Filed pursuant to General Instruction II.K of Form F-9;
File No. 333-108901.
PROSPECTUS
INCO LOGO
$300,000,000
INCO LIMITED
5.70% DEBENTURES DUE 2015
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We will pay interest on the debentures on April 15 and October 15 of each
year, beginning on April 15, 2004. The debentures will mature on October 15,
2015. We may redeem some or all of the debentures at any time at 100% of their
principal amount plus a make-whole premium described herein. We may also redeem
all of the debentures at any time in the event of certain changes affecting
Canadian withholding taxes.
The debentures will be unsecured and unsubordinated obligations and will
rank equally with our existing and future unsecured and unsubordinated
indebtedness. The debentures will be issued only in registered form in
denominations of $1,000.
INVESTING IN THE DEBENTURES INVOLVES RISKS. SEE THE "RISK FACTORS"
BEGINNING ON PAGE 10.
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UNDER THE MULTIJURISDICTIONAL DISCLOSURE SYSTEM ADOPTED BY THE U.S.
SECURITIES AND EXCHANGE COMMISSION, WE ARE PERMITTED TO PREPARE THIS PROSPECTUS
IN ACCORDANCE WITH CANADIAN DISCLOSURE REQUIREMENTS, WHICH ARE DIFFERENT FROM
THOSE OF THE UNITED STATES. WE PREPARE OUR FINANCIAL STATEMENTS IN ACCORDANCE
WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, AND ARE SUBJECT TO
CANADIAN AUDITING AND AUDITOR INDEPENDENCE STANDARDS. THEY MAY NOT BE COMPARABLE
TO FINANCIAL STATEMENTS OF UNITED STATES COMPANIES.
OWNING THE DEBENTURES MAY SUBJECT YOU TO TAX CONSEQUENCES BOTH IN THE
UNITED STATES AND CANADA. THIS PROSPECTUS MAY NOT DESCRIBE THESE TAX
CONSEQUENCES FULLY. YOU SHOULD READ THE TAX DISCUSSION UNDER "CERTAIN INCOME TAX
CONSIDERATIONS."
YOUR ABILITY TO ENFORCE CIVIL LIABILITIES UNDER THE UNITED STATES FEDERAL
SECURITIES LAWS MAY BE AFFECTED ADVERSELY BECAUSE WE ARE INCORPORATED IN CANADA,
MOST OF OUR OFFICERS AND DIRECTORS AND MOST OF THE EXPERTS NAMED IN THIS
PROSPECTUS ARE CANADIAN RESIDENTS, AND MOST OF OUR ASSETS ARE LOCATED OUTSIDE
THE UNITED STATES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PER DEBENTURE TOTAL
------------- -----
Public Offering Price 99.978% $299,934,000
Underwriting Commission .675% $2,025,000
Proceeds to Inco (before expenses) 99.303% $297,909,000
Interest on the debentures will accrue from September 26, 2003 to the date of
delivery.
------------------
The Underwriters expect to deliver the debentures to purchasers on or
about September 26, 2003.
------------------
Sole Bookrunner and Joint
Lead Manager Joint Lead Manager
CITIGROUP JPMORGAN
------------------
Merrill Lynch & Co.
Morgan Stanley
RBC Capital Markets
Scotia Capital
September 23, 2003
You should rely only on the information contained in, or incorporated by
reference into, this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in the prospectus and the documents
incorporated by reference is accurate only as of their respective dates. Our
business, financial condition, results of operations and prospects may have
changed since those dates.
IN THIS PROSPECTUS, UNLESS WE STATE OTHERWISE, "INCO," THE "COMPANY,"
"WE," "US" AND "OUR" REFER TO INCO LIMITED AND ALL OF ITS CONSOLIDATED
SUBSIDIARIES, UNINCORPORATED UNITS AND DIVISIONS.
----------------------
TABLE OF CONTENTS
PAGE
----
Currency References......................................... 2
Cautionary Notice Regarding Forward-Looking Statements...... 3
Enforceability of Certain Civil Liabilities................. 4
Summary..................................................... 5
Risk Factors................................................ 10
Use of Proceeds............................................. 23
Capitalization.............................................. 24
Description of Debentures................................... 26
Legal Ownership............................................. 36
Ratings of the Debentures................................... 38
Earnings Coverage........................................... 39
Certain Income Tax Considerations........................... 40
Underwriting................................................ 43
Validity of the Debentures.................................. 45
Experts..................................................... 45
Where You Can Find More Information......................... 45
Documents Incorporated by Reference......................... 45
Documents Filed as Part of the Registration Statement....... 46
CURRENCY REFERENCES
Unless we state otherwise or the context otherwise requires, all
references to dollar amounts in this prospectus are references to U.S. dollars.
The exchange rate between the Canadian dollar and the U.S. dollar used in this
prospectus varies depending on the date and context of the information contained
herein.
On September 22, 2003, the noon buying rate for U.S. dollars reported by
the Bank of Canada was Cdn. $1.3471 for each U.S. $1.00.
2
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in, or incorporated by reference into, this
document are forward-looking statements as defined in the U.S. federal
securities laws. Examples of such statements include, but are not limited to,
statements concerning: (1) the price volatility for nickel and other primary
metals products produced by us; (2) the demand for and supply of nickel, copper,
cobalt and other metals as well as the availability of, and prices for,
intermediates containing nickel purchased by us, and nickel-containing stainless
steel scrap and other substitutes for primary nickel; (3) our premiums realized
over London Metal Exchange cash prices and the sensitivity of our financial
results to changes in metals prices, exchange rates and interest rates; (4) our
strategies and objectives; (5) our energy, interest and other costs; (6) our
pension contributions and expense; (7) our position as a low-cost producer of
nickel; (8) our debt-equity ratio and tangible net worth; (9) the political
unrest or instability in countries such as Indonesia and its impact on our
Indonesian subsidiary, PT International Nickel Indonesia Tbk, and political
developments in other countries in which we operate and elsewhere; (10) the
completion and results of the second phase, or phase 2, of the comprehensive
review of the capital cost, scope, schedule, execution plan and other key
aspects of our Goro project; (11) the timing of the start of production and the
costs of construction with respect to, and the issuance of the necessary
permits, legislation and other authorizations required for, engineering and
construction timetables for, and the necessary financing plans and arrangements
for, our Goro and Voisey's Bay projects, and, in the case of our Goro project,
joint venture or similar investment and other agreements or arrangements and
financial support and/or other direct or indirect financial assistance from
certain governmental agencies; (12) our estimates of the quantity and quality of
ore reserves; (13) our planned capital expenditures; (14) our costs of
production and production levels, including the costs and potential impact of
complying with existing and proposed mining and environmental laws and
regulations and reductions in environmental emissions; (15) our expectation that
we will be a significant producer of cobalt in the future; (16) the impact of
changes in Canadian-U.S. dollar and other foreign exchange rates on our costs
and results; (17) nickel market conditions and sales of our specialty nickel
products; (18) our cost reduction and other financial and operating objectives;
(19) the commercial viability of our new production processes; (20) our
productivity, exploration and research and development initiatives as well as
environmental, health and safety initiatives; (21) our expected use of proceeds
of this offering; (22) the negotiation of collective agreements with our
unionized employees; (23) our sales organization and personnel requirements;
(24) business and economic conditions and (25) the enforceability of certain
liabilities. Inherent in forward-looking statements are risks and uncertainties
well beyond our ability to predict or control. Actual results and developments
are likely to differ, and may differ materially, from those expressed or implied
by the forward-looking statements contained in, or incorporated by reference
into, this document. Such statements are based on a number of assumptions which
may prove to be incorrect, including, but not limited to, assumptions about: (a)
business and economic conditions, including exchange rates and energy, pension
and other costs and other anticipated and unanticipated costs; (b) the supply
and demand for, deliveries of, and the level and volatility of prices of,
nickel, copper, cobalt and our other metals products, purchased intermediates
and nickel-containing stainless steel scrap and other substitutes and competing
products for the primary nickel and other metals products we produce; (c) the
timing of the receipt of regulatory and governmental approvals for our Goro and
Voisey's Bay projects and other operations; (d) the availability of financing,
including partner or other investment arrangements in the case of our Goro
project, for our development projects on acceptable terms; (e) our costs of
production and our production and productivity levels, as well as those of our
competitors and customers; (f) engineering and construction timetables and
capital and operating costs for our Goro and Voisey's Bay projects; (g) market
competition and conditions; (h) mining, processing, exploration and research and
development activities; (i) the accuracy of ore reserve estimates; (j) premiums
realized over London Metal Exchange cash and other benchmark prices; (k) tax
benefits; (l) the resolution of environmental and other proceedings and the
impact on us of the Kyoto Protocol and various other environmental and mining
regulations and initiatives; (m) political unrest or instability in Indonesia
and other countries or locations in which we operate or otherwise; and (n) our
ongoing relations with our employees at our operations throughout the world. See
"Risk Factors" for more information about certain factors that, among others,
may cause actual results and developments to differ from those expressed or
implied by forward-looking statements contained in, or incorporated by reference
into, this document.
3
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
We are a corporation organized under the laws of Canada and most of our
assets are located in, and most of our directors and officers are residents of,
Canada. As a result, it may be difficult for United States investors to effect
service of process within the United States upon our directors or officers who
are not residents of the United States, or to realize in the United States upon
judgments of courts of the United States predicated upon civil liability of such
directors or officers under U.S. federal securities laws. We have been advised
by Osler, Hoskin & Harcourt LLP, our Canadian counsel, that a judgment of a U.S.
court predicated solely upon civil liability under such laws would probably be
enforceable in Canada if the U.S. court in which the judgment was obtained had a
basis for jurisdiction in the matter that was recognized by a Canadian court for
such purposes. We have also been advised by such counsel, however, that there is
substantial doubt whether an action could be brought in Canada in the first
instance on the basis of liability predicated solely upon such laws.
4
SUMMARY
This summary highlights selected information found in greater detail
elsewhere in this prospectus or the documents that are incorporated herein by
reference. This summary does not contain all of the information that is
important to you. You should read the entire prospectus and the documents we
incorporate by reference, including the financial data and related notes, before
making an investment decision.
INCO LIMITED
Inco Limited is one of the world's premier mining and metals companies.
We are a leading producer of nickel, a hard, malleable metal which, given its
properties and wide range of applications, can be found in thousands of
products. We are also an important producer of copper, precious metals and
cobalt, and we produce sulphuric acid and liquid sulphur dioxide as by-products
of our operations at Sudbury, Ontario. Our principal mines and processing
operations are located in the Sudbury area of Ontario, the Thompson area of
Manitoba, and, through our 59 per cent-owned subsidiary, PT International Nickel
Indonesia Tbk ("PT Inco"), on the island of Sulawesi, Indonesia. We have
additional wholly-owned metals refineries at Port Colborne, Ontario and in the
United Kingdom at Clydach, Wales and Acton, England. We also have interests in
nickel refining capacity and nickel salts production facilities located in
Japan, Taiwan, South Korea and the People's Republic of China.
We currently have two major development projects, our Goro and Voisey's
Bay projects. We own an 85 per cent interest in Goro Nickel S.A. which holds a
number of claims covering nickel-cobalt properties in the French overseas
territorial community of New Caledonia, which we refer to as our Goro deposit.
Our wholly-owned subsidiary, Voisey's Bay Nickel Company Limited, holds the
mineral licenses covering the Voisey's Bay deposit and certain other mineral
licenses and claims in the Province of Newfoundland and Labrador. See "Recent
Developments" and "Risk Factors -- Risks Associated with, and Importance of,
Development of New Low-Cost Nickel Projects", and "Risk Factors -- Uncertainty
of Production and Capital and Other Cost Estimates".
Our executive offices are located at 145 King Street West, Suite 1500,
Toronto, Ontario, Canada M5H 4B7. You should refer to our annual report on Form
10-K for the year ended December 31, 2002 (the "2002 10-K") and our quarterly
reports on Form 10-Q for the periods ended March 31, 2003 (the "First Quarter
10-Q") and June 30, 2003 (the "Second Quarter 10-Q", and together with the First
Quarter 10-Q, the "2003 10-Qs") for additional information regarding the Company
and our operations throughout the world, including our exploration programs and
our ore reserves.
RECENT DEVELOPMENTS
On August 13, 2003 we outlined the results of the first of the two phases
of our comprehensive review of the Goro nickel-cobalt project which we had
started in December 2002. That first phase identified certain costs which we
believe could be reduced as part of our objective of reaching a capital cost
estimate for the development of this project of $1.8 billion. We have begun the
second phase of this review, which is currently expected to be completed during
the second quarter or early in the third quarter of 2004, focusing on the
development of a capital cost estimate that would achieve an acceptable return
on investment for the project as well as a detailed project schedule and
execution plan for the project. The results of this second phase are currently
expected to enable us to be in a position to determine the conditions and
timetable under which construction of the Goro project could restart. We have
also begun the process of the selection of one or more new firms to provide
engineering, procurement, construction management and other related services for
the project.
We were not able to reach terms on new collective agreements with our
unionized production and maintenance workers at our Ontario operations when
their collective agreements expired at the end of May 2003 and these workers
went on strike. The strike lasted nearly three months. New collective agreements
were entered into on August 29, 2003 and expire on May 31, 2006. The strike
significantly and adversely affected our 2003 planned production of nickel,
copper and other metals as well as our financial results and
5
cash flow for the second quarter of 2003 and for the third quarter of 2003 to
date. We currently estimate that we will record pre-tax expenses associated with
the strike of approximately $70 million in the third quarter of 2003. We expect
that our third quarter 2003 financial results will also be adversely affected by
the cost trends we have experienced to date in 2003. See "Risk Factors -- Effect
on Profitability of Increases in Costs".
6
THE OFFERING
Debentures................. $300,000,000 aggregate principal amount of
debentures due 2015.
Interest................... The debentures will bear interest at 5.70% per
annum payable semi-annually in arrears on April 15
and October 15 of each year, commencing on April
15, 2004.
Maturity................... The debentures will mature on October 15, 2015.
Ranking.................... The debentures will be unsecured and unsubordinated
obligations and will rank on parity in right of
payment with all of our existing and future
unsecured and unsubordinated indebtedness.
Redemption................. We will have the option to redeem the debentures in
whole or in part at any time, at a redemption price
equal to the greater of (1) 100% of the principal
amount of the debentures, and (2) the sum of the
present values of the remaining scheduled payments
of principal and interest on the debentures
(exclusive of interest accrued to the date of
redemption) discounted to the redemption date,
calculated on a semi-annual basis (assuming a
360-day year of twelve 30-day months), at the
Treasury Yield (as defined) plus 25 basis points,
together in each case with accrued interest to the
date of redemption. See "Description of
Debentures -- Optional Redemption." We may also
redeem the debentures, in whole but not in part, at
any time in the event of certain changes in
Canadian tax laws, at 100% of the aggregate
principal amount plus accrued interest to the date
of redemption. See "Description of
Debentures -- Redemption for Tax Reasons."
Certain Covenants.......... The indenture governing the debentures restricts
our ability and that of our restricted subsidiaries
to incur certain liens, enter into certain sale and
leaseback transactions and consolidate, amalgamate,
merge or transfer all or substantially all of our
assets and certain assets of our restricted
subsidiaries. See "Description of
Debentures -- Certain Covenants."
Sinking Fund............... None.
Additional Amounts......... Payments on the debentures to non-residents of
Canada generally are not subject to withholding for
Canadian taxes under current law and administrative
practice. We will withhold on payments we make with
respect to the debentures for Canadian taxes only
if required by law or the interpretation or
administration thereof. In that case, we will pay
the additional amounts necessary so that the net
amount received by holders of the debentures (other
than certain excluded holders) after such
withholding will not be less than the amount the
holders would have received if Canadian taxes had
not been withheld.
