INCO LTD - 10-Q Quarterly Report

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

The Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Act”) during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

The Registrant is an accelerated filer (as defined in Rule 12b-2 under the Act).

Unless otherwise stated, dollar amounts in this Report are expressed in United States currency.

Common Shares outstanding at September 30, 2003: 185,360,547 shares, no par value.

*Notices and communications from the Securities and Exchange Commission may be sent to S.F. Feiner, Executive Vice-President, General Counsel and Secretary, 145 King Street West, Suite 1500, Toronto, Ontario M5H 4B7. His telephone number is (416) 361-7680.


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(in millions of United States dollars except per share amounts)		2003			2002			2003			2002

Net sales		$	450		$	536		$	1,642		$	1,633

Costs and operating expenses (income)
Cost of sales and operating expenses (Note 3)			358			336			1,189			1,020
Depreciation and depletion (Note 3)			62			58			193			193
Selling, general and administrative			44			22			104			91
Research and development			4			5			18			13
Exploration			6			5			18			14
Currency translation adjustments			6			(31	)		156			4
Goro project suspension costs			(8	)		—			(2	)		—
Asset impairment charges			—			—			—			2,415

Total costs and operating expenses			472			395			1,676			3,750

Operating earnings (loss)			(22	)		141			(34	)		(2,117	)
Interest expense			10			12			36			35
Other income, net (Note 4)			(20	)		(20	)		(61	)		(27	)

Earnings (loss) before income and mining taxes and minority interest			(12	)		149			(9	)		(2,125	)
Income and mining taxes (Note 5)			2			51			(103	)		(660	)

Earnings (loss) before minority interest			(14	)		98			94			(1,465	)
Minority interest			13			7			31			15

Net earnings (loss)			(27	)		91			63			(1,480	)
Dividends on preferred shares			—			(6	)		(6	)		(19	)
Accretion of convertible debt (Note 8)			(2	)		(1	)		(5	)		(3	)
Premium on redemption of preferred shares			—			—			(15	)		—

Net earnings (loss) applicable to common shares		$	(29	)	$	84		$	37		$	(1,502	)

Net earnings (loss) per common share (Note 6)
	Basic	$	(0.16	)	$	0.46		$	0.20		$	(8.22	)

	Diluted	$	(0.16	)	$	0.45		$	0.20		$	(8.22	)


Nine months ended September 30,	2003			2002
(in millions of United States dollars)				(Restated)

Retained earnings (deficit) at beginning of period, as previously reported	$	(317	)	$	1,194
Change in accounting policy (Note 2)		(18	)		(17	)

Retained earnings (deficit) at beginning of year, as restated		(335	)		1,177
Net earnings (loss)		63			(1,480	)
Dividends on preferred shares		(6	)		(19	)
Accretion of convertible debt (Note 8)		(5	)		(3	)
Premium on redemption of preferred shares		(15	)		—

Deficit at end of period	$	(298	)	$	(325	)


			September 30,			December 31,
(in millions of United States dollars)			2003			2002

ASSETS						(Restated)
Current assets
Cash and marketable securities (Note 13)			$	725		$	1,087
Accounts receivable				268			251
Inventories (Note 13)				665			576
Other				94			73

Total current assets				1,752			1,987
Property, plant and equipment (Note 13)				6,787			6,382
Deferred charges and other assets				267			208

Total assets			$	8,806		$	8,577

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Long-term debt due within one year (Note 7)			$	403		$	97
Accounts payable				209			338
Accrued payrolls and benefits				122			118
Other accrued liabilities				222			210
Income and mining taxes payable				29			167

Total current liabilities				985			930
Deferred credits and other liabilities
Long-term debt (Note 7)				1,404			1,546
Deferred income and mining taxes				1,552			1,352
Post-retirement benefits				581			475
Asset retirement obligation				141			119
Minority interest				399			368

Total liabilities				5,062			4,790

Commitments and contingencies (Note 11)
Shareholders’ equity
Convertible debt (Note 8)				602			238

