonnes of ore averaging 1.2% Ni, 1.25% Cu plus PGMs. Mill feed will come from the Craig, Fraser, Lockerby and Thayer Lindsley mines near Sudbury. The Falconbridge smelter is expected to produce 62,000 tonnes of nickel matte, approximately 16,000 tonnes of which can be credited to the Sudbury Basin operations. The four active mines have reserves totalling 8.1 million tonnes grading 1.18% Ni and 1.46% Cu. There are also 20.5 million tonnes of resources outlined at the properties.

The three major development projects that had been set in motion by Falconbridge are going ahead under Xstrata’s direction.

Shaft-sinking continues at the Nickel Rim South project. It may cost Cdn$627 million to complete the mine, but operating cash costs for nickel will be literally less than nothing, at minus US$1.09/lb after byproduct credits. And the ore is considered high grade. Resources are 13.4 million tonnes averaging 1.8% Ni and 3.3% Cu plus “significant” PGMs. The first development ore should be hoisted in late 2008 and the mine will reach full production in 2010.

The Fraser Morgan project shares infrastructure with the Fraser mine via the 34-level, a situation that has kept capital costs in the Cdn$204-million neighbourhood. There are five separate mineralized zones that add up to 4.9 million tonnes of measured and indicated resources averaging 1.80% Ni and 0.56% Cu. The development schedule is flexible, and in light of today’s high metal prices, is being fast-tracked for first ore in 2008 and full production in 2011.

Xstrata is looking at the Onaping Depth project as a major anchor of its operations in Sudbury. This is a large, high-grade deposit that lies below Craig zone 12 and is accessible from that mine. The least developed of Xstrata’s Sudbury area projects, Onaping Depth has resources of 14.6 million tonnes grading 2.52% Ni and 1.15% Cu.

Community partners

CVRD Inco considers itself to be the most active partner in community activities, COO Mark Cutifani told CMJ. “We are partners with our community in every sense of the word.

“We have committed funding to the new Centre for Excellence in Mining Innovation. With our employees we will together raise more than $700,000 for this year’s United Way program. The great thing to note here,” he continued, “is the employees have contributed almost $500,000 from their own pockets. We will support various programs ranging from the Sudbury foodbank, the new hospice for the elderly and a range of community-based initiatives.”

Xstrata, too, puts high importance on community partnership. “We are currently engaging with community members to help us identify community priorities and develop a Corporate Social Involvement program specifically for the Sudbury area, said Mike Romaniuk, VP of Sudbury operations.

“We have made some significant commitments already,” he added. “We recently announced a $5-million contribution to Laurentian University for the Centre for Excellence in Mining Innovation as well as the creation of a permanent endowment for the Xstrata Nickel Memorial Lecture Series.”

Attracting and keeping employees

The shortage of skilled labour has not gone unnoticed by the new owners. Cutifani says CVRD Inco is committed to respecting every individual and creating the opportunity for its workforce to be heard and make a difference. “By improving our competitive position together, we will create stability and a future for them and, hopefully, their children and their grandchildren. This is a very powerful incentive for all of us,” he said.

Xstrata Nickel is tackling the workforce shortfall on a number of fronts. The company participates in local job fairs and forums including those with Cambrian College and Algoma College. It accepts co-op placements of students from colleges and universities across Canada.

Neither expects its workforce to shrink in light of the expansion projects and new mine developments they have planned.

“We do no anticipate significant changes,” said Cutifani. “What I do anticipate is improving production, which will underpin our business for the long term. Exploration success will be the key to driving growth above and beyond a natural improvement program… We will commit the funds necessary to position us for this type of opportunistic growth.”

Romaniuk paints a rosy picture, too. “Bot
tom line, we do see employment levels increasing somewhat over the next several years with increases in production and the development of growth opportunities,” he said. The possibility of boosting the workforce is even more welcome than Xstrata’s takeover promise that it would freeze labour numbers for three years–no layoffs in the immediate future.

As January draws to a close, Xstrata and Mine Mill/CAW Local 598 are at odds over the first labour contract they hope to sign. Union members have voted in favour of a strike if the two sides cannot agree on a new contract by Jan. 31. At issue is the amount of vacation time owed to union members and the manner in which job openings are posted.

Synergies still possible

The original merger proposal would have created immense synergies among the mining and milling operations of former-rivals Inco and Falconbridge. The deal could have ensured the future of the mines (and their employees) for many years by lowering the cost of production substantially. The possibility still exists for CVRD Inco and Xstrata to rationalize some aspects of their operations, though perhaps not to realize the $550 million in savings that the original proposal might have done.

The two companies are working together and are confident that significant savings can be made by using all of their infrastructure to its full capacity. No major deal has yet been announced.

The best for last

“Sudbury cannot simply be defined by the name that hangs over the door of the mining companies that operate in its jurisdiction,” CVRD Inco’s Cutifani said. “The things that make Sudbury great are the resources, the infrastructure that has been established over one hundred years and, most importantly, the people. The key for both owners to be successful for the future is to understand and work with the people to re-establish Sudbury as the greatest mining centre in the world.”

That is the attitude welcomed by the residents of Sudbury.

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