Use of Proceeds............ The proceeds of this offering, after deducting
underwriting commissions and other expenses of the
offering, are expected to be approximately $297
million, which will be used, together with
available cash, to redeem our 9.60% Debentures due
2022 and our 7 3/4% Convertible Debentures due
2016. See "Use of Proceeds."
Governing Law.............. The debentures and the indenture governing the
debentures will be governed by the laws of the
State of New York.
Risk Factors............... See "Risk Factors" and the other information
included and incorporated by reference in this
prospectus for a discussion of certain factors you
should carefully consider before deciding to invest
in the debentures.
7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following data for the years ended December 31, 2002, 2001 and 2000
(except for the data under "Operating data" and "Realized prices per tonne")
were derived from consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent auditors. The following data for the six
month periods ended June 30, 2003 and 2002 (except for "Operating data" and
"Realized prices per tonne") were derived from our unaudited consolidated
financial statements which, in the opinion of management, contain all of the
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of our consolidated financial condition and results of operations
as of the dates and for the periods presented. Operating results for the six
months ended June 30, 2003, which reflect the first month of the strike at our
Ontario operations, are not necessarily indicative of the results that may be
expected for the entire year ended December 31, 2003. You should read the
following summary consolidated financial data together with our consolidated
financial statements included in our 2002 10-K and 2003 10-Qs, the other
information in this prospectus and the information we incorporate by reference
into this prospectus.
Our consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP"). These
principles conform in all material respects with U.S. generally accepted
accounting principles ("U.S. GAAP") except as described in Note 22 to the
consolidated financial statements in our 2002 10-K and in Note 14 to the
consolidated financial statements in our Second Quarter 10-Q. For all periods
presented, the summary consolidated financial data is prepared in accordance
with Canadian GAAP.
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------
2003 2002(1) 2002(1) 2001(1) 2000(1)
-------- --------- --------- --------- ---------
(UNAUDITED)
(IN MILLIONS, EXCEPT OPERATING DATA AND REALIZED PRICES)
SUMMARY OF OPERATIONS(2)(3)(4)
Net sales....................................... $1,192 $ 1,097 $ 2,161 $2,066 $2,917
Net earnings (loss)............................. 90 (1,571) (1,481) 305 400
OTHER FINANCIAL DATA(2)(3)(4)
Net cash provided by (used for) operating
activities.................................... $ (17) $ 199 $ 599 $ 360 $ 842
Capital expenditures............................ 291 157 600 263 227
Working capital................................. 891 974 1,057 560 365
Total assets.................................... 8,467 7,833 8,540 9,587 9,676
Total debt...................................... 1,550 1,219 1,643 840 1,030
Preferred shares................................ -- 472 472 472 472
Common shareholders' equity..................... 3,147 2,997 3,075 4,571 4,290
OPERATING DATA
Nickel production (tonnes in thousands)......... 95 115 210 207 203
Copper production (tonnes in thousands)......... 55 61 112 116 114
Nickel deliveries (tonnes in thousands)......... 111 121 232 230 259
Copper deliveries (tonnes in thousands)......... 59 63 113 117 118
Cobalt deliveries (tonnes)...................... 595 760 1,582 1,454 1,422
Platinum-group metals deliveries (troy ounces in
thousands).................................... 184 211 431 405 342
REALIZED PRICES PER TONNE
Primary nickel, including intermediates......... $8,618 $ 6,901 $ 7,143 $6,468 $9,007
Copper.......................................... 1,686 1,656 1,629 1,668 1,908
---------------
(1) Effective January 1, 2003, we adopted a new accounting standard for both
Canadian GAAP and U.S. GAAP. This standard changed the method of accounting
for future removal and site restoration costs. The cumulative impact of
this change as at December 31, 2002 was an increase to the deficit of $18
million; an increase to property, plant and equipment of $37 million; a
decrease to deferred income and mining taxes of $12 million; and an
increase to asset retirement obligations of $67 million. The figures
presented here for 2002, 2001 and 2000 have not been restated to reflect
this change. For a restated balance sheet as of December 31, 2002
reflecting these changes, see our 2003 10-Qs.
8
(2) Differences between Canadian GAAP and U.S. GAAP as they apply to us for the
years indicated are described in Note 22 to the consolidated financial
statements in our 2002 10-K. As indicated in such note, under U.S. GAAP net
earnings (loss) in 2002, 2001 and 2000 were $(2,119) million, $283 million
and $387 million, respectively. Differences between Canadian GAAP and U.S.
GAAP as they apply to us for the quarters indicated are described in Note 14
to the consolidated financial statements in our Second Quarter 10-Q. As
indicated in such note, under U.S. GAAP net loss in the six months ended
June 30, 2003 and 2002 was $182 million and $2,203 million, respectively.
The figures presented in these Notes have not been restated to reflect the
accounting change described in footnote (1) to the table above.
(3) Accounting changes adopted (a) for the years ended December 31, 2002 and
2001 are discussed in Notes 2 and 22 to the consolidated financial
statements in our 2002 10-K and (b) in the first quarter of 2003 are
discussed in Notes 2 and 14 to the consolidated financial statements in our
Second Quarter 10-Q.
(4) In July 2002, we completed a review of the net carrying value for Voisey's
Bay in view of the Statement of Principles reached with the Government of
the Province of Newfoundland and Labrador in June 2002 and other
arrangements with key stakeholders that would enable the development of the
Voisey's Bay project to proceed. This review included an analysis of the key
assumptions which we have utilized in evaluating this net carrying value on
a quarter-to-quarter basis relating to a number of important factors,
including our best assessment of the expected cash flows from the project,
how the development of Voisey's Bay, taking into account the agreements
which have been reached, fits within our overall long-term development plans
and updated mining and other cost assumptions. As a result of this review,
as is further described in Note 3 to the consolidated financial statements
in our 2002 10-K, we recorded a non-cash charge of $1,552 million, net of
deferred income and mining taxes of $770 million, in the second quarter of
2002 to reduce the $3,753 million net carrying value of the Voisey's Bay
project to $2,201 million. In 2000, as a result of a change in Canadian
GAAP, the deferred income and mining tax liability associated with Voisey's
Bay was increased by $2,222 million and the carrying value of Voisey's Bay
was also increased by this same amount.
Under Canadian GAAP at that time, the carrying value of an impaired asset was
required to be reduced to the amount of the estimated undiscounted future net
cash flows from the use of the asset together with the asset's residual
value. A non-cash charge was measured differently under U.S. GAAP and, under
U.S. GAAP, as indicated in Note 22 to the consolidated financial statements
in our 2002 10-K, and Note 14 to the consolidated financial statements in our
Second Quarter 10-Q resulted in a non-cash charge for the Voisey's Bay
project of $2,172 million, net of deferred income and mining taxes of $928
million.
9
RISK FACTORS
Investment in the debentures involves certain risks. Prospective
purchasers of debentures should consider carefully the risk factors set forth
below as well as the other information contained and incorporated by reference
in this prospectus before purchasing the debentures, including the other
information in our 2002 10-K and 2003 10-Qs.
RISKS RELATING TO OUR BUSINESS
VOLATILITY OF PRICE OF NICKEL AND OTHER PRICES AND THEIR EFFECT ON OUR
FINANCIAL RESULTS
The price of nickel has represented, and is currently expected to
continue to represent, the principal determinant of our profitability.
Accordingly, our financial performance has been, and is expected to continue to
be, closely linked to the price of nickel and, to a lesser extent, the price of
copper and other primary metals produced by us. Since we sell our nickel
products in all major geographical markets, the prices for primary nickel and
other primary metals products realized by us are influenced by both global and
regional supply and demand factors and by the availability and prices of
secondary or metal-containing scrap material, including nickel-containing scrap
generated by the stainless steel industry, and other substitute or competing
commodity products for the primary nickel and other metal products produced by
us. In recent times, the world's nickel and copper markets have been adversely
affected by excess supply conditions. Based upon available data, we believe that
between mid-1999 and the second half of 2000, global nickel demand exceeded
supply, but for most, if not all, of 2001, a surplus condition existed in the
global nickel market. For 2002, we estimated that, with the improvement in
global nickel demand, the global nickel market experienced a modest surplus
position. We have seen a continued improvement in nickel demand to date in 2003
and we currently believe that, taking into account the indicated release to date
in 2003 into the market of some 60,000 metric tonnes (about 133 million pounds)
of nickel which had been pledged to secure a loan entered into by a leading
nickel producer and the short-term decline in nickel supply resulting from the
very recent strike at our Ontario operations, global nickel demand and supply
for 2003 year to date are essentially in balance, reflecting a modest surplus of
about 9,000 metric tonnes (about 20 million pounds). There can be no assurance
that the excess supply situations which have existed historically in the nickel
markets will not occur in the future. Any such excess supply condition would
have an adverse effect on the prices realized by us for our nickel products.
Other international economic trends, including an uncertain global economic
environment, security concerns, expectations of inflation and political and
social events in major nickel-producing and consuming countries can also affect
nickel prices and the prices of other metals produced by us. These factors are
beyond our control and have resulted, and are expected to continue to result, in
a high degree of price volatility for nickel and other primary metals produced
by us. There can be no assurance that the price for nickel or other metals
produced by us will not decline significantly from current levels. A return to
the relatively low price of nickel reflected by the London Metal Exchange
("LME") cash nickel price which prevailed through most of 1998 and into the
first half of 1999 and during a portion of the second half of 2001 would have a
material adverse impact on our business, results of operations, financial
condition and liquidity.
The price of nickel, as the principal determinant of our profitability,
has fluctuated significantly for many years. Since the beginning of 2001, there
have been wide fluctuations in the LME cash nickel price. The LME cash nickel
price on January 2, 2001 was $6,995 per tonne ($3.17 per pound) and fell during
the course of that year through the end of October 2001, reaching a low of
$4,420 per tonne ($2.00 per pound) on October 31, 2001. The LME cash nickel
price improved during the remainder of the fourth quarter of 2001, averaging
$5,039 per tonne ($2.29 per pound) for that quarter and was $5,680 per tonne
($2.58 per pound) on December 31, 2001. The LME cash nickel price opened 2002 at
$5,680 per tonne ($2.58 per pound) and increased during the first half of 2002
as the economies of certain industrialized countries began to recover from their
relatively low fourth quarter 2001 levels, ending the first half of the year at
$7,080 per tonne ($3.21 per pound). Prices declined through the third quarter,
reaching a low of $6,305 per tonne ($2.86 per pound) as concern over the pace of
economic recovery and uncertainty about a potential war with Iraq adversely
affected the nickel markets. Prices increased in the fourth quarter of 2002, and
the LME cash nickel price ended 2002 at $7,100 per tonne ($3.22 per pound). For
2003 through September 22, 2003 the LME
10
cash nickel price has averaged $8,657 per tonne ($3.93 per pound) and for the
third quarter of 2003 through September 22, 2003 has averaged $9,281 per tonne
($4.21 per pound). As of September 22, 2003, the LME cash nickel price was
$10,325 per tonne ($4.68 per pound). We believe that the continued improvement
in the LME cash nickel price during 2003 through September 22, 2003 has been due
principally to the recovery in stainless steel production levels and demand for
certain other end-use applications for nickel in certain geographic regions.
However, we have not seen any recovery in certain other important end-use
markets for nickel, in particular the high nickel alloys industry, in 2003 to
date. Global nickel demand has historically been closely correlated with global
industrial production.
Copper is also an important product for us and, like nickel, copper
prices have been volatile for many years. For 2001, while the early part of the
year saw some improvement in global copper demand, copper prices declined during
the course of the year based upon the overall global economic slowdown and
increased copper inventories. The COMEX first position cash copper price, the
principal price upon which our copper sales are based, averaged $1,600 per tonne
($0.73 per pound) in 2001, down 14 per cent from its average of $1,851 per tonne
($0.84 per pound) in 2000. Copper prices for 2002 did not change significantly
from the 2001 average, with the average COMEX first position cash copper price
at $1,560 per tonne ($0.72 per pound) for 2002. For 2003 through September 22,
2003, the COMEX first position averaged $1,692 per tonne ($0.77 per pound) and
for the third quarter of 2003 through September 22, 2003 has averaged $1,758 per
tonne ($0.80 per pound). On September 22, 2003 the COMEX first position cash
copper price was $1,821 per tonne ($0.83 per pound).
Our development projects discussed under "Risks Associated with, and
Importance of, Development of New Low-Cost Nickel Projects" below, in addition
to the quantities of nickel projected to be produced by them, are expected to
produce significant quantities of cobalt given the currently estimated
quantities of cobalt in the mineral deposits to be mined as part of these
projects. With significant increases in the global supply of cobalt and changes
in demand, the price of cobalt has fluctuated significantly over the past
several years, reaching a high of $70.30 per kilogram ($31.90 per pound) in
January 1996 and declining significantly from that peak to an average price,
based upon the Metal Bulletin 99.8 per cent average cobalt reference price, of
$15.66 per kilogram ($7.10 per pound) for 2002. For 2003 through September 22,
2003 the Metal Bulletin 99.8 per cent average cobalt reference price was $21.24
per kilogram ($9.64 per pound) and was $23.49 per kilogram ($10.65 per pound)
for the third quarter 2003 to date and on September 22, 2003 was $23.50 per
kilogram ($10.65 per pound). The financial analyses undertaken by us in support
of the substantial investment to be made with respect to these projects has been
based upon a long term price of cobalt of $15.40 per kilogram ($7.00 per pound).
If realized cobalt prices, as well as realized prices for the other metals to be
produced by these projects, were to be below the long-term prices assumed by us,
the expected financial returns from, and expected cash and other unit costs of
production for, these projects would be adversely affected.
For information concerning the sensitivity of our results of operations
to certain changes in the price of nickel and other metals refer to "Risks and
Uncertainties -- Sensitivities" in the Management's Discussion and Analysis
included in our 2002 10-K.
RISKS ASSOCIATED WITH, AND IMPORTANCE OF, DEVELOPMENT OF NEW LOW-COST NICKEL
PROJECTS
As part of our strategy to be the world's lowest cost and most profitable
nickel producer, we have continued our efforts to develop new low-cost sources
of nickel. Following the completion of the PT Inco expansion project in late
1999, we have focused on future projects to commercialize our Goro nickel-cobalt
deposit and Voisey's Bay nickel-copper-cobalt deposit. A number of risks and
uncertainties are associated with the development of these projected low-cost
sources of nickel and other metals, including political, regulatory, design,
construction, labor, operating, technical and technological risks, uncertainties
relating to capital and other costs and financing risks and, in the case of
Goro, those risks related to the possible future transition to independence of
the French overseas territorial community of New Caledonia.
In addition to the risks and uncertainties referred to above, there are
certain issues that must be resolved to enable the commercial development of
each of these deposits to proceed. For the Goro deposit,
11
we still need to receive the necessary environmental and operating permits,
complete the second phase, or phase 2, of our comprehensive review focusing on
the project schedule, capital costs, scope, execution plan and other key aspects
of this project and develop an acceptable updated capital cost estimate (as
discussed under "Uncertainty of Production and Capital and Other Cost Estimates"
below) and, as further discussed below, arrange the required financing,
including obtaining certain financial support from the Government of France and
other direct or indirect financial assistance under other government-sponsored
programs and bringing in a partner for the project, in each case on acceptable
terms. In the case of our Voisey's Bay deposit, certain preliminary work on site
during the second half of 2002 was completed and the start of commercial
development of the project began essentially in July 2003. We have not received
all of the necessary construction and operating permits we will need for this
project. While we currently anticipate that we will be able to obtain all such
remaining permits on a timely basis, any failure to obtain, or delay in the
issuance of, such permits could adversely affect the construction or start-up of
the project. In addition, we will need to continue to meet the terms and
conditions under the definitive agreements covering the development of the
Voisey's Bay deposit reached in October 2002 between the Government of
Newfoundland and Labrador and us, including the construction of a demonstration
plant to test hydrometallurgical processing technologies expected to be
completed and in operation in 2006. We will also need to secure financing
required for the completion of the development of the three phases of the
Voisey's Bay project on acceptable terms.