Preferred shares (Note 9)				—			472

Common shareholders’ equity
	Common shares issued and outstanding 185,360,547			2,816			2,771
		(2002 — 183,238,351 shares) (Note 6)
	Warrants (Note 10)			62			62
	Contributed surplus			562			559
	Deficit			(298	)		(335	)

				3,142			3,057

Contingently issuable equity (Note 6)				—			20

Total shareholders’ equity				3,744			3,787

Total liabilities and shareholders’ equity			$	8,806		$	8,577


			Three Months						Nine Months
			Ended September 30,						Ended September 30,
(in millions of United States dollars)			2003			2002			2003			2002

Operating activities
	Earnings (loss) before minority interest		$	(14	)	$	98		$	94		$	(1,465	)
	Charges (credits) not affecting cash
		Depreciation and depletion		62			58			193			193
		Deferred income and mining taxes		—			24			(58	)		(763	)
		Asset impairment charges		—			—			—			2,415
		Other		1			(25	)		73			3
	Decrease (increase) in non-cash working capital related to operations
		Accounts receivable		10			54			(17	)		(30	)
		Inventories		(39	)		(10	)		(89	)		(13	)
		Accounts payable and accrued liabilities		3			7			(50	)		20
		Income and mining taxes payable		24			58			(138	)		124
		Other		(15	)		1			(18	)		(23	)
	Other			(13	)		2			12			5

	Net cash provided by operating activities			19			267			2			466

Investing activities
	Capital expenditures			(126	)		(181	)		(417	)		(338	)
	Other			3			(9	)		17			(5	)

	Net cash used for investing activities			(123	)		(190	)		(400	)		(343	)

Financing activities
	Long-term borrowings			308			428			308			846
	Repayments of long-term debt			(53	)		(41	)		(269	)		(79	)
	Convertible debt issued (Notes 7 and 8)			—			—			470			—
	Preferred shares redeemed (Note 9)			—			—			(487	)		—
	Common shares issued			23			—			27			12
	Preferred dividends paid			—			(6	)		(6	)		(19	)
	Dividends paid to minority interest			—			—			(2	)		(1	)
	Other			(2	)		—			(5	)		—

	Net cash provided by financing activities			276			381			36			759

Net increase (decrease) in cash and marketable securities				172			458			(362	)		882
Cash and marketable securities at beginning of period				553			730			1,087			306

Cash and marketable securities at end of period			$	725		$	1,188		$	725		$	1,188

(Tabular amounts in millions of United States dollars except number of shares and per share amounts)

The unaudited consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada (see Note 15 for significant differences between Canadian and United States GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these interim consolidated financial statements do not include all of the information and note disclosures required by Canadian GAAP. In the opinion of management, all adjustments considered necessary for a fair presentation of results for the periods reported have been included. These adjustments consist only of normal recurring adjustments. Results of operations for the three-month and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 or any other interim period. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.

Effective January 1, 2003, we changed our accounting for stock options from the intrinsic value method to one that recognizes as an expense the cost of stock-based compensation based on the estimated fair value of new stock options granted to employees in 2003 and in future years. The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model. As a result of this change in accounting policy, which was applied prospectively, an expense of $1 million and $3 million was recorded in the third quarter and first nine months of 2003, respectively, to reflect the fair value of stock options granted to employees in 2003.

Effective January 1, 2003, we adopted a new accounting standard of the Canadian Institute of Chartered Accountants (“CICA”) relating to asset retirement obligations. This standard significantly changed the method of accounting for future removal and site restoration costs. Under this new standard, asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset’s carrying value and depreciated over the asset’s useful life. This change in accounting policy was applied retroactively and, accordingly, the consolidated financial statements of prior periods were restated. As a result of this change, certain balance sheet accounts as of December 31, 2002 were restated as follows: the deficit increased by $18 million; property, plant and equipment increased by $37 million; deferred income and mining taxes decreased by $12 million; and the asset retirement obligation increased by $67 million. An expense of $2 million and $6 million was recorded in the third quarter and first nine months of 2003, respectively, for accretion and depreciation for asset retirements.

