Inco Limited Business Information, Profile, and History

Company Perspectives:

Our goal is to become the most profitable nickel producer in the world. At Inco, we are making good progress toward that goal through our three-part strategy. Our strategy is: to be a low-cost producer at all our operations; to pursue profitable and low-cost growth at our development properties; to grow our specialty-nickel products business.

History of Inco Limited

Inco Limited is one of the world's top producers of nickel. It operates Canada's largest mining and processing operation in Sudbury, Ontario, and runs other mines in Canada, the United Kingdom, and Indonesia. It has interests in refineries in Japan, Taiwan, and South Korea, and sales and operations in over 40 countries worldwide. Overall Inco provides about 25 percent of the nickel used globally. The company also produces cobalt, copper, precious metals, and specialty nickel products.

Early Years

Nickel was first isolated as an element in the middle of the 18th century, but not until the following century did it come into demand as a coin metal. Up to around 1890, coining remained the metal's only use, and most of the world's nickel was mined by Le Nickel, a Rothschild company, on the island of New Caledonia. At that time, however, it was determined that steel made from an iron-nickel alloy could be rolled into exceptionally hard plates, called armor plate, for warships, tanks, and other military vehicles, and the resulting surge in demand spurred a worldwide search for nickel deposits. The world's largest nickel deposit ever discovered was in Ontario's Sudbury Basin; before long, one of the area's big copper mining companies, Canadian Copper, began shipping quantities of nickel to a U.S. refinery in Bayonne, New Jersey, the Orford Copper Company. Orford had devised the most economical process for refining nickel, and its alliance with Canadian Copper proved an unbeatable combination. Orford dominated the U.S. nickel business, supplying much of the metal needed by the growing steel industry, and managed to make inroads into the European market as well.

The U.S. steel industry did not feel comfortable relying on a single Canadian source for one of its essential materials; so in 1902 Charles Schwab of U.S. Steel and a group of other steelmen used the financial backing of J.P. Morgan to take control of and merge Orford and Canadian Copper. The new company was called International Nickel, nicknamed Inco, and was based in New York. From the first, Inco was able to control a majority of the U.S. nickel market, and had increased its share to 70 percent by 1913. Its large-scale operations in the Sudbury Basin allowed the company to eliminate competition through price wars and sheer staying power. According to Fortune magazine in May 1957, Inco had maintained its control of the U.S. market without interruption for nearly 40 years.

As the world's leading nickel producer, Inco enjoyed an enormous increase in business during World War I, when the need for armor-plate drove up steel sales. This good fortune soon changed, when the 1921 world disarmament agreements killed the munitions market and Inco was left with a huge backlog of nickel. Its record 1921 profit of US$2 million slipped to a US$1.2 million loss the following year, and the Sudbury mines were shut down for over six months. The shock of this setback stayed with the company for many years in the form of a conservative management policy and a determination to avoid large inventories. In 1922, Robert Crooks Stanley began a 30-year tenure as president--and later chairman--of Inco, intent upon building new markets in fields other than munitions. Stanley created a vigorous research and development department to find new peacetime uses for nickel. So effective were the Inco engineers that many of the innovations in nickel metallurgy over the next 50 years can be traced to their efforts. In effect, Inco became the research department for the entire nickel industry, sharing its findings with customer and competitor alike. Of course, for many years Inco had few of the latter.

By the late 1920s, Stanley brought Inco sales back up to their wartime peak, much of the peacetime addition coming from the automobile industry. Inco's first major postwar investment was a US$3 million rolling mill in Huntington, West Virginia, designed to produce Monel metal, a widely used copper-nickel alloy. At the same time, Stanley effectively blocked the growth of competition from such newcomers as British America Nickel, which in 1923 made a serious bid for the U.S. market. Inco promptly lowered its price from 34 to 25 cents per pound, driving British America to bankruptcy a year later. When no one purchased the fallen company's assets, a little-known firm, Anglo-Canadian Mining & Refining, bought them very cheaply. Anglo-Canadian was actually a corporation owned by Inco, which simply took what it could use from British America's refinery and sold the rest for scrap.