In connection with raising the significant financing which we currently
believe will be required for the commercial development of the Goro and Voisey's
Bay deposits, we currently expect that, in order to meet such financing needs,
we will be required to borrow additional funds and/or issue additional debt
and/or equity or arrange other forms of financing and/or enter into strategic or
other arrangements. Our current plans for development of Goro include obtaining
at least approximately $350 million in tax-advantaged financing under an
existing French legislative program and certain additional direct or indirect
financial assistance under other government-sponsored programs. Our plans also
contemplate reaching an agreement under which a Japanese consortium to be led by
Sumitomo Metal Mining Co., Ltd. would acquire up to a 25 per cent interest in
Goro and assume, subject to certain limitations, the obligation to fund their
pro rata share of the capital costs of the Goro project. There can be no
assurance that these financing and investment arrangements will be completed or
that we will be able to raise additional required funds on acceptable terms when
financing is needed for either project. As discussed under "Uncertainty of
Production and Capital and Other Cost Estimates" below, while we have certain
potential new mine development projects at our existing operations in Canada, as
well as additional resources that could be developed in Indonesia, in addition
to the Voisey's Bay and Goro projects, if sufficient new low-cost sources of
nickel are not developed by us on a timely basis, we currently believe that our
overall nickel production, particularly at our Manitoba operations, could
decline beginning as early as 2005, and our unit cost of production could
increase significantly with any material decline in mine production from the
Canadian operations if such operations were not significantly restructured.
These developments could materially adversely affect our business, results of
operations, financial condition and liquidity.
UNCERTAINTY OF PRODUCTION AND CAPITAL AND OTHER COST ESTIMATES
The level of production and capital and operating cost estimates relating
to our Goro and Voisey's Bay projects and other projects of ours, which are used
in establishing ore reserve estimates and for determining and obtaining
financing and other purposes, are based on certain assumptions and are
inherently subject to significant uncertainties. It is very likely that actual
results for our Voisey's Bay and Goro projects will differ from our current
estimates and assumptions, and these differences may be material. In addition,
as discussed below, experience from actual mining or processing operations may
identify new or unexpected conditions which could reduce production below,
and/or increase capital and/or operating costs above, our current estimates. If
actual results are less favorable than we currently estimate, our business,
results of operations, financial condition and liquidity could be materially
adversely impacted.
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Goro
In September 2002, at the time our Goro project was experiencing certain
labor disruptions, we initiated a review of the status of certain key aspects of
the project, including the necessary permitting, capital cost estimate, schedule
and organization. Work on the project was generally curtailed over the
September -- November 2002 period but work on certain critical parts of the
project, including engineering, continued during this initial review. In early
December 2002, we announced that we would be undertaking a comprehensive review
of the Goro project. The comprehensive review was commenced in response to
information we received from the principal firms then providing project
engineering, procurement and construction management services that, if
confirmed, would indicate an increase in the capital cost for the project in the
range of 30 to 45 per cent above the then current capital cost estimate of
$1,450 million. The objective of the comprehensive review was to assess all
information on our Goro project, including the various cost estimates and
trends, and determine what changes in the capital cost estimate and the project
could be made to maintain the project's economic feasibility. As a result of the
temporary suspension of certain development activities and other actions which
had been taken by year-end 2002 during this review process, we recorded a
pre-tax charge of $25 million in the fourth quarter of 2002. This charge was
comprised of pre-tax expenses of $62 million relating to the cancellation or
termination of certain outstanding contractual obligations, to accrue for
demobilization costs and to reduce the carrying value of certain assets relating
to the project, partially offset by currency gains of $37 million from the early
settlement of certain forward currency contracts that had been entered into for
hedging purposes. As part of the comprehensive review, we also evaluated various
contractual and other arrangements covering construction and other work relating
to the Goro project and implemented certain actions to suspend or terminate
certain of those contractual arrangements.
As the comprehensive review of the Goro project that began in December
2002 moved forward during 2003, it evolved into two phases. The first phase, or
phase 1, which was completed in July 2003, focused on the identification of
issues that had resulted in, or created, actual or potential increases in
capital costs and how those issues could be addressed and other actions that
could be taken to reduce these costs. On August 13, 2003, we announced the
results of phase 1 of the review. Phase 2, which began essentially in August
2003, is intended to evaluate further opportunities to reduce costs and develop,
among other key deliverables, a new capital cost control estimate, project scope
and schedule and execution plan for the project. While one of our objectives of
phase 2 of our review is to have a capital cost estimate of $1.8 billion, the
conclusion of that review could result in a capital cost estimate higher than
this objective.
As of June 30, 2003, we had spent approximately $530 million on the Goro
project since July 1, 2001 when this project was formally launched. This amount
excludes a current estimate of approximately $70 million that would still have
to be spent for equipment, services and other requirements under existing
contracts and commitments, and accruals of approximately $35 million relating to
such requirements as of June 30, 2003, most of which expenditures are expected
to have value for the project. We currently believe that, based upon the focus
on certain potential new approaches to construction as part of, and the expected
results of, the phase 2 review as it progresses, we will be required to take
additional charges beyond those taken in the fourth quarter of 2002 but we
cannot predict at this time the amount of such non-cash charges and whether they
will have a material effect on our results of operations or financial results.
While the key objective of phase 2 of the review is to have a project
that will produce an acceptable rate of return on the investment to be made in
this project, if, upon completion of this phase of the review, we were to
conclude that the Goro project could not be restructured to meet our rate of
return on investment requirements, we currently expect that we would undertake a
further evaluation to determine how the project could be restructured to provide
an acceptable return on the investment to be made. Depending upon the timing of
the completion of such further evaluation, or if that further evaluation did not
occur or did not result in achieving an acceptable return, we would likely write
off all or a substantial portion of the carrying value of the Goro project,
approximately $720 million at June 30, 2003, and we would also lose the expected
future production from Goro. Such a result would have a material adverse effect
on our business, results of operations, financial condition and liquidity.
13
Existing Canadian Operations
During 2002, as mine production at our Manitoba operations transitioned
from the Thompson mine to the lower grade Birchtree mine, we experienced lower
mine production. We have continued to experience such lower mine production in
2003 and, as this transition continues to move forward, we currently expect to
see a decline in mine production in Manitoba continue in 2004 and expect to see
further declines in future years. We have recently been relying upon, and expect
that we will continue to rely upon, on an increasing basis, the availability of
purchased intermediates to maintain Manitoba's nickel production at around the
45,000 tonne annual level. While we have entered into agreements and other
arrangements to purchase intermediates to maintain Manitoba's production levels
at or near the 45,000 tonne annual level for the next few years, until the
Voisey's Bay project produces intermediates in the form of concentrates for
further processing at the Manitoba and Ontario operations, if suppliers of the
purchased intermediates were to experience production problems or other
disruptions which would adversely affect their supply of such intermediates to
us or reduce their shipments of concentrate below our requirements, this could
have a material adverse effect on our nickel production, business, results of
operations, financial condition and liquidity. While we have certain potential
new mine development projects at our existing operations in Canada, if
sufficient new low-cost sources of nickel such as our Voisey's Bay and Goro
projects are not developed on a timely basis, our overall nickel production,
particularly at our Manitoba operations, could decline beginning as early as
2005, and our unit cost of production could increase significantly with any
material decline in mine production from our Canadian operations if such
operations were not significantly restructured. These developments could
materially adversely impact our business, results of operations, financial
condition and liquidity.
Voisey's Bay
We announced in late March 2003 (1) the results of our bankable
feasibility study for the mine for the Ovoid and adjacent surface deposits,
concentrator and related Voisey's Bay facilities representing part of the
initial phase of the Voisey's Bay project and (2) that we plan to proceed with
this initial phase. Based upon the results of the study, the estimated total
capital cost for the mine and 6,000-tonne per-day concentrator and related
facilities representing the mine, concentrator and related facilities and
infrastructure in the Voisey's Bay area (the "Mine/Concentrator Project") is
estimated to be $582 million, including $35 million spent since July 2002 on
infrastructure and related work. The $582 million amount represents an increase
of $77 million or about 15 per cent over the prefeasibility study estimates for
the Mine/Concentrator Project. This estimate includes a $54 million contingency.
The initial phase of the Voisey's Bay project will also involve a research and
development program covering hydrometallurgical processing technologies (the
"Hydromet R&D Program") for the treatment of the Voisey's Bay nickel and
cobalt-containing concentrates to be produced into finished nickel and cobalt
product, including a demonstration plant to be constructed in Argentia,
Newfoundland. The Hydromet R&D Program is expected to cost approximately $134
million or about 14 per cent above the initial estimate for this program. In
addition to the Mine/Concentrator Project and the Hydromet R&D Program, the
initial phase will include handling facilities to be constructed at our Canadian
operations for the nickel and cobalt-containing concentrates to be processed
over the 2006 -- 2011 period once the Mine/ Concentrator Project and the
demonstration plant are in operation, at an estimated cost of $47 million, and
an exploration program at an estimated cost of $13 million. The total capital
cost estimate for all four parts of the initial phase of the Voisey's Bay
project is $776 million, or about 14 per cent above the prefeasibility study
estimates of $680 million. The engineering firm retained to complete the study
indicated that it believed that the capital cost estimate was within a range of
plus 15% and minus 5% of the $547 million figure still to be spent for the
Mine/Concentrator Project. Given that we currently expect that a significant
portion of these costs will be incurred in Canadian dollars, we have entered
into Canadian dollar hedges for approximately 4% of the $776 million total
capital cost estimate. The $776 million estimate assumed a Canadian dollar-U.S.
dollar exchange rate of approximately Cdn.$1.00 to $0.66. To the extent that
this exposure is not hedged at exchange rates equivalent to this assumed rate,
then this capital cost estimate could rise, adversely affecting the projected
returns on our investment in this project.
14
CONSTRUCTION RISKS AND TECHNOLOGICAL RISKS
The mine, processing plant and related infrastructure required for
development of the Goro and Voisey's Bay deposits have not yet been constructed
and no commercial mining has commenced. While certain necessary construction and
other permits have been obtained in respect of the Goro and Voisey's Bay
deposits and detailed exploration and related studies with respect to the Goro
deposit and a portion of the Voisey's Bay deposit have been completed based on
(1) significant surface exploratory drilling, (2) extensive investigations of
certain of the mineralization delineated to date, (3) construction and mine
plans, and (4) production and cost estimates, we are not currently in a position
to predict when all of the required approvals would be in place for us to
develop either project and, in the case of the Goro project, when construction,
beyond the $6 million in limited interim construction work we currently plan to
undertake during the balance of 2003 and into early 2004 during phase 2 of our
review, would be restarted given the current timetable for the completion and
results of phase 2 of the comprehensive review, as discussed under "Uncertainty
of Production and Capital and Other Cost Estimates", currently being undertaken,
and, in the case of the Voisey's Bay deposit, when construction will be
completed. Depending on the severity of winter conditions and other factors
applicable to the Voisey's Bay deposit, a period of approximately 36 months from
site mobilization will be required to complete construction of the initial
phase, the mine, mill and related facilities necessary for the commercial
development of such deposit after all necessary approvals and permits have been
secured. After completion of certain preliminary work on site during the second
half of 2002, construction and related work, including site mobilization, for
the initial phase of the Voisey's Bay project began in July 2003.
Unforeseen conditions or developments could arise during the construction
period for either project which could delay or prevent completion, and/or
substantially increase the cost of construction of the necessary facilities and
infrastructure to develop the Goro and the Voisey's Bay deposits. Such events
may include, without limitation, shortages of equipment, materials or labor,
delays in delivery of equipment or materials, labor disruptions, political
events, local or political opposition, civil disturbances, litigation, adverse
weather conditions, unanticipated increases in costs, natural or man-made
disasters, accidents and unforeseen engineering, technical and technological,
design, environmental, geological or geotechnical problems. Any delay in
construction would delay the production of nickel and other products from the
Goro and/or the Voisey's Bay deposits, and the expected significant source of
revenue for us that production from these deposits would represent. Any such
delay could also materially adversely impact our business, results of
operations, financial condition and liquidity. Our Goro project will involve the
application of new processing and other technologies and, depending upon the
results of the hydrometallurgical process research and development program we
plan to conduct for our Voisey's Bay project, as described under "Uncertainty of
Production and Capital and Other Cost Estimates" above, that project could also
utilize new processing and other technologies to produce one or more refined or
finished nickel products. There can be no assurance that these technologies will
be successfully developed and applied on a commercial basis or that the costs
associated with and/or the timing of their implementation will not have a
material adverse effect on the timing of the start-up of commercial production,
the capital and/or operating costs for either or both projects and on other
factors impacting the profitability of these projects. These developments could
materially adversely impact our business, results of operations, financial
condition and liquidity.
RISKS ASSOCIATED WITH PT INCO
Our investment in PT Inco at book value as of June 30, 2003 totaled $364
million. In addition, a lender to PT Inco currently has the right, under certain
circumstances, to require one of our wholly-owned subsidiaries to purchase
approximately $35 million in debt extended to PT Inco by that lender.
Approximately one-third of our currently planned total production of primary
nickel for 2003, taking into account the effect that the recent strike of our
Ontario operations had on production and including intermediate product, is
currently expected to come from PT Inco. In 1999, to meet PT Inco's cash
shortfalls attributable principally to the increase in the capital cost of the
new hydroelectric facilities which were part of PT Inco's expansion project, the
relatively low nickel prices, and constraints on PT Inco's production
attributable to then reduced hydroelectric power generation caused by below
average rainfall, we advanced $88 million in total to
15
PT Inco. These advances have since been repaid. PT Inco may experience cash
shortfalls in the future, particularly if there were to be a significant decline
in primary nickel demand and nickel prices. In the event of such a cash
shortfall, we may again conclude that it would be necessary to advance cash to
PT Inco in order to meet PT Inco's cash needs.
The uncertain political situation and security concerns in Indonesia,
primarily as a result of the ongoing economic, political and social problems
facing that country, could adversely affect PT Inco's ability to operate. While
there has been no indication that the Government of the Republic of Indonesia is
considering currency controls, nationalization of certain properties or
facilities or other similar actions, regional and local governmental authorities
have sought to take greater control of the development of their resources and
these or other political developments, including, but not limited to, the
possibility of disruptions in PT Inco's operations arising out of the actions of
non-governmental organizations or community activist groups, could have a
material adverse effect on PT Inco's, and therefore our, nickel production,
business, results of operations, financial condition and liquidity.
ENVIRONMENTAL RISKS
Environmental legislation affects nearly all aspects of our operations
worldwide. These laws apply to us along with other companies in the mining and
metals industry. This type of legislation requires us to obtain operating
licenses, permits and other approvals and imposes standards and controls on
activities relating to mining, exploration, development, production, closure and
the refining, distribution and marketing of nickel and other metals products.