Effective January 1, 2002, we adopted a new standard of the CICA in respect of foreign currency translation that eliminated the deferral and amortization of currency translation adjustments related to long-term monetary items with a fixed and ascertainable life. There was no significant impact on our results of operations or financial condition as a result of the adoption of this standard.

A strike of the unionized workforce at our Ontario operations began on June 1, 2003 and a new collective agreement ending the strike was entered into on August 28, 2003. Strike expenses are those ongoing costs, such as salaries and certain employment benefits, depreciation, property taxes, utilities and maintenance, incurred during the strike period which would normally be treated as production costs and charged to inventory but, in the absence of production, have been expensed. During the course of this 13-week strike, we incurred strike expenses in the amount of $72 million and $107 million during the third quarter and first nine months of 2003, respectively. Included in these expenses was depreciation expense of $13 million and $19 million for the third quarter and first nine months of 2003, respectively. The balance of the strike expenses was included in cost of sales and other operating expenses.

The effective income and mining tax rates for the third quarter and first nine months of 2003 were affected by non-deductible currency translation adjustments primarily due to the translation of Canadian dollar-denominated liabilities into U.S. dollars. These rates were also affected by a significant appreciation of the Canadian dollar in 2003 which resulted in a gain subject to Canadian income taxes. In addition, the effective tax rates for both periods were impacted by higher earnings of PT International Nickel Indonesia Tbk, which are taxed at a relatively lower rate.

The effective income and mining tax rate in the first nine months of 2003 was also significantly affected by the recognition of income tax benefits of $38 million recorded in the first quarter of 2003 relating primarily to favourable tax rulings and other decisions on tax matters from Canadian and other jurisdictions concerning the tax treatment of certain prior period transactions and, in the second quarter of 2003, an income tax benefit of $96 million which was primarily due to the revaluation of deferred income tax liabilities for reductions in future tax rates and the overall favourable effect of certain other changes in Canadian tax legislation applicable to mining companies. We also had taxable gains from the sale or transfer of shares and other interests, as well as currency hedging gains, which were not subject to tax as a result of capital losses. The effective income and mining tax rate in the first nine months of 2002 was adversely affected by asset impairment charges where a portion of that charge was not deductible for tax purposes.

Basic earnings per Common Share is computed by dividing net earnings applicable to Common Shares by the weighted-average number of Common Shares issued and outstanding for the relevant period. Diluted earnings per Common Share is computed by dividing net earnings applicable to Common Shares, as adjusted for the effects of dilutive convertible securities, by the sum of the weighted-average number of Common Shares issued and outstanding and all additional Common Shares that would have been outstanding if potentially dilutive Common Shares had been issued.

We are authorized to issue an unlimited number of Common Shares without nominal or par value. Changes in Common Shares were as follows:


	Number
	of shares		Amount

December 31, 2002		183,238,351	$	2,771
Options exercised		1,584,341		27
Warrants exercised		11		—
Shares issued under incentive plans		35,249		1
Shares issued upon exercise of former Diamond Fields’ stock options		485,471		17
Shares issued upon conversion of Series E Preferred Shares		1,424		—
Shares issued upon conversion of 5.75% Convertible Debentures		15,700		—

September 30, 2003		185,360,547	$	2,816

Contingently issuable equity included Common Shares contingently issuable upon exercise of stock options held by former employees of Diamond Fields Resources Inc. On April 17, 2003, all remaining outstanding options held by one holder were exercised and upon exercise the holder received a combination of 485,471 Common Shares with a value of $17 million and cash in the amount of $3 million in lieu of certain securities that had been called for redemption.


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002

Basic earnings (loss) per share computation
Numerator:
	Net earnings (loss)	$	(27	)	$	91		$	63		$	(1,480	)
	Dividends on preferred shares		—			(6	)		(6	)		(19	)
	Premium on redemption of preferred shares		—			—			(15	)		—
	Accretion of convertible debt		(2	)		(1	)		(5	)		(3	)

	Net earnings (loss) applicable to common shares	$	(29	)	$	84		$	37	<


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 2. Changes in Securities and Use of Proceeds
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents



Canada (Jurisdiction of Incorporation)		98-0000676 (I.R.S. Employer Identification No.)