A more serious competitor was handled in a different manner. Mond Nickel Company had been operating in the Sudbury Basin since just after the turn of the century, shipping its nickel to Europe to compete with France's Le Nickel and Inco's European offices. Mond, the creation of Ludwig Mond, the British chemist who founded Imperial Chemical Industries (ICI), owned half of the best nickel deposits in Sudbury, in an area known as the Frood. The other owner of these deposits was Inco. In 1928, Inco decided it would be wiser to join forces rather than fight over the world's largest nickel mine. Mond and Inco were then merged at the end of that year to form International Nickel Co. of Canada, Ltd., still nicknamed Inco. Mond remained a U.K. subsidiary of Inco, handling both European and Asian customers. By moving its incorporation to a foreign country, Inco was better able to deflect inevitable and periodic attempts by the U.S. Department of Justice to prosecute the company for antitrust violations. The 1929 appearance of a small competitor called Falconbridge Nickel Mines Ltd., another European supplier, was only tolerated to avoid the impression of absolute monopoly.

Depression and World War II

The Great Depression caused Inco temporary losses for the second time in its history, but the growing number of industrial uses for nickel soon pulled sales back up to a healthy level. By this time, Inco had become a major producer of copper and platinum as well as nickel, thanks to Sudbury Basin's rich supply of minerals. The company was now the sixth largest copper producer in the world and the largest supplier of platinum, a metal whose unusual properties had found many industrial applications; however, it was in nickel that Inco held unchallenged power as the source of 90 percent of the noncommunist world's supply. Inco's metal was needed by all of the world's arms makers and for the production of super-hard steel for a variety of uses, from armorplate to exhaust valves on aircraft engines to gun recoil systems.

In a move that stirred up plenty of controversy, Inco became the nickel supplier to both sides of the approaching World War II, which included signing a long-term contract with Germany's I.G. Farben in the mid-1930s. In antitrust action ten years later, the Department of Justice charged that Inco's agreement with Farben was part of an effort to form a worldwide nickel cartel, and that in the process it had supplied Germany with a stockpile of nickel critical to its imminent war plans. The antitrust action was settled in 1948 when Inco signed a consent decree, agreeing only that it would sell nickel in the United States at fair prices; its worldwide monopoly, however, was beyond the reach of the U.S. Department of Justice.

World War II taxed Inco's capacity and strained its relationship with the U.S. armed forces. Still mindful of its near collapse after World War I, Inco refused to stockpile the inventory desired by the armed forces, instead committing only to the timely delivery of critical metal. As an insurance policy, the U.S. government financed the creation of Nicaro Nickel Company in 1942, a Cuban venture under the direction of the Freeport Sulphur Company. Although Nicaro managed to produce some nickel, it never really got off the ground and was mothballed soon after the war. Its decline may have been hastened by Inco's price cuts on nickel oxides, Nicaro's specialty. The full extent of Inco's nickel monopoly was further suggested by the fact that, aside from the case of nickel oxide, its nickel price never varied between 1928 and 1946--an indication of complete freedom from the normal pressures of competition. At the war's end, Inco's assets were valued at about US$135 million, sales stood at US$148 million, and the company showed a very healthy net income of about US$30 million.

Inco's hesitation to expand its nickel production helped it to avoid a serious postwar slump, but it also left the company unprepared for what soon followed. In the booming economy of the 1950s nickel assumed new importance, finding applications in stainless steel, home appliances, automobiles, jet engines, and atomic power plants. When the Korean War added the usual backlog of orders for armorplate, Inco faced a severe and growing nickel shortage. The U.S. government made the situation more difficult by adding nickel to its list of stockpiled metals critical to national defense, a contract Inco was naturally called upon to fulfill.