Environmental assessments are required before initiating most new projects or
undertaking significant changes to existing operations. In addition to current
requirements, we expect that additional environmental regulations will likely be
implemented to protect the environment and quality of life, given issues of
sustainable development and other similar requirements which governmental and
supragovernmental organizations and other bodies have been pursuing. Some of the
issues currently under review by environmental regulatory agencies include (1)
further reducing or stabilizing various emissions, including sulphur dioxide,
metal and greenhouse gas emissions, (2) mine reclamation and restoration, and
(3) water, air and soil quality and waste treatment and disposal.
Although the ultimate amount to be incurred is uncertain, the total
liability for future removal and site restoration costs in respect of our
worldwide operations, to be incurred primarily after cessation of operations,
was estimated to be approximately $140 million at June 30, 2003 based upon
certain discount rates and timing with respect to when these costs would be
expected to be incurred applied in accordance with a new accounting standard
discussed below. In July 2003, our closure plan covering our Manitoba operations
was approved by the Province of Manitoba. The undiscounted estimated costs
associated with that plan were approximately $15 million higher than the cost
included in the $140 million estimate. Effective January 1, 2003, we adopted a
new accounting standard of the Canadian Institute of Chartered Accountants
relating to asset retirement obligations. This standard significantly changed
the method of accounting for future removal and site restoration costs. This
liability is accreted over time through periodic charges to earnings. The
current estimate of the charge for 2003 is approximately $9 million. In
addition, the asset retirement cost is capitalized as part of the asset's
carrying value and depreciated over the asset's useful life. A further
discussion of this standard is included in footnote (1) to the "Summary
Consolidated Financial Data" above. The estimate of the total liability for
future removal and site restoration costs has been developed from independent
environmental studies, which include an evaluation of, among other factors,
currently available information with respect to closure plans and closure
alternatives, the anticipated method and extent of site restoration using
current costs and existing technology, and compliance required by presently
enacted laws, regulations and existing industry standards. The total liability
for future removal and site restoration costs represents estimated expenditures
associated with closure, progressive rehabilitation and post-closure care and
maintenance. Potential recoveries of funds from the future sale of assets upon
the ultimate closure of operations have not been reflected in the estimate of
the total liability or related annual provision. Future changes, if any, to the
estimated total liability, as a result of amended requirements, laws,
regulations and operating assumptions may be significant and would be recognized
prospectively as a change
16
in accounting estimate, when applicable. Environmental laws and regulations are
continually evolving in all areas in which we operate.
Changes made in 2000 to mining regulations in the Province of Ontario
will require us to provide letters of credit or other forms of financial
security to fund our future reclamation and restoration costs, which are not
expected to be incurred for many years, if we were to no longer meet certain
minimum investment grade credit ratings for our outstanding publicly traded debt
securities. Although our debt securities are currently rated investment grade,
they were rated below investment grade in recent times and there can be no
assurance that this situation will not reoccur. If we are not able to maintain
the minimum investment grade credit ratings, it is currently estimated that
letters of credit or other forms of financial security associated with the
currently estimated costs of the eventual future closure of our mines and other
facilities in Ontario would have to cover approximately $310 million in such
closure costs. Due to the closure of three mines in Ontario in 2002, we were
required under such mining regulations to provide surety bonds in the amount of
$17 million to secure these near-term closure costs. In addition, we are subject
to certain Indonesian regulations which require us to provide security for the
reclamation of land areas that have been mined. In the case of our Manitoba
operations, we expect that, based upon recently enacted regulations in the
Province of Manitoba, we will be required to provide some form of financial
security for our future reclamation and restoration costs in that Province.
However, it is not currently expected that these costs with respect to our
Manitoba operations (beyond what has been included in the $140 million estimate
referred to above and the recently approved closure plan) and for our Indonesian
operations and/or such financial security to be provided for our Manitoba
operations will be of a material amount. These potential costs might not be
incurred until many years in the future. If these requirements for letters of
credit or other forms of financial security had to be satisfied, they could have
an adverse effect on the amounts available for borrowing by us under our bank
credit facilities.
In February 2002, the Ontario government issued a control order that
requires us to reduce sulphur dioxide emissions by 34 per cent at our Ontario
smelting operations by the end of 2006. We are currently implementing an
approximately $85 million investment in fluid bed roaster off-gas scrubbing
technology intended to reduce sulfur dioxide emissions to the new levels
mandated by this new control order by the end of 2006. As part of the control
order, we will also be required to (1) reduce ground level concentrations of
sulfur dioxide, (2) continue research into the technology and economics of
further reductions in sulphur dioxide emissions and (3) report annually to the
Ontario Ministry of the Environment and the public on the progress of this
research program. The control order calls for a final report on achieving the
additional reductions to be submitted by December 31, 2010. We do not currently
expect that compliance with the annual sulphur dioxide emission levels from our
smelter operations or ground level concentrations levels as set forth in the
control order will have any significant effect on our costs, operating
procedures or annual production of nickel and other primary metals from our
Ontario operations. In February 2003, the Province of Ontario issued a
discussion paper covering proposals for further reductions in sulfur dioxide
emissions by non-ferrous smelting operations, including our operations, and the
federal government of Canada has recently designated for further regulation
certain sulfur dioxide and particulate emissions from copper-smelting operations
such as those we have in Ontario. While we are not able to determine the effect,
if any, of these recent developments and significant future changes in
regulatory emission limits and other environmental laws and regulations that may
be enacted in the future due to the uncertainty surrounding the timing and
ultimate form that such changes may take, any such changes could have a material
adverse effect on our business, results of operations, financial condition and
liquidity.
Canada signed and ratified the Kyoto Protocol to the United Nations
Framework Convention on Climate Change ("Kyoto Protocol") in December 2002. The
Kyoto Protocol calls for significant reductions in the emissions of greenhouse
gases, such as carbon dioxide, and nationwide ceilings on such emissions. In
August 2003, the federal government of Canada released certain principles
covering the Kyoto Protocol intended to be used to implement the objective of
having the oil and gas, thermal energy and mining and manufacturing sectors
reduce greenhouse gases by certain specified limits. In November 2002, the
federal government of Canada released an initiative to address certain causes of
climate changes. The specific requirement of this initiative is also to limit
the discharge of carbon dioxide and other greenhouse gases.
17
Neither of the Kyoto Protocol nor this other initiative has as yet established
what the specific allocation of reductions among various sources of greenhouse
gases would be. While the precise impact on our Canadian operations and the
operations of others who provide energy or other products or services to us is
uncertain at this time, we anticipate that compliance with these initiatives
could have a significant adverse effect on our results of operations and costs.
In addition, the federal government of Canada in July 2003 under existing
legislation indicated its plan to regulate on the federal level sulfur dioxide
emissions based upon their treatment as a precursor of respirable particulate
matter. We cannot predict what effect this new regulatory initiative covering
these emissions could have on our results of operations, financial results or
liquidity.
In 2002, the Danish Environmental Protection Agency, as part of the
authority granted to it under certain environmental regulations of the European
Union Commission, published draft risk assessment reports, including certain
conclusions concerning potential human health hazards associated with nickel
metal and certain soluble nickel compounds, including nickel sulphate, nickel
chloride and nickel nitrate. This Agency determined, based on certain animal
studies, that soluble nickel is a reproductive toxin and has proposed certain
product labeling requirements as a result of this determination. It has also
assessed certain other environmental issues. In addition, based upon these draft
reports and taking into consideration certain studies, this Agency has proposed
that soluble nickel be classified under its hazard classification system as a
known human carcinogen. During 2003, the European Union Commission released
draft sections of their risk assessment focussing on the characterization of
certain forms of nickel and the related human health assessment. This risk
assessment is currently expected to be completed in 2004. The study of the
socio-economic effects of such risk assessment also moved forward in 2003.
Before any such proposed classification could come into effect, a number of
regulatory and administrative steps would have to be completed. If this proposed
classification were to come into effect as currently proposed, it could result
in use restrictions and other requirements which could have a material adverse
impact on certain producers and end users of the forms of nickel covered by such
classification and on our business, results of operations, financial condition
and liquidity. The European Union Commission also in 2002 proposed a directive
on air pollution which includes target limit values for nickel since nickel is
considered by this Commission to be a possible carcinogenic pollutant. Member
states of the European Union will have until 2010 to achieve the target limit
values, after which more stringent binding limit values may be considered. The
technical and socio-economic feasibility of meeting such limits are currently
being considered by the European Union Commission and those industries that
would be affected, including nickel producers.
Further changes in environmental laws, the restrictions on our discharge
of greenhouse gases as a result of Canada's program to comply with the Kyoto
Protocol and similar developments that may be imposed, new information on
existing environmental conditions and other events, including legal proceedings
brought based upon such conditions or an inability to obtain necessary permits,
could require increased accounting reserves or compliance or other expenditures
or otherwise have a material adverse effect on our business, results of
operations, financial condition and liquidity.
Other changes in environmental legislation could have a material adverse
effect on product demand, product quality and methods of production and
distribution. The complexity and breadth of these issues make it extremely
difficult to predict their future impact on us. We anticipate capital
expenditures and operating expenses will increase in the future as a result of
the implementation of existing and new and increasingly stringent environmental
regulations. Compliance with environmental legislation can require significant
expenditures and failure to comply with environmental legislation may result in
the imposition of fines and penalties, liability for clean up costs, damages and
the loss of important permits.
There can be no assurance that we will at all times be in compliance with
all environmental regulations or that steps to bring us into compliance would
not materially adversely affect our business, results of operations, financial
condition or liquidity. We may also be subject to claims from persons alleging
that they have suffered significant damages as a result of the environmental
impact of our operations, including operations that have ceased to exist for
many years.
18
COMPETITION
The nickel industry is highly competitive in all aspects of operations,
including the exploration for, and the development of, new sources of supply,
the acquisition of deposits, and the processing, distribution and marketing of
nickel products as well as substitutes for nickel products. The level of
production and export of primary nickel and secondary or nickel-containing scrap
material from the Russian Federation as well as other sources of such scrap,
together with the continuing relatively limited level of domestic consumption of
nickel in the Russian Federation since the break-up of the former Soviet Union,
has had, and is expected to continue to have, a significant impact on the nickel
industry's supply-demand balance.
During 1999, three new nickel projects in Australia began commercial
production at costs of production which the sponsors of such projects had
estimated to be very favorable relative to other industry participants,
including us. While these projects still have not operated at close to their
aggregate indicated production capacity, which had been estimated by their
sponsors to be approximately 65,000 tonnes annually in total, increases in the
supply of nickel resulting from those projects, and from other new sources of
nickel, if developed, could create downward pressure on prices realized by us
for our primary nickel products.
While we expect that the demand for nickel will continue to grow over the
longer term, increases in supply in excess of increases in demand could cause
nickel prices to decrease significantly from current levels. In addition, the
successful substitution of other materials for nickel in a number of important
applications could occur. Any of these situations could materially adversely
affect our business, results of operations, financial condition and liquidity.
See "Volatility of Price of Nickel and Other Prices and their Effect on Our
Financial Results" above. As we expect to become a significant producer of
cobalt once our development projects begin commercial production, our results
will also be affected by the currently projected highly competitive market for
cobalt.
GOVERNMENTAL REGULATIONS
In addition to environmental regulations referred to above, the mining
and metals industry in Canada operates under federal, provincial and municipal
legislation, regulation and intervention by governments in such matters as land
tenure, limitations on areas in which mining can be conducted, production rates,
income and other taxes and the export of ore and other products, as well as
other matters. Our operations in Indonesia, the United Kingdom, New Caledonia
and in other countries outside Canada are also subject to various environmental
and other applicable laws and regulations and governmental interventions, some
of which are similar to those in Canada and all of which are subject to change.
The mining and metals industry is also subject to regulation and intervention by
governments in such matters as control over the development and abandonment of
mine sites (including restrictions on production) and possible expropriation or
cancellation of contract and mineral rights. Before proceeding with major
projects, including significant changes to existing operations, we must obtain
regulatory approvals. The regulatory approval process can involve stakeholder
consultation, environmental impact assessments and public hearings, among other
things. In addition, regulatory approvals may be subject to conditions,
including the obligation to post security deposits and other financial
commitments. Failure to obtain regulatory approvals, or failure to obtain them
on a timely basis, could result in delays and abandonment or restructuring of
projects and increased costs, all of which could negatively affect our future
earnings and cash flow. In addition, such regulations may be changed from time
to time in response to economic or political conditions, and the implementation
of new regulations or the modification of existing regulations affecting the
mining and metals industry could increase our costs and have a material adverse
impact on business, results of operations, financial condition and liquidity.
There can be no assurance that we will be in compliance with all
applicable statutes or regulations at all times or that steps to bring us into
compliance would not materially adversely impact our business, results of
operations, liquidity or financial condition. See "Environmental Risks" above.
CAPITAL REQUIREMENTS AND OPERATING RISKS
Each of our two current principal primary metals business units, the
Canadian and U.K. operations, and our 59 per cent owned Indonesian subsidiary,
PT Inco, has required, and is expected to continue to
19
require, certain levels of investment to sustain its current levels of
production. For 2003, we currently forecast capital expenditures totaling
approximately $635 million, covering sustaining capital projects for these units
as well as planned expenditures for our Goro and Voisey's Bay projects and other
development projects. This total amount assumes a level of capital expenditures
for our Goro project of approximately $260 million, and $140 million for our
Voisey's Bay project. We currently anticipate very substantial continuing
capital expenditures in 2004 and subsequent years for sustaining capital
projects and for our development projects. The expected capital costs of our
Goro development project is under review as discussed above. To meet our current
anticipated capital expenditure requirements, we must generate sufficient
positive internal cash flow and/or utilize available financing sources and if we
are unable to do so, it will have an adverse effect on our business, results of
operations, financial condition and liquidity.
In addition, our mining operations and processing and related
infrastructure facilities are subject to risks normally encountered in the
mining and metals industry. Such risks include, without limitation,
environmental hazards, industrial accidents, labor disputes, changes in laws,
technical difficulties or failures, late delivery of supplies or equipment,
unusual or unexpected geological formations or pressures, cave-ins, pit-wall
failures, rock falls, unanticipated ground, grade or water conditions, flooding,
periodic or extended interruptions due to the unavailability of materials and
force majeure events. Such risks could result in damage to, or destruction of,
mineral properties or producing facilities, personal injury, environmental
damage, delays in mining or processing, losses and possible legal liability. Any
prolonged downtime or shutdowns at our mining or processing operations could
materially adversely affect our business, results of operations, financial
condition and liquidity.
For example, in February 2003 we experienced certain seismic conditions
at two of our mines at our Ontario operations which required us to curtail
mining activities while these conditions were evaluated. These conditions did
not result in any significant production disruptions but could reoccur in the
future and could adversely affect our production. In addition, in February 2003
our Indonesian subsidiary experienced an unexpected maintenance development
covering one of its two hydroelectric generating facilities which required a
limited shutdown of the facility to repair the facility's two turbines. Although
this shutdown did not affect PT Inco's 2003 planned production, there can be no
assurances that similar events will not occur in the future which could affect
PT Inco's production.
The wholesale electricity markets in Ontario were deregulated for a
portion of 2002 and as a result we experienced fluctuations in some of our
electricity costs at our Ontario operations. Depending upon future changes in
the regulatory environment for these markets, we could experience future
fluctuations in such costs. We could also experience disruptions due to
blackouts and similar events. We have from time to time experienced adverse
production and production cost trends at our operations in Canada and elsewhere
and could experience similar adverse trends in the future.