Indeed, Inco and the U.S. Department of Commerce together allocated nickel to customers across the country. Yet this nickel shortage had two long-term consequences for Inco. First, it made a rise in prices inevitable--prices increased by 60 percent between 1946 and 1950 alone. Second, a host of new competitors entered the nickel market, encouraged by the acute shortage, rising prices, and the U.S. government's willingness to finance alternative suppliers of the important metal. Inco's share of the free-world market, which was estimated at 85 percent as late as 1950, soon began a decline to what would eventually mirror its 1990s level of 34 percent.

Ups and Downs in the Postwar Nickel Market

Once assured the boom in nickel was permanent, Inco increased production and began to search for new deposits. After several years of exploration, a major find was made in northern Manitoba in 1956, a field it christened "Thompson" after company Chairman John F. Thompson, successor to Robert Stanley. Thompson was the most significant new deposit of nickel found since the discovery of Sudbury in the 1880s. After Inco spent about US$175 million building mines, smelters, refineries, a town to house its employees, and a railroad to reach the town, the site added about 30 percent to the company's 1956 sales of US$445 million. Inco remained extremely profitable despite its new competitors and still carried no long-term debt. In the recession of 1958, sales dropped to US$322 million but a strike by the Mill, Mine and Smelter Workers Union kept inventories low and prevented a loss for the year.

After the 1958 recession, sales of nickel took off once again. Inco's research engineers continued to provide a new generation of customers with ingenious uses for nickel, as in the rapidly growing electronics and aerospace industries where the use of stainless steel was just beginning to mushroom. Under the leadership of new Chairman Harry S. Wingate, Inco's sales hit US$572 million in 1965, and its net income remained a remarkably high US$136 million. The Thompson field had grown into a thriving town and its deposits proved to be every bit as rich as hoped.

Nickel sales were given yet another boost by the Vietnam War, in which the United States employed a vast array of sophisticated weaponry, the bulk of which required nickel-hardened steel. Responding to the bull market, Inco launched a comprehensive refurbishment and expansion program eventually costing more than US$1 billion. For the first time in its history, Inco borrowed money and chose to continue concentrating on the mining of high-grade, relatively expensive nickel at a time when many competitors had come up with inexpensive, readily available nickel oxides and ferronickels.

The impact of these decisions was felt when a devastating strike by 17,000 Sudbury workers in 1969-70 was followed by the sharp recession of 1971; nickel sales dropped by 25 percent and Inco's stock fell by 50 percent in a matter of months. The company did not show a loss for the year, but it was thoroughly shaken by the low sales and a mounting debt burden. Wingate retired and his successor, L. Edward Grubb, moved to curtail the expansion program then just coming on line. Grubb cut production back to 80 percent of capacity and reduced labor where possible. To protect Inco against the further erosion of sales by ferronickel competitors, he spent another US$750 million to exploit the company's own ferronickel sources in Guatemala and Indonesia, where nickel was extracted from laterite ore by means of a refining process using petroleum.

In 1974, Inco made its first and only major acquisition, paying US$224 million for ESB Inc., a leading manufacturer of large storage batteries using nickel. Inco believed ESB's sales would help balance cyclical downturns in nickel, and that demand for batteries would increase in a world growing short of oil. Inco's share of the world's nickel sales had slipped below 50 percent by this time. Except in 1974, a boom year for commodities, the nickel market was generally soft for the rest of the decade. More worrisome, the soaring price of oil made Inco's huge investments in laterite nickel practically a dead loss, as the cost of refining the ore with petroleum rendered the product too expensive to sell.

New Challenges in the 1980s and 1990s

In 1976 International Nickel Co. of Canada, Ltd. officially changed its name to Inco Limited. A looming problem for the newly named company was Inco's US$850 million debt burden, which grew less manageable as interest rates reached a peak in the early 1980s. Additionally, Inco's new battery subsidiary was floundering, and in the severe recession of 1981 Inco found itself in deep trouble. Forced to write off its Guatemalan investment, sales began a steep slide; the company reported a disastrous year-end loss of US$470 million, its first since 1932. In the following three years, Inco's sales fell another US$500 million, as the recession and corporate debt proved an almost fatal combination.