LABOR RELATIONS
Collective agreements with unionized hourly production and maintenance
workers at our Ontario operations ended on May 31, 2003. We were not able to
negotiate new collective agreements by that date and these workers went on
strike and, as discussed under "Recent Developments" above, the strike lasted
until August 29, 2003 when new collective agreements expiring on May 31, 2006
were entered into by the Company and the local unions representing these
workers. This strike had a material adverse effect on our 2003 production of
nickel, copper and certain other metals and results of operations and cash flow.
A three-year collective agreement with our unionized office, clerical and
technical employees at our Ontario operations remains in effect until March 31,
2004. On September 15, 2002, a new three year collective agreement with our
unionized workers at our Manitoba operations was successfully negotiated. Our PT
Inco subsidiary entered into a new two-year collective labor agreement with its
union in January 2003. While there were no significant problems in reaching this
new agreement with PT Inco's labor force, with the increased potential for
actions of non-government organizations and other activist groups, as part of
the current uncertain economic and political situation in Indonesia, and the
general increase in labor activism in that country, there can be no assurance
that such activism will not adversely affect PT Inco's ability to successfully
operate. Any disruption in PT Inco's operations as a result of labor issues or
other issues may
20
adversely affect its operations and could materially adversely impact our
business, results of operations, financial condition and liquidity. At Goro, we
currently have two unions representing some of our employees. In early September
2002, Goro experienced labor disruptions by personnel associated with certain
project construction subcontractors. As a result of these disruptions, the
decision was made in late September 2002 to curtail certain activities at the
project's site to enable the project company, Goro Nickel S.A., contractors,
subcontractors and other interested parties to develop procedures to avoid
future disruptions. A number of procedures were put in place prior to the start
of the comprehensive review in early December 2002 and we and Goro Nickel S.A.
have been seeking to complete the implementation of these and other procedures
as part of the negotiation of labor or site accords to help minimize any such
disruptions in the future. Through an employer's association, of which we are
the controlling member, we negotiated a collective agreement effective September
2002 covering the construction of the first phase of the Voisey's Bay project.
There can be no assurance that we will be able to maintain a positive
relationship with our employees at our operations in Canada and elsewhere or
that new collective agreements will be entered into without work interruptions.
We could also be adversely affected by labor disruptions involving third parties
who may provide us with goods or services at our operations in Canada and
elsewhere. For example, as discussed above, our Goro project experienced labor
disruptions by employees certain of the project's construction subcontractors.
Strikes and other labor disruptions at any of our operations and lengthy work
interruptions at our Goro or Voisey's Bay projects could materially adversely
affect the timing of completion and the cost of either project, as well as our
business, results of operations, financial condition and liquidity.
UNCERTAINTY OF RESERVE ESTIMATES
Our reported ore reserves are estimated quantities of proven and probable
ore that under present and anticipated conditions can be legally and
economically mined and processed by the extraction of their mineral content. We
determine the amount of our ore reserves in accordance with the requirements of
the applicable securities regulatory authorities and established industry
practices, based upon a number of assumptions, including long-term prices for
nickel, copper and cobalt, exchange rates and capital cost estimates. In some
cases, we assume long-term prices that are above current and recent prices.
Changes in these assumptions, including any reduction in the assumed metals
prices and changes in exchange rates, could materially adversely affect the
estimation of the quantities of proven and probable ore reserves and any
significant reduction in such reserves could adversely affect our production
levels and, accordingly, our results of operations, financial condition and
liquidity. The volume and grade of reserves actually recovered and rates of
production from our present ore reserves may be less than what is indicated by
geological measurements of the reserves. Further, market price fluctuations in
nickel, other metals and exchange rates, and changes in operating and capital
costs may in the future render certain ore reserves uneconomic to mine. In
addition, the results of phase 2 of our review of the Goro project could also
affect the assumptions utilized for and, accordingly, the amount of, the ore
reserve estimate for the Goro deposit. See also "Volatility of Price of Nickel
and Other Prices and their Effect on Our Financial Results" and "Uncertainty of
Production and Capital and Other Cost Estimates" above.
No assurance can be given that the indicated amount of ore will be
recovered or that it will be recovered at the rates anticipated by us. Our
reserve estimates are based on limited sampling and, consequently, are uncertain
because the samples may not be representative of the entire orebody. As more
knowledge and understanding of the ore body is obtained, the reserve estimates
may change significantly, either positively or negatively.
RISKS RELATING TO BANK FACILITIES
To provide liquidity for our operations, we maintain committed bank
credit facilities currently aggregating $680 million, none of which was drawn as
of the date hereof. Covenants contained in these bank credit facilities require
us to maintain a consolidated indebtedness to tangible net worth ratio, as
defined in such credit facilities ("debt:equity ratio"), of not more than 50:50
and a minimum tangible net worth (as defined in such credit facilities) of at
least $1.5 billion. At June 30, 2003, pursuant to these covenants, the
debt:equity ratio was approximately 27:73 and our tangible net worth was $3.7
billion. There can be no
21
assurance that future material adverse developments would not result in a breach
of these covenants. If we are unable to maintain a debt:equity ratio of not more
than 50:50 and tangible net worth of at least $1.5 billion, our bank lenders
generally would have the right to declare a default and require all then
outstanding loans to be repaid and pursue the various remedies available to them
under the bank credit facilities, including declining to make any new loans
under such facilities. Any such action by the lenders could materially adversely
affect our ability to finance our operating and development projects, and our
results of operations, financial condition and liquidity.
EFFECT ON PROFITABILITY OF INCREASES IN COSTS
Over the past 18 months, we have experienced an increase in our costs of
production due to, among other factors, rising energy and pension costs, the
costs of intermediate feeds we purchase and the impact of the appreciation of
the Canadian dollar against the U.S. dollar with respect to those of our costs
that are incurred in Canadian dollars. While we will continue to pursue
productivity improvements and other actions to offset these cost increases,
these cost increases are currently expected to continue to have a negative
impact on our profitability and our results of operations for the balance of
2003. In addition, these trends may have an adverse effect on our profitability
and results of operations in future years and, while we believe at least some of
our competitors face similar cost trends, our competitive position in the global
nickel industry could also be adversely affected if these adverse cost trends
continue.
EXPOSURE TO PREVAILING INTEREST RATES AND EQUITY MARKET RETURNS IN CONNECTION
WITH OUR PENSION PLANS
We sponsor defined benefit pension plans for our employees principally in
Canada, the United States and the United Kingdom. Our pension plan assets
consist primarily of listed stocks and bonds. Our estimate of liabilities and
expenses for pensions and other post-retirement benefits incorporate significant
assumptions, including interest rates used to discount future liabilities and
expected long-term rates of return on plan assets. Our pension contributions and
expense, results of operations, liquidity or shareholders' equity in a
particular period could be materially adversely affected by equity market
returns that are less than our pension plans' expected long-term rates of
return, a decline in the rate used to discount future liabilities and changes in
the Canadian dollar--U.S. dollar exchange rate.
If the assets of our pension plans do not achieve expected investment
returns for any fiscal year, such deficiency would require increases in our
pension expense. We have been required to significantly increase our pension
plan contributions in 2003 and expect such increased contributions to continue
for the next few years as a result of recent poor plan investment performance
and the existing significant deficits in certain plans as a result of such
performance. Changing economic conditions, poor pension investment returns or
other factors may require us to make substantial additional cash contributions
to our pension plans in the future, preventing the use of such cash for other
purposes and adversely affecting our liquidity.
EXCHANGE RATE FLUCTUATIONS
Our results of operations are affected by various exchange rates, in
particular between the Canadian dollar and the U.S. dollar and, to a lesser
extent, other exchange rates. As discussed above, our capital expenditures for
our existing operations and Voisey's Bay and Goro projects are also sensitive to
changes in exchange rates depending upon the currency in which such expenditures
are incurred. Those exchange rates that can have a substantial impact on our
results of operations and capital expenditures have varied substantially over
time, including over the last five years. For example, the Canadian dollar has
strengthened significantly compared to the U.S. dollar to date in 2003, rising
from $0.6350 per Cdn.$1.00 on January 2, 2003 to $0.7423 per Cdn.$1.00 on
September 22, 2003. A substantial portion of our revenue is received in U.S.
dollars since the price of nickel and other metals produced by us are generally
referenced in U.S. dollars, while a significant portion of our costs and
expenses are incurred in Canadian dollars. Our consolidated financial statements
are expressed in U.S. dollars. Fluctuations in exchange rates between the U.S.
dollar and the Canadian dollar and between the U.S. dollar and other currencies
may give rise to foreign currency exposure, either favorable or unfavorable,
which have materially impacted and may in the future materially impact our
results of operations. We from time to time hedge a portion of our Canadian
dollar and
22
other currency requirements to limit any adverse effect of exchange rate
fluctuations with respect to our Canadian dollar and other costs, but such
hedges have not eliminated the potential material adverse effect that such
fluctuations could have on our results of operations or financial condition. See
"Uncertainty of Production and Capital and Other Cost Estimates" above.
INTEREST RATE AND COUNTERPARTY RISK
Our exposure to changes in interest rates results from investing and
borrowing activities undertaken to manage our liquidity and capital
requirements. We generally have used fixed-rate debt to finance long-term
investments, while variable-rate debt has been used to meet working capital
requirements and related requirements on a more near-term basis. At the end of
2002, we entered into an interest rate swap agreement to manage the interest
rate risk associated with a portion of our fixed-rate debt. The interest rate
swap changes our exposure to interest rate risk by effectively converting a
portion of our fixed-rate debt to a floating rate. We may elect in the future to
enter into interest rate swaps to effectively convert floating-rate debt to
fixed-rate debt and enter into additional fixed-rate to floating-rate swaps. At
June 30, 2003, approximately $649 million, or 42 per cent, of our total debt of
$1,550 million was effectively subject to variable interest rates. Based upon
our level of debt that is effectively floating rate, as of June 30, 2003 the
impact of a 10 per cent change in interest rates, or 11 basis points (based on
certain benchmark interest rates as at June 30, 2003), over the course of a full
year would change our interest expense by less than $1 million over a full year.
As noted above, we may be required to raise additional debt in the future and,
accordingly, we could be materially adversely affected by changes in interest
rates in the future despite any interest rate swaps we then might have in
effect. Since year-end 2002, we have entered into an interest rate swap covering
100 per cent of our $400 million aggregate principal amount of 7 3/4% Notes due
2012 that effectively converts all of those securities to floating rate debt and
increases the sensitivity of our interest expense to changes in interest rates
proportionately and cancelled in accordance with its terms the interest rate
swap on our 9.60% Debentures due 2022. There can be no assurance that we will
not be materially adversely affected by interest rate changes in the future,
notwithstanding our use of interest rate swaps.
In addition, our interest rate swaps, metals hedging and foreign currency
risk management activities expose us to the risk of default by the
counterparties to such arrangements. Any such default could have a material
adverse effect on our business and financial condition.
ABSENCE OF PUBLIC MARKETS FOR THE DEBENTURES
The debentures comprise a new issue of securities for which there is
currently no public market. If the debentures are traded after their initial
issuance, they may trade at a discount from their initial public offering price,
depending on prevailing interest rates, the market for similar securities, our
performance and other factors. We do not intend to apply for listing of the
debentures on any securities exchange or to seek approval for quotation of the
debentures through an automated quotation system. No assurance can be given as
to whether an active trading market will develop or be maintained for the
debentures. To the extent that an active trading market for the debentures does
not develop, the liquidity and trading prices for the debentures may be
adversely affected.
USE OF PROCEEDS
The proceeds of this offering, after deducting underwriting commissions
and other expenses of the offering, are expected to be approximately $297
million, which, together with available cash, will be used to redeem our 9.60%
Debentures due 2022 and our 7 3/4% Convertible Debentures due 2016.
23
CAPITALIZATION
The following table sets forth a summary of our consolidated
capitalization as of June 30, 2003, and as adjusted to reflect the sale of the
debentures offered by this prospectus. The table is based on our unaudited
consolidated financial statements as of and for the six months ended June 30,
2003, which have been prepared in accordance with Canadian GAAP. The table
should be read in conjunction with our consolidated financial statements and
other information included in the documents incorporated by reference into this
prospectus. Note 1 to the table sets forth information regarding material
differences between Canadian and U.S. GAAP. For further information regarding
differences between Canadian GAAP and U.S. GAAP, see Note 22 to the consolidated
financial statements in our 2002 10-K and Note 14 to the consolidated financial
statements in our Second Quarter 10-Q. For further information regarding our
long-term debt, see Note 10 to the consolidated financial statements in our 2002
10-K and Note 6 to the consolidated financial statements in our Second Quarter
10-Q.
AS OF JUNE 30, 2003(1)
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
(IN MILLIONS)
Long-term debt (including $115 million which is due within
one year)................................................. $1,550 $1,548
Minority interest........................................... 384 384
Shareholders' equity (2):
Convertible debt.......................................... 599 599
Common shareholders' equity:
Common shares issued and outstanding, without nominal
or par value (authorized -- unlimited)................ 2,793 2,793
Warrants............................................... 62 62
Contributed surplus.................................... 561 561
Deficit (3)............................................ (269) (269)
------ ------
Total common shareholders' equity......................... 3,147 3,147
------ ------
Total shareholders' equity.................................. 3,746 3,746
------ ------
Total capitalization........................................ $5,680 $5,678
====== ======
------------
(1) Under U.S. GAAP, minority interest, common shares, warrants and contributed
surplus would be reported in the same amounts as set forth in the foregoing
table, but our outstanding convertible debt would be recorded as a different
amount and classified as long-term debt, not equity. Therefore, under U.S.
GAAP our long-term debt, total common shareholders' equity, total
shareholders' equity and consolidated capitalization would differ and the
above table would read as follows:
24
AS OF JUNE 30, 2003
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
(IN MILLIONS)
Long-term debt (including $115 million which is due within
one year and convertible debt)............................ $ 2,180 $ 2,178
Minority interest........................................... 384 384
Shareholders' equity:
Common shareholders' equity
Common shares issued and outstanding, without nominal
or par value (authorized -- unlimited)............... 2,793 2,793
Warrants............................................... 62 62
Contributed surplus.................................... 561 561
Deficit (3)............................................ (1,194) (1,194)
Accumulated other comprehensive loss................... (483) (483)
------- -------
Total shareholders' equity.................................. 1,739 1,739
------- -------
Total capitalization........................................ $ 4,303 $ 4,301
======= =======
(2) For further information regarding the convertible debt, warrants,
contributed surplus and common shares, see Notes 13, 15 and 16 to the
consolidated financial statements in our 2002 10-K and Notes 5, 7 and 9 to
the consolidated financial statements in our Second Quarter 10-Q.
(3) The premium payable in connection with the planned redemption of our 9.60%
Debentures due 2022 would have increased the deficit by approximately $7
million. However, such increase will be effectively offset by an amount
already received upon cancellation of a related interest rate swap.
25
DESCRIPTION OF DEBENTURES
The debentures are a single series of debt securities under an indenture
dated as of June 29, 1989, as amended and supplemented by a first supplemental
indenture dated as of March 31, 1992, between us and The Bank of New York, as
trustee. The following summary does not purport to be complete and is subject
to, and qualified by reference to, all of the provisions of the indenture,
including the definitions of certain terms in the indenture. The indenture and
the supplemental indenture are filed as an exhibit to the registration statement
of which this prospectus is a part. As used in this description, the words "we",
"us", "our", the "Company" and "Inco" do not include any of our current or
future subsidiaries. In the following summary, the term "securities" refers to
all debentures, notes and other evidences of indebtedness authenticated and
delivered under the indenture.
GENERAL
The debentures will be unsecured general obligations and will rank on a
parity in right of payment with all of our existing and future unsecured and
unsubordinated indebtedness. The debentures will be limited to $300,000,000
aggregate principal amount and will mature on October 15, 2015. The debentures
will bear interest at 5.70% per annum from September 26, 2003, or from the most
recent interest payment date to which interest has been paid or provided for,
payable semi-annually in arrears, on April 15 and October 15 of each year,
commencing April 15, 2004, to each person in whose name a debenture is
registered at the close of business on the preceding April 1 or October 1, as
the case may be. The initial public offering price of the debentures is 99.978%
of their principal amount, resulting in an effective yield of 5.70% per annum if
held from the time of issuance to maturity. Principal of and interest on the
debentures will be payable, and the transfer of debentures will be registrable,
at the principal corporate trust office of the trustee, which at present is 101
Barclay Street, New York, New York, 10286, Attention: Corporate Trust
Administration. However, payment of interest may, at our option be made by check
mailed to the address of the person entitled thereto as it appears in the
security register.
No service charge will be made for any registration, transfer or exchange
of the debentures, but we may require payment of a sum sufficient to cover any
tax, assessment or other governmental charge payable in connection therewith.
BOOK-ENTRY SYSTEM
The debentures will initially be issued in the form of one or more global
securities held in book-entry form. The Depository Trust Company ("DTC") or its
nominee will be the sole registered holder of the debentures for all purposes
under the indenture. Owners of beneficial interests in the debentures
represented by the global securities will hold such interests pursuant to the
procedures and practices of DTC. As a result, beneficial interests in any such
securities will be shown on, and transfers thereof will only be effected
through, records maintained by DTC and its direct and indirect participants and
any such interests may not be exchanged for certificated securities, except in
limited circumstances. Owners of beneficial interests must exercise any rights
in respect of their interests in accordance with the procedures and practices of
DTC and any intermediary through which they hold their debentures. Beneficial
owners will not be holders and will not be entitled to any rights under the
global securities or the indenture provided to the holders of the debentures.
Inco and the trustee, and any of their respective agents, may treat DTC as the
sole holder and registered owner of the global securities. See "Legal Ownership"
below.
DTC has advised us that it is a limited-purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
United States Securities Exchange Act of 1934, as amended. DTC holds securities
that its participants deposit with DTC and facilitates the settlement among
participants of securities transactions in deposited securities through
electronic computerized book-entry changes in participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Participants include securities brokers and dealers, banks, trust
26
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its participants and by the New York Stock Exchange, Inc., The
American Stock Exchange LLC and the National Association of Securities Dealers,
Inc. Access to DTC's book-entry system is also available to others, such as
securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the Securities and Exchange Commission (the "SEC").
OPTIONAL REDEMPTION
We will have the option to redeem the debentures in whole or in part at
any time, at a redemption price equal to the greater of (1) 100% of the
principal amount of the debentures, and (2) the sum of the present values of the
remaining scheduled payments of principal and interest on the debentures
(exclusive of interest accrued to the date of redemption) discounted to the
redemption date, calculated on a semi-annual basis (assuming a 360-day year of
twelve 30-day months), at the Treasury Yield plus 25 basis points, together in
each case with accrued interest to the date of redemption.
"Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semi-annual equivalent yield to maturity or interpolated (on
a day count basis) of the Comparable Treasury Issue, assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such redemption date.
"Comparable Treasury Issue" means United States Treasury security or
securities selected by the Independent Investment Banker as having an actual or
interpolated maturity comparable to the remaining term of the debentures to be
redeemed that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining term of those debentures.
"Independent Investment Banker" means one of the Reference Treasury
Dealers appointed by the trustee after consultation with us.
"Comparable Treasury Price" means, with respect to any redemption date,
(1) the average of the Reference Treasury Dealer Quotations for that redemption
date after excluding the highest and lowest of such Reference Treasury Dealer
Quotations, or (2) if the trustee obtains fewer than four such Reference
Treasury Dealer Quotations, then the average of the available Reference Treasury
Dealer Quotations for the redemption date, or (3) if only one is available on
that date, then that Reference Treasury Dealer Quotation.
"Reference Treasury Dealer Quotation" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the trustee, of the bid and asked prices for the comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by that Reference Treasury Dealer at 3:30 p.m. (New York
time) on the third business day preceding that redemption date.
"Reference Treasury Dealer" means Citigroup Global Markets Inc. and J.P.
Morgan Securities Inc., plus three other Primary Treasury Dealers (as defined)
appointed by the trustee after consultation with us, and their respective
successors; provided, however, that if any of the foregoing ceases to be a
primary U.S. Government securities dealer in The City of New York (a "Primary
Treasury Dealer"), we will substitute therefor another Primary Treasury Dealer,
if available.
REDEMPTION FOR TAX REASONS
We may also redeem all but not part of the debentures if we have or would
become obligated (including on the future enactment of a proposed change) to pay
to the holder of any debenture "Canadian additional amounts" or "other
additional amounts" (which are, in each case, more than a de minimis amount) as
a result of any change (including any announced prospective change) from the
date of this prospectus (or the date a party organized in a jurisdiction other
than Canada or the United States, or any province, territory, state or district
thereof, becomes our successor) in the laws or any regulations of Canada (or of
our successor's jurisdiction) or any political subdivision or taxing authority
thereof, or in an
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interpretation or application of such laws or regulations by any legislative
body, court, governmental agency, taxing authority or regulatory authority
(including the enactment of any legislation and the publication of any judicial
decision or regulatory or administrative determination) and if we cannot avoid
these obligations by taking reasonable measures available to us. The term
"Canadian additional amounts" is defined in "-- Canadian Withholding Taxes" and
the term "other additional amounts" is defined in "-- Certain
Covenants -- Amalgamation and Merger". This redemption would be at 100% of the
principal amount plus accrued interest plus any Canadian additional amounts or
other additional amounts (except to the extent you would not have been entitled
to Canadian additional amounts or other additional amounts, as the case may be).
We will give you not less than 30 days' nor more than 60 days' notice of this
redemption, except that (1) we will not give notice of redemption earlier than
60 days prior to the earliest date on or from which we would be obligated to pay
any such additional amounts, and (2) at the time we give the notice, the
circumstances creating our obligation to pay such additional amounts must remain
in effect.
REDEMPTION PROCEDURES
We will give you at least 30 days (but not more than 60 days) prior
notice of any redemption. If less than all of the debentures are redeemed, the
trustee will select the debentures to be redeemed by a method determined by the
trustee to be fair and appropriate.
On or before the redemption date, we will deposit with a paying agent (or
the trustee) money sufficient to pay the redemption price and accrued interest
on the debentures to be redeemed on such date. On and after the redemption date,
interest will cease to accrue on any debentures that have been called for
redemption (unless we default in the payment of the redemption price and accrued
interest).
CANADIAN WITHHOLDING TAXES
We will make payments on account of the debentures without withholding or
deducting on account of any present or future Canadian tax or other Canadian
governmental charge ("Canadian taxes"), unless we are required by law or the
interpretation or administration thereof by the relevant governmental authority
to withhold or deduct Canadian taxes. If we are required to withhold or deduct
any amount on account of Canadian taxes, we will make such withholding or
deduction and pay the additional amounts ("Canadian additional amounts")
necessary so that the net amount received by each holder of debentures after the
withholding or deduction (including with respect to Canadian additional amounts)
will not be less than the amount the holder would have received if the Canadian
taxes had not been withheld or deducted. We will make similar payment of
Canadian additional amounts to holders of debentures (other than excluded
holders (defined below)) that are exempt from withholding but are required to
pay tax directly on amounts otherwise subject to withholding. However, no
Canadian additional amounts will be payable with respect to a payment made to
holders or beneficial owners of debentures (referred to as "excluded holders")
(i) with which we do not deal at arm's length (for purposes of the Income Tax
Act (Canada)); (ii) who are subject to Canadian tax on those payments because
they carry on business in Canada or are otherwise connected with Canada
otherwise than by the mere holding of debentures or receipt of payments
thereunder; or (iii) who fail to comply with any certification, identification,
information, documentation or other reporting requirement if compliance is
required by applicable law or by the relevant governmental authority as a
precondition to exemption from or a reduction in the rate of deduction or
withholding of such Canadian taxes. We will remit the amount we withhold or
deduct to the relevant authority.
CERTAIN COVENANTS
Certain Definitions Applicable to Covenants
"Attributable Debt" is defined to mean as to any particular lease under
which any person is liable at the time as lessee, and at any date as of which
the amount thereof is to be determined, the total net amount of rent required to
be paid by such person under such lease during the remaining term thereof
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended), discounted from the respective due dates
thereof to such date at a rate per annum equivalent to the rate inherent in such
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lease (as determined in good faith by Inco) compounded semi-annually, excluding
amounts required to be paid on account of or attributable to operating costs and
overhead charges and including, in certain circumstances, any termination
penalty in the case of a lease terminable by the lessee.
"Consolidated Net Tangible Assets" is defined to mean the aggregate
amount of assets (less applicable reserves and other properly deductible items)
after deducting therefrom (1) all current liabilities (excluding any portion
thereof constituting Funded Debt); and (2) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent consolidated balance sheet of
Inco and its Subsidiaries contained in the latest annual report to shareholders
of Inco and computed in accordance with Canadian GAAP as specified in the
indenture.
"Funded Debt", as applied to any person, means all indebtedness for money
borrowed, created or assumed by such person maturing after, or renewable or
extendable at the option of such person beyond, 12 months from the date of
creation thereof.
"Principal Property" is defined to mean any (1) mineral property; or (2)
manufacturing or processing plant, building, structure or other facility,
together with the land upon which it is erected and fixtures comprising a part
thereof, whether owned as of the date of the indenture or thereafter acquired or
constructed by Inco or any Restricted Subsidiary, which is located in Canada or
the United States or its territories or possessions, the gross book value
(without deduction of any reserve depreciation) of which, in each case, on the
date as of which the determination is being made, is an amount which exceeds
0.25% of Consolidated Net Tangible Assets, except any such plant, building,
structure or facility or any portion thereof (together with the land upon which
it is erected and fixtures comprising a part thereof) (a) acquired or
constructed principally for the purpose of controlling or abating atmospheric
pollutants or contaminants, or water, noise, odor or other pollution or (b)
which the board of directors of Inco by resolution declares is not of material
importance to the total business conducted by Inco and its Restricted
Subsidiaries considered as an enterprise.
"Restricted Subsidiary" is defined to mean (1) any Subsidiary (a)
substantially all of the property of which is located, or substantially all of
the business of which is carried on, within Canada or the United States or its
territories or possessions and (b) which owns or leases a Principal Property;
and (2) any Subsidiary engaged primarily in the business of owning or holding
securities of Restricted Subsidiaries; provided that the term "Restricted
Subsidiary" will not include any Subsidiary the principal assets of which are
stock or indebtedness of corporations which conduct substantially all of their
business outside Canada and the United States or its territories or possessions.
"Subsidiary" of Inco is defined to mean any corporation more than 50% of
the outstanding voting stock of which is owned, directly or indirectly, by Inco
and/or one or more Subsidiaries of Inco.
Negative Pledge
We have covenanted under the indenture that we will not, and that we will
not permit any Restricted Subsidiary to, create, incur or assume any mortgage,
hypothec, charge, pledge, lien or other security interest (each a "mortgage")
securing any indebtedness for money borrowed ("Indebtedness") of or upon any
Principal Property, or on shares of stock or indebtedness of any Restricted
Subsidiary, now owned or hereafter acquired by Inco or a Restricted Subsidiary,
without making effective provision for the outstanding debentures (together
with, if and to the extent we so determine, any other indebtedness or other
obligations then existing or thereafter created) to be secured by such mortgage
equally and rateably with (or prior to) any and all indebtedness and obligations
secured or to be secured thereby and for so long as such Indebtedness is so
secured. Such negative pledge in general will not prevent or restrict the
creation, incurrence or assumption by Inco or any Restricted Subsidiary of:
- any mortgage on property, shares of stock or indebtedness of any
corporation existing at the time such corporation becomes a Restricted
Subsidiary;
- any mortgage on any Principal Property existing at the time of
acquisition of such Principal Property by Inco or a Restricted
Subsidiary, whether or not assumed by Inco or such Restricted
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Subsidiary, provided that no such mortgage will extend to any other
Principal Property of Inco or any Restricted Subsidiary;
- any mortgage on any Principal Property (including any improvements on
an existing Principal Property) hereafter acquired or constructed by
Inco or any Restricted Subsidiary to secure the payment of all or any
part of the purchase price or cost of construction of such Principal
Property (or to secure any Indebtedness incurred by Inco or a
Restricted Subsidiary for the purpose of financing all or any part of
the purchase price thereof or cost of construction thereof or of
improvements thereon) created prior to, at the time or within 90 days
after the later of the acquisition, completion of construction, or
commencement of full operation of such Principal Property, provided
that no such mortgage will extend to any other Principal Property of
Inco or a Restricted Subsidiary other than, in the case of any such
construction or improvement, any theretofore unimproved real property
on which the Principal Property so constructed, or the improvement, is
located;
- any mortgage on any Principal Property or any Restricted Subsidiary to
secure Indebtedness owing by it to Inco or to another Restricted
Subsidiary;
- any mortgage on any Principal Property of Inco or any Restricted
Subsidiary in favor of any government authority in Canada or in the
United States to secure partial, progress, advance or other payments to
Inco or any Restricted Subsidiary pursuant to the provisions of any
contract or statute;
- any mortgage on any Principal Property of Inco or any Restricted
Subsidiary existing on the date of the indenture;
- any mortgage on any Principal Property of Inco or any Restricted
Subsidiary created for the sole purpose of renewing or refunding any of
the foregoing mortgages, provided that the Indebtedness secured thereby
will not exceed the principal amount of Indebtedness so secured at the
time of such renewal or refunding, and that such renewal or refunding
mortgage will be limited to all or any part of the same property and
improvements thereon which secured the mortgage renewed or refunded; or
- any mortgage on any Principal Property created, incurred or assumed to
secure Indebtedness of Inco or any Restricted Subsidiary, which would
otherwise be subject to the foregoing restrictions, in an aggregate
amount which, together with the aggregate principal amount of other
Indebtedness secured by mortgages on Principal Properties then
outstanding (excluding Indebtedness secured by mortgages permitted
under the foregoing exceptions) and the Attributable Debt in respect of
all Sale and Leaseback Transactions entered into after the date of the
indenture (not including Attributable Debt in respect of any such sale
and Leaseback Transactions the proceeds of which are applied as set
forth below under "Limitation on Sale and Leaseback Transactions")
would not then exceed 5% of Consolidated Net Tangible Assets.
The following types of transactions will not be deemed to be mortgages
securing Indebtedness: any acquisition by Inco or any Restricted Subsidiary of
any property or assets subject to any reservation or exception under the terms
of which any vendor, lessor or assignor creates, reserves or excepts or has
created, reserved or excepted an interest in nickel, copper, cobalt, precious
metals, oil, gas or any other mineral or timber in place or the proceeds
thereof; any conveyance or assignment whereby Inco or any Restricted Subsidiary
conveys or assigns to any person or persons an interest in nickel, copper,
cobalt, precious metals, oil, gas or any other mineral or timber in place or the
proceeds thereof; or any mortgage upon any property or assets owned or leased by
Inco or any Restricted Subsidiary or in which Inco or any Restricted Subsidiary
owns an interest to secure to the person or persons paying the expenses of
developing or conducting operations for the recovery, storage, transportation or
sale of the mineral resources of the said property (or property with which it is
utilized) the payment to such person or persons of Inco's or the Restricted
Subsidiary's proportionate part of such development or operating expense.