Inco, however, had one asset that remained invulnerable: it still owned the world's richest nickel fields. Under CEO Donald J. Phillips, Inco wrote off its ill-fated battery venture for $245 million, almost halved its workforce, closed all excess production facilities, and sat tight, waiting for the severely depressed price of nickel to recover. New techniques allowed the extraction of ore in far bigger chunks than previously possible, and the reduced staff performed the smelting and refining tasks with improved methods. A rebound in the nickel market in 1987 brought the boost Inco needed: an increase in market share to nearly 35 percent and a year-end profit of US$125 million.

When nickel prices reached an all-time high in 1988, Inco's worldwide shipments of 495 million pounds of nickel (its highest level in 14 years) sent profits soaring to US$735 million and a stunning US$753 million in 1989.

As a reward for his efforts in raising productivity, Phillips was made chairman and CEO of Inco. His first task was to decide what to do with US$1 billion in retained earnings. Mindful of the poor results of past efforts at diversification, Phillips put some into further production refinements; however, the bulk was used for a $10 per share special cash dividend as part of a controversial recapitalization and shareholders' rights package. Taking cues from its U.S. neighbors, Inco's "poison pill" plan was the first of its kind in Canada. Spurring heated debate from all sides, Quebec's pension fund management group, Caisse de Depot et Placement du Quebec, filed suit on behalf of its 3.2 million Inco shares to legally overturn shareholders' December 1988 approval of the poison pill.

As the 1990s dawned, environmental issues became an increasingly expensive concern for Inco. The company faced an $80,000 fine for a sulphur trioxide leak from its Copper Cliff refinery in April 1987 and also faced repeated requests to regulate the sulphur dioxide released into the atmosphere by its smelting operations in Sudbury. Responding to what Maclean's called "the largest single source of sulphur dioxide pollution on the continent," Inco launched a series of abatement programs (with a price tag of over $500 million) to substantially lower emissions by 1994. To meet this goal, Inco planned to implement new magnetic separators to extract sulphur from ore and replace natural-gas burning furnaces with oxygen flash furnaces, which used oxygen rather than fossil fuels, eliminating toxic emissions altogether. Additionally, the new processes would significantly lower energy costs and boost efficiency.

In 1991, Michael Sopko, an Inco employee since 1964, was named president while Phillips retained the titles of CEO and chairman. Though annual net sales for 1991 fell to just under US$3 billion, net earnings plunged from 1990's US$441 million to US$83 million. In 1992, Sopko replaced the retiring Phillips as chairman and CEO, and Scott M. Hand assumed the presidency. The changing of the guard, however, had little effect on the continued downward trend of nickel prices, sluggish demand, and increased competition from Russian exports--all of which contributed to a year-end loss of US$18 million on net sales of US$2.56 billion. In response, Inco slashed executive salaries, decreased capital expenditures by $50 million, and closed its Ontario and Manitoba facilities for several weeks to cut production by 40 million pounds. Next Inco sold its 62 percent stake in TVX Gold Inc. for $371 million in 1993, as nickel prices plunged to their lowest level since 1987. Finishing 1993 with sales of only US$2.13 billion, the company had managed to post a profit of US$28 million rather than another loss.

Although earnings were not spectacular, they were nonetheless encouraging. The following year, Inco continued to struggle, announcing plans to prune upper management, eliminate 1,000 union jobs, and fund expansion at the company's low-cost Soroako mine in Indonesia--just as 4,900 laborers announced their intention to strike. Narrowly averting the strike, Inco took its employee relations in a different direction, funding more research into automated mining, with which the company had increasing success. The company also increased financing for the research and development of scores of new nickel applications and products. Nickel alloys, foam, foil, and powders, as well as nickel coating on fibers, papers, cloths, and even gold, were providing excellent results.