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Limitation on Sale and Leaseback Transactions
Sale and Leaseback Transactions (which term is defined in the indenture
and which definition excludes certain temporary leases and leases between Inco
and a Restricted Subsidiary or between Restricted Subsidiaries) by Inco or any
Restricted Subsidiary of any Principal Property are prohibited by the indenture
unless: (1) immediately prior to the entering into of such arrangement, Inco or
such Restricted Subsidiary could create a mortgage on such Principal Property
securing Indebtedness in an amount equal to the Attributable Debt with respect
to the particular Sale and Leaseback Transaction; or (2) within 120 days after
the sale or transfer, an amount equal to the fair market value of the Principal
Property so sold and leased back at the time of entering into such Sale and
Leaseback Transaction (as determined by our board of directors) is applied to
the prepayment (other than mandatory prepayment) of Funded Debt of Inco or a
Restricted Subsidiary (other than Funded Debt held by the Company or any
Restricted Subsidiary).
Amalgamation and Merger
We have covenanted that we will not enter into any consolidation,
amalgamation or merger with or into any other corporation, or statutory
arrangement in which Inco participates, or any sale, conveyance or lease of all
or substantially all of our property unless (1) immediately after such
consolidation, amalgamation, merger, statutory arrangement, sale, conveyance or
lease the corporation (whether Inco or such other corporation) formed by or
surviving any such consolidation, amalgamation, merger or statutory arrangement,
or to which such sale, conveyance or lease will have been made, will not be in
default in the performance or observance of any of the terms, covenants and
conditions of the indenture to be kept or performed by Inco; (2) the due and
punctual payment of the principal of and interest on the debentures, and the due
and punctual performance and observance of all of the covenants and conditions
of the indenture to be performed or observed by Inco, will be expressly assumed,
by a supplemental indenture satisfactory in form to the trustee, executed and
delivered to the trustee, by the corporation (if other than Inco) formed by or
surviving any such consolidation, amalgamation, merger or statutory arrangement,
or by the corporation which will have acquired or leased such property; and (3)
if the corporation (whether Inco or another corporation) formed by or surviving
any such consolidation, amalgamation, merger or statutory arrangement, or to
which such sale, conveyance or lease will have been made, is organized under the
laws of a jurisdiction other than Canada or the United States or any province,
territory, state or district thereof (each, a "relevant taxing jurisdiction"),
we become or such successor corporation becomes obligated by a supplemental
indenture satisfactory in form to the trustee to make all payments on account of
the debentures without withholding of or deduction for, or on account of, any
present or future taxes or governmental charges ("specified taxes") imposed or
levied by a relevant taxing jurisdiction, unless we are required by law or the
interpretation or administration thereof to withhold or deduct such specified
taxes. In that event, we will pay such additional amounts ("other additional
amounts") as may be necessary in order that the net amounts received by each
holder of debentures after such withholding or deduction, including any
withholding or deduction with respect to such other additional amounts, shall
equal the respective amounts of principal and interest which would have been
receivable in respect of the debentures in the absence of such withholding or
deduction, except that no such other additional amounts shall be payable with
respect to payments made to a holder:
(a) if such holder is liable for such taxes by reason of such holder or
the beneficial owner of the debenture having a present or former
direct or indirect connection with the relevant taxing jurisdiction
other than the mere holding of the debenture or the receipt of
payment in respect thereof;
(b) for any taxes imposed as a result of the failure of such holder or
beneficial owner to comply with certification, identification,
declaration or similar reporting requirements, if such compliance is
required by statute or by regulation, administrative practice or an
applicable treaty, as a precondition to relief or exemption from
such tax;
(c) for any estate, inheritance, gift, sales, transfer, personal
property or similar tax, duty or fine, assessment or other
governmental charge;
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(d) for any tax which is payable otherwise than by withholding or
deduction from payment by us of principal of, or interest on, the
debenture;
(e) if the payment of other additional amounts would be for any
withholding or deduction imposed on a payment to an individual which
is required to be made pursuant to the European Union directive on
the taxation of savings adopted by members of the Economic and
Financial Affaires European Council (ECOFIN) on June 3, 2003 or any
law implementing or complying with or introduced in order to conform
to such directive; or
(f) any combination of items (a) to (e);
nor will such other additional amounts be paid with respect to a payment on the
debenture to a holder who is a fiduciary or partnership or other than the sole
beneficial owner of such debenture to the extent that a beneficiary or settlor
with respect to such fiduciary, or a member of such partnership or a beneficial
owner thereof, would not have been entitled to receive a payment of such other
additional amounts had such beneficiary, settlor, member or beneficial owner
received directly its beneficial or distributive share of such payment.
We shall have the right reasonably to require a holder as a condition of
payment of amounts on the debentures to present at such place as we shall
reasonably designate a certificate in such form as we may from time to time
prescribe to enable us to determine our duties and liabilities with respect to
(i) any specified taxes that we or any withholding agent may be required to
deduct or withhold from payments in respect of a debenture under any present or
future law of any relevant taxing jurisdiction or any regulation of any taxing
authority thereof and (ii) any reporting or other requirements under such laws
or regulations. To the extent not otherwise prohibited by applicable laws and
regulations, we shall be entitled to determine our duties and liabilities with
respect to such deduction, withholding, reporting or other requirements on the
basis of information contained in such certificate, or, if no certificate shall
be presented, on the basis of any presumption created by any such law or
regulation, and shall be entitled to act in accordance with such determination.
If, upon any such consolidation, amalgamation, merger or statutory
arrangement or upon any such sale, conveyance or lease, or upon any
consolidation, amalgamation, merger or statutory arrangement of any Restricted
Subsidiary, or upon the sale, conveyance or lease of all or substantially all
the property of any Restricted Subsidiary to any other corporation, any
Principal Property of Inco or of any Restricted Subsidiary or any shares of
stock or indebtedness of any Restricted Subsidiary owned by Inco or a Restricted
Subsidiary immediately prior thereto or immediately thereafter would thereupon
become subject to any mortgage securing any Indebtedness, unless assumption of
such mortgage would be permitted under the covenant described above under "--
Negative Pledge" without securing the outstanding debentures, Inco, prior to
such consolidation, amalgamation, merger, statutory arrangement, sale,
conveyance or lease, will secure or cause to be secured by supplemental
indenture the due and punctual payment of the principal of and interest, if any,
on the debentures (together with, if and to the extent Inco so determines, any
other indebtedness or other obligation then existing or thereafter created) by a
direct mortgage equally and rateably with (or prior to) any and all indebtedness
and obligations secured or to be secured thereby and so long as such
indebtedness is so secured.
DEFAULT AND RELATED MATTERS
Events of Default
You will have special rights if an Event of Default occurs and is not
cured, as described later in this subsection. The term "Event of Default" means
any of the following with respect to the debentures:
- we do not pay any interest on the debentures when such interest is due,
and such failure is continued for 30 days;
- we do not pay the principal of (or premium, if any, on) the debentures
when such principal (or premium) is due;
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- we fail to perform any other covenant of the Company in the indenture,
and such failure is continued for a period of 90 days after written
notice as provided in the indenture;
- we default under any indebtedness for money borrowed by the Company,
other than the debentures, which results in the acceleration of the
maturity of any such indebtedness of the Company if such indebtedness
is not discharged or such acceleration is not rescinded or annulled
within 10 days after written notice as provided in the indenture; and
- we file for bankruptcy in Canada or certain other events of bankruptcy,
insolvency or reorganization occur.
Remedies if an Event of Default Occurs
If an Event of Default with respect to the debentures occurs and is
continuing, either The Bank of New York, as trustee, or the holders of not less
than 25% in aggregate principal amount of the outstanding debentures may
declare, by written notice as provided in the indenture, the principal amount of
all debentures to be due and payable immediately. However, at any time after a
declaration of acceleration with respect to the debentures has been made and
before a judgment or decree for payment of the money due has been obtained, the
holders of a majority in aggregate principal amount of the outstanding
debentures may, under certain circumstances, rescind and annul such declaration
if all Events of Default with respect to the debentures, other than the
non-payment of accelerated principal, have been cured or waived as provided in
the indenture. For information as to waiver of defaults, see "Modification and
Waiver" below.
Except in cases of default, where the trustee has some special duties,
the trustee is not required to take any action under the indenture at the
request of any holders of the debentures unless the holders offer the trustee
reasonable protection from expenses and liability (called an "indemnity"). If
reasonable indemnity is provided, the holders of a majority in principal amount
of the outstanding debentures may direct the time, method and place of
conducting any lawsuit or other formal legal action seeking any remedy available
to the trustee. These majority holders may also direct the trustee in performing
any other action under the indenture.
Before you bypass the trustee and bring your own lawsuit or other formal
legal action or take other steps to enforce your rights or protect your
interests relating to the debentures, the following must occur:
- you must give the trustee written notice that an Event of Default has
occurred with respect to the debentures and remains uncured;
- the holders of at least 25% in principal amount of the outstanding
debentures must make a written request that the trustee take action
because of the default, and must offer reasonable indemnity to the
trustee against the cost and other liabilities of taking that action;
- the trustee shall have not received from the holders of a majority in
aggregate principal amount of the debentures a direction inconsistent
with such request and shall have failed to take any action for 60 days
after receipt of the above notice, request and offer.
However, you are entitled at any time to bring a lawsuit for the payment
of money due on your debentures on or after its due date.
The trustee may withhold notice of any continuing default from the
holders of the debentures (except a default in the payment of principal (or
premium, if any) or interest) if it determines in good faith that withholding
notice is in the interest of the holders.
Every year we will furnish to the trustee a written statement of certain
of our officers certifying that to their knowledge we are in compliance with the
indenture and the debentures or else specifying any default.
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MODIFICATION AND WAIVER
There are three types of changes we can make to the indenture and the
debentures.
Changes Requiring Your Approval. First, there are changes that cannot be
made to your debentures without your specific approval. The following is a list
of those types of changes:
- alter the manner or rate of accrual of interest on any debenture;
- change the stated maturity of the principal of, or any instalment of
principal of or interest on, any debenture;
- reduce the principal amount of any debenture or any amount payable upon
redemption of any debenture;
- make any debenture payable in money or securities other than that
stated in the indenture;
- change the place or currency of payment on a debenture;
- impair your right to sue for payment;
- reduce the percentage of holders of debentures whose consent is needed
to modify or amend the indenture;
- reduce the percentage of holders of debentures whose consent is needed
to waive compliance with provisions of the indenture or to waive
defaults; or
- modify any other aspect of the provisions dealing with modification and
waiver of the indenture where consent of the holders of debentures is
required.
Changes Requiring a Super-Majority Vote. The second type of change to
the indenture and the debentures is the kind that requires a vote in favor by
holders of securities issued under the indenture owning 66 2/3% of the principal
amount of the securities of each series issued under the indenture affected by
the change. Most changes fall into this category, except for clarifying changes
and some other changes that would not adversely affect holders of the
debentures.
Changes Not Requiring Approval. The third type of change does not
require any vote by holders of debentures. This type is limited to
clarifications and some other changes that would not adversely affect holders of
the debentures.
Waivers. An affirmative vote of 66 2/3% of the outstanding principal
amount of the debentures would be required for us to obtain a waiver of all or
part of the restrictive covenants described in the indenture. Otherwise, an
affirmative vote of not less than a majority in outstanding principal amount of
the debentures would be required to waive a past default with respect thereto.
However, we cannot obtain a waiver of a payment default or any other aspect of
the indenture or the debentures listed in the first category described
previously under "Changes Requiring Your Approval" unless we obtain your
individual consent to the waiver.
Further Details Concerning Voting. At any meeting where a vote is
required, you will be entitled to cast one vote for each $1,000 principal amount
of debentures owned by you. When taking a vote, we will use the principal amount
that would be due and payable on the voting date if the maturity of any
securities issued under the indenture at an original issue discount were
accelerated to that date because of a default.
Your debentures will not be considered "outstanding", and therefore will
not be eligible to vote, if we have deposited or set aside in trust for you
money or securities for their payment or redemption.
We will generally be entitled to set any day as a record date for the
purpose of determining the holders of outstanding debentures that are entitled
to vote or take other action under the indenture. If we set a record date for a
vote or other action to be taken by holders, that vote or action may be taken
only by persons who are holders of outstanding debentures on the record date.
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"STREET NAME" AND OTHER INDIRECT HOLDERS SHOULD CONSULT THEIR BANKS OR
BROKERS FOR INFORMATION ON HOW APPROVAL MAY BE GRANTED OR DENIED IF WE SEEK TO
CHANGE THE INDENTURE OR THE DEBENTURES OR REQUEST A WAIVER.
DEFEASANCE AND COVENANT DEFEASANCE
We may elect to be discharged from all of our obligations under the
outstanding debentures (defeasance), except for our obligations to:
- register the transfer or exchange of debentures;
- replace temporary or mutilated, destroyed, lost or stolen securities;
- maintain an office or agency for the securities; and
- hold moneys for payment of principal and interest in trust.
Alternatively, we may elect to be released from the following obligations
under the debentures (covenant defeasance):
- some provisions of the indenture relating to an event of default;
- some requirements regarding maintaining our corporate existence,
maintaining our properties and paying taxes and some other claims; and
- the restrictions described in "Negative Pledge" and "Limitation on Sale
and Leaseback Transactions" above.
In either case, in order to make this election we must first deposit with
the trustee enough money and/or U.S. government obligations to fund the payment
of the principal of and interest on the debentures. We must also obtain a legal
opinion that the holders of the debentures will not recognize income, gain or
loss for federal income tax purposes as a result of the defeasance or covenant
defeasance, and will be subject to federal income tax on the same amount in the
same manner and at the same time as would have been the case if the defeasance
or covenant defeasance had not occurred. For a defeasance, the legal opinion
must refer to and be based on a ruling of the Internal Revenue Service or a
change in federal income tax law occurring after the date of the indenture.
GOVERNING LAW
The indenture and the debentures will be governed by, and construed in
accordance with, the laws of the State of New York.
CONSENT TO SERVICE
In connection with the indenture, Inco will designate and appoint CT
Corporation System as its authorized agent upon which process may be served in
any suit or proceeding arising out of or relating to the indenture or the
debentures that may be instituted in any federal or New York state court located
in the Borough of Manhattan, in the City of New York, or brought by the trustee
(whether in its individual capacity or in its capacity as trustee under the
indenture), and will irrevocably submit to the non-exclusive jurisdiction of
such courts.
DISCHARGE OF THE INDENTURE
We may satisfy and discharge our obligations under the indenture with
respect to the debentures by delivering to the trustee for cancellation all
outstanding debentures or by depositing with the trustee or the paying agent,
after the debentures have become due and payable, whether at stated maturity, on
any redemption date or otherwise, cash sufficient to pay all of the outstanding
debentures and pay all other sums payable under the indenture by us.
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ENFORCEABILITY OF JUDGMENTS
Since substantially all of our assets, as well as the assets of most of
our directors and officers are located outside the United States, any judgment
obtained in the United States against us or certain of our directors or
officers, including judgments with respect to the payment of principal, premium,
if any, and interest on the debentures, may not be collectible within the United
States.