In 1996 the company bought a 25 percent stake in what was reputed to be the richest nickel discovery in 30 years. This was a tract known as Voisey's Bay in northern Labrador. The find belonged to a small Canadian mining concern, Diamond Fields. Its operatives had discovered the nickel deposits by accident in 1993. Diamond Fields was on the verge of selling a stake in the area to another Canadian mining firm, Falconbridge, when Inco stepped in with a bigger offer. The deal was worth about C$4.5 billion, financed by a complex strategy that created a special category of Inco stock. It was deemed a high price for the relatively unexplored Voisey's Bay, but Inco expected great things from the area.

However, plans to develop Voisey's Bay were being hindered. The mine could not be dug until an environmental impact study was completed, and local government insisted that metal mined in the area also be refined there, and not shipped elsewhere. Negotiations over these issues with government and tribal groups dragged on for years. Meanwhile, competition from nickel suppliers in Russia, Australia, and Cuba cut into Inco's profits. Bad weather forced the company's Indonesian mine to shut down for part of 1997, and a strike in Sudbury further chipped away at Inco's profits. In addition, the company was burdened with about US$1.5 billion in debt.

Inco looked for innovative ways to get the most out of its business. It continued to investigate high-tech mining, investing in a joint-venture Mining Automation Program in 1996. New equipment allowed miners to operate machinery by remote control from the surface. Though development of so-called telemining was expensive and not always smooth, the company stood to gain a lot in saved labor costs. To go into deep pits, some miners spent as much as two hours out of each eight-hour shift commuting in trains or elevators. Automation would ostensibly eliminate much of this lost time. The company also formed a new marketing group, called Inco Special Products, to exploit some more specialized niches. It formed the new division in 2000 to market nickel foams, powders, oxides, particles, and fibers. These were used in batteries, auto parts, and consumer electronics. Inco hoped to reach sales of $200 million from the new division within the next five years.

Inco then pledged to develop a nickel-cobalt mine in the French dependency of New Caledonia in 2001. The plant was expected to yield some 54,000 tons of nickel annually, and 5,400 tons of cobalt. The cost to develop the mine was estimated at about $1.4 billion. The company's Voisey's Bay property was still embattled by the fall of 2001, though negotiations with provincial governments continued. Inco was unable to start building a pilot smelting plant in the area until it guaranteed that it would also build a permanent plant. By 2001 costs for developing the mine were estimated at US$1.25 billion, with another US$500 million to build the pilot smelter. The economic downturn of 2001 made the company's plans all the more variable. Production was hoped to begin by 2005.

Principal Subsidiaries: Inco Special Products; Inco United States, Inc.; Novamet Specialty Products Corp. (U.S.A.); International Metals Reclamation Company, Inc. (U.S.A.); Exploraciones Y Explotaciones (Guatemala; 70%); Compagnie des Mines de Xere (France; 85%); Goro Nickel SA (New Caledonia); Jinco Nonferrous Metals Co., Ltd. (China; 65%); Ingold Holdins Indonesia, Inc. (Canada); Voisey's Bay Nickel Company Limited.

Principal Divisions: Ontario Division; Clydach Refinery (UK); Acton Refinery (UK); Manitoba Division; PT International Nickel (Indonesia); Inco TNC Limited (Japan).

Principal Competitors: Norilsk Nickel; Falconbridge Limited.

Chronology

• Key Dates:
• 1902: International Nickel is formed in New York.
• 1916: Company is incorporated in Canada as International Nickel Company of Canada, Ltd. (Inco).
• 1928: Inco merges with Mond Nickel Company.
• 1956: Company discovers giant Thompson nickel deposit in Manitoba.
• 1974: Inco acquires ESB Inc.
• 1996: Inco acquires stake in Voisey's Bay nickel deposit.