We have been informed by Osler, Hoskin & Harcourt LLP, our Canadian
counsel, that the laws of the Province of Ontario and the federal laws of Canada
applicable therein permit an action to be brought in a court of competent
jurisdiction in the Province of Ontario on any final and conclusive judgment in
personam of any federal or state court of competent jurisdiction located in the
State of New York (a "New York Court") against Inco, which judgment is
subsisting and unsatisfied for a sum certain with respect to the enforcement of
the indenture and the debentures that is not impeachable as void or voidable
under the laws of the State of New York if (1) the New York Court rendering such
judgment had jurisdiction over the judgment debtor, as recognized by the courts
of the Province of Ontario (and submission by Inco in the indenture to the
jurisdiction of the New York Court will be sufficient for that purpose); (2)
such judgment was not obtained by fraud or in a manner contrary to natural
justice, or obtained contrary to any order made by the Attorney General of
Canada under the Foreign Extraterritorial Measures Act (Canada) or by the
Competition Tribunal under the Competition Act (Canada) and the enforcement
thereof would not be inconsistent with public policy, as such terms are
understood under the laws of the Province of Ontario; (3) the enforcement of
such judgment would not be contrary to the laws of general application limiting
the enforcement of creditors' rights and does not constitute, directly or
indirectly, the enforcement of foreign revenue, expropriatory or penal laws in
the Province of Ontario; (4) a dispute between the same parties based on the
same subject matter has not given rise to a decision rendered by a court in the
Province of Ontario or been decided by a foreign authority and the decision
meets the necessary conditions for recognition under the laws of the Province of
Ontario; (5) no new admissible evidence relevant to the action is discovered
prior to the rendering of judgment by the court in the Province of Ontario; (6)
interest payable on the debentures is not characterized by a court in the
Province of Ontario as interest payable at a criminal rate within the meaning of
Section 347 of the Criminal Code (Canada); and (7) the action to enforce such
judgment is commenced within the appropriate limitation period; except that any
court in the Province of Ontario may only give judgment in Canadian dollars. In
the opinion of such counsel, there are no reasons under present laws of the
Province of Ontario for avoiding recognition of such a judgment of a New York
Court under the indenture or on the debentures based upon public policy.
INFORMATION CONCERNING THE TRUSTEE
We have appointed The Bank of New York as the trustee under the indenture
and as paying agent, registrar and custodian for the debentures. The trustee or
its affiliates provide banking and other services to us in the ordinary course
of their business. The Bank of New York currently acts as our trustee with
respect our existing indentures and securities issued under those indentures,
including our 7 3/4% Convertible Debentures due 2016, our Liquid Yield Option
Notes due 2021 (our LYON Notes), our 7 3/4% Notes due 2012, our 9.60% Debentures
due 2022, our 7.20% Debentures due 2032, our Convertible Debentures due 2023 and
our 3 1/2% Subordinated Convertible Debentures due 2052. The indenture provides
that we will indemnify The Bank of New York against any loss, liability or
expense incurred without negligence or bad faith of The Bank of New York in
connection with the acceptance or administration of the trust created by the
indenture.
LEGAL OWNERSHIP
STREET NAME AND OTHER INDIRECT HOLDERS
Investors who hold debentures in accounts at banks or brokers will
generally not be recognized by us as legal holders of debentures. This is called
holding in "street name." These intermediary banks, brokers and other financial
institutions pass along principal, interest and other payments on debentures,
either because
36
they agree to do so in their customer agreements or because they are legally
required to do so. If you hold debentures in street name, you should check with
your own institution to find out:
- how it handles securities payments, redemptions and notices;
- whether it imposes fees or charges;
- how it would handle voting if ever required;
- whether and how you can instruct it to send you debentures registered
in your own name so you can be a direct holder in the limited
circumstances described below; and
- how it would pursue rights under the debentures if there were a default
or other event triggering the need for holders to act to protect their
interests.
DIRECT HOLDERS
Our obligations, as well as the obligations of the trustee and those of
any third parties employed by us or the trustee, run only to persons or entities
who are the direct holders of the debentures, i.e., those who are registered as
holders of the debentures. As noted above, we do not have obligations to you if
you hold in street name or through other indirect means, either because you
choose to hold debentures in that manner or because the debentures are issued in
the form of global securities as described below. For example, once we make
payment to the registered holder, we have no further responsibility for the
payment even if that registered holder is legally required to pass the payment
along to you as a street name customer but does not do so.
GLOBAL SECURITIES
A global security is a special type of indirectly held security, as
described above under "-- Street Name and Other Indirect Holders."
The debentures will be issued initially in the form of global securities.
We do this by requiring that the global securities be registered in the name of
the nominee of DTC and by requiring that the global securities not be
transferred to the name of any other direct holder unless the special
circumstances described below occur. DTC is called the depositary.
Any person wishing to own a beneficial interest in a global security must
do so indirectly by virtue of an account with a broker, bank or other financial
institution that in turn has an account with the depositary.
SPECIAL INVESTOR CONSIDERATIONS FOR GLOBAL SECURITIES
As an indirect holder, an investor's rights relating to a global security
will be governed by the account rules of the investor's financial institution
and of the depositary, as well as general laws relating to securities transfers.
We do not recognize this type of investor as a registered holder of debentures
and instead deal only with the depositary that holds the global securities.
As an investor in debentures that are issued only in the form of global
securities, you should be aware that except in limited circumstances:
- you cannot get debentures registered in your own name;
- you cannot receive physical certificates for your interest in the
debentures;
- you will be a street name holder and must look to your own bank or
broker for payments on the debentures and protection of your legal
rights relating to the debentures. See "-- Street Name and Other
Indirect Holders";
- you may not be able to sell interests in the debentures to some
insurance companies and other institutions that are required by law to
own their securities in the form of physical certificates; and
37
- the depositary's policies will govern payments, transfers, exchange and
other matters relating to your interest in the global securities. We
and the trustee have no responsibility for any aspect of the
depositary's actions or for its records of ownership interests in the
global securities. We and the trustee also do not supervise the
depositary in any way.
SPECIAL SITUATIONS WHEN GLOBAL SECURITIES WILL BE TERMINATED
In a few special situations described later, the global securities will
terminate and interests in them will be exchanged for physical certificates
representing debentures. After that exchange, the choice of whether to hold
debentures directly or in street name will be up to you. You must consult your
own bank or broker to find out how to have your interests in debentures
transferred to your own name, so that you will be a direct holder.
The special situations for termination of global securities are:
- when the depositary notifies us that it is unwilling, unable or no
longer qualified to continue as depositary;
- when we notify the trustee that we wish to terminate the global
securities; or
- when an Event of Default on the debentures has occurred and has not
been cured.
Defaults are discussed above under "Description of Debentures -- Default
and Related Matters".
EXCEPT UNDER THE HEADING "LEGAL OWNERSHIP," IN THIS PROSPECTUS "YOU"
MEANS DIRECT HOLDERS AND NOT STREET NAME OR OTHER INDIRECT HOLDERS OF
DEBENTURES. INDIRECT HOLDERS SHOULD READ THE PREVIOUS SECTION ENTITLED
"-- STREET NAME AND OTHER INDIRECT HOLDERS" AND "-- SPECIAL INVESTOR
CONSIDERATIONS FOR GLOBAL SECURITIES."
RATINGS OF THE DEBENTURES
The following table discloses the credit ratings assigned to the
debentures by the following rating agencies:
RATING AGENCY RATING OUTLOOK
------------- ------ -------
Moody's Investor Services, Inc. ("Moody's")........ Baa3 stable
Standard & Poor's Corporation ("S&P").............. BBB- stable
Credit ratings are intended to provide investors with an independent
measure of credit quality of any issue of securities. The credit ratings
accorded to the debentures by the rating agencies are not recommendations to
purchase, hold or sell the debentures. Each rating should be evaluated
independent of any other rating. There is no assurance that any rating will
remain in effect for any given period of time or that any rating will not be
revised or withdrawn entirely by a rating agency in the future if in its
judgment circumstances so warrant.
Moody's credit ratings are on a long-term debt rating scale that ranges
from Aaa to C, which represents the range from highest to lowest quality of such
securities rated. According to the Moody's rating system, debt securities rated
Baa are considered as medium-grade obligations, that is they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such securities
lack outstanding investment characteristics and in fact have speculative
characteristics as well. Moody's applies numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa through Caa in its corporate bond rating
system. The modifier 1 indicates that the issue ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category. Moody's indicates in its rating assigned to the debentures that the
impact of nickel prices will remain an important issue in the overall Inco
credit rating and, accordingly, lengthy periods of sustained low nickel prices,
particularly in light of current cost pressures
38
and the sizable capital investment requirements for our Voisey's Bay and Goro
projects, could become an issue for the rating. Moody's also noted that
significant increases in the costs to develop our Goro project could also
negatively impact the rating.
S&P's credit ratings are on a long-term debt rating scale that ranges
from AAA to D, which represents the range from highest to lowest quality of such
securities rated. According to the S&P rating system, debt securities rated BBB
exhibit adequate protection parameters. However, insofar as a BBB rating is
concerned, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitments
on the securities. The ratings from AA to CCC may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within the major rating
categories.
EARNINGS COVERAGE
For 2002, we recorded total non-cash charges of $1,626 million, net of
deferred income and mining taxes of $789 million, under Canadian GAAP. As a
result of these non-cash charges, we had a net loss, before deduction of
interest and income and mining taxes, of $2,070 million for the twelve months
ended December 31, 2002 and, after giving effect to this offering, as if made as
of January 1, 2002, we would have had a deficiency of $2,172 million in the
amount required to cover our interest requirement of $102 million. Excluding
these non-cash charges, after giving effect to this offering as if made as of
January 1, 2002, consolidated net earnings, before deduction of interest and
income and mining taxes of $345 million for the twelve months ended December 31,
2002, would have been 3.4 times our interest requirement for 2002 of $102
million. If this offering had been made as of July 1, 2002, consolidated net
earnings, before deduction of interest and income and mining taxes of $200
million for the twelve months ended June 30, 2003 would have been 2.0 times our
interest requirement of $98 million. As our LYON Notes, our 3 1/2% Subordinated
Convertible Debentures due 2052 (the "Subordinated Debentures") and Convertible
Debentures due 2023 (the "Convertible Debentures") are treated as equity for
Canadian GAAP purposes, our interest requirement does not include the carrying
charges associated with these securities. Had we accounted for the LYON Notes,
the Subordinated Debentures and the Convertible Debentures as debt, as is
required by U.S. GAAP, the carrying charges of the LYON Notes, the Subordinated
Debentures and the Convertible Debentures would have been reflected in interest
expense and consolidated net earnings, before deduction of interest and income
and mining taxes, would have been 1.8 times our interest requirement for the
twelve months ended June 30, 2003 and we would have had a deficiency of $2,184
million in the amount required to cover our interest requirement for the twelve
months ended December 31, 2002.
The information included in this section is based upon our audited
financial statements prepared in accordance with Canadian GAAP, which differ in
certain material respects from U.S. GAAP. As a result of the above-referenced
non-cash charges, which totalled $2,247 million, net of deferred income and
mining taxes of $947 million, for U.S. GAAP purposes, we had a net loss, before
deduction of the cumulative effect of a change in accounting principles of $18
million, interest and income and mining tax expenses, of $2,867 million for the
twelve months ended December 31, 2002 and, after giving effect to this offering,
as if made as of January 1, 2002, we would have had a deficiency of $2,981
million in the amount required to cover our interest requirement of $114 million
for the twelve months ended December 31, 2002. Excluding these non-cash charges,
after giving effect to this offering as if made as of January 1, 2002,
consolidated net earnings, before deduction of interest and income and mining
taxes of $327 million for the twelve months ended December 31, 2002, would have
been 2.9 times our interest requirement of $114 million. If this offering had
been made as of July 1, 2002, excluding the cumulative effect of a change in
accounting principles of $18 million, consolidated net earnings, before
deduction of interest and income and mining taxes of $185 million for the twelve
months ended June 30, 2003, would have been 1.7 times our interest requirement
of $111 million. For further information regarding the differences between
Canadian GAAP and U.S. GAAP, see Note 22 to our consolidated financial
statements included in our 2002 10-K and Note 14 to our Second Quarter 10-Q.
39
CERTAIN INCOME TAX CONSIDERATIONS
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Sullivan & Cromwell LLP, our counsel, this section
describes the material United States federal income tax consequences of owning
the debentures. It applies to you only if you acquire debentures in the offering
at the offering price, you hold your debentures as capital assets for tax
purposes, and you are a United States holder.
You are a United States holder if you are a beneficial owner of a
debenture and you are:
- a citizen or resident of the United States,
- a domestic corporation,
- an estate whose income is subject to United States federal income tax
regardless of its source, or
- a trust if a United States court can exercise primary supervision over
the trust's administration and one or more United States persons are
authorized to control all substantial decisions of the trust.
This section does not apply to you if you are a member of a class of
holders subject to special rules, such as:
- a dealer in securities or currencies,
- a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings,
- a bank,
- a life insurance company,
- a tax-exempt organization,
- a person that owns debentures that are a hedge or that are hedged
against interest rate risks,
- a person that owns debentures as part of a straddle or conversion
transaction for tax purposes,
- a person whose functional currency for tax purposes is not the U.S.
dollar, or
- a person that actually or constructively owns 10% or more of our voting
stock.
If you purchase debentures at a price other than the offering price, the
amortizable bond premium or market discount rules may also apply to you. You
should consult your tax advisor regarding this possibility.
This section is based on the Internal Revenue Code of 1986, as amended,
its legislative history, existing and proposed regulations under the Internal
Revenue Code, published rulings and court decisions, all as currently in effect.
These laws are subject to change, possibly on a retroactive basis.
Please consult your own tax advisor concerning the consequences of owning
these debentures in your particular circumstances under the Internal Revenue
Code and the laws of any other taxing jurisdiction.
Payments of Interest
You will be taxed on interest on your debenture as ordinary income at the
time you receive the interest or when the interest accrues, depending on your
method of accounting for United States federal income tax purposes.
Interest paid on the debentures is income from sources outside the United
States, but, with certain exceptions, will be "passive" or "financial services"
income, which is treated separately from other types of income for purposes of
computing the foreign tax credit allowable to a United States holder.
40
Purchase, Sale and Retirement of the Debentures
Your tax basis in your debenture generally will be its cost. You will
generally recognize capital gain or loss on the sale or retirement of your
debenture equal to the difference between the amount you realize on the sale or
retirement, excluding any amounts attributable to accrued but unpaid interest
(which will generally be taxed as interest) and your tax basis in your
debenture. Capital gain of a non-corporate United States holder that is
recognized before January 1, 2009 is generally taxed at a maximum rate of 15%
where the holder has a holding period greater than one year.
Backup Withholding and Information Reporting
If you are a non-corporate United States holder, information reporting
requirements, on Internal Revenue Service Form 1099, generally will apply to:
- payments of principal and interest on a debenture within the United
States, including payments made by wire transfer from outside the
United States to an account you maintain in the United States, and
- the payment of the proceeds from the sale of a debenture effected at a
United States office of a broker.
Additionally, backup withholding will apply to such payments if you are a
noncorporate United States holder that:
- fails to provide an accurate taxpayer identification number,
- is notified by the Internal Revenue Service that you have failed to
report all interest and dividends required to be shown on your federal
income tax returns, or
- in certain circumstances, fails to comply with applicable certification
requirements.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Osler, Hoskin & Harcourt LLP, our counsel, the
following is a summary of the principal Canadian federal income tax
considerations generally applicable to prospective purchasers pursuant to this
offering who, at all relevant times, for the purposes of the Income Tax Act
(Canada) (the "Canadian Tax Act") and any applicable income tax treaty or
convention are not resident in Canada or deemed to be resident in Canada, hold
debentures as capital property, deal at arm's length with the Company and any
successor to the Company, do not use or hold, and are not be deemed to use or
hold, debentures in connection with a trade or business carried on, or deemed to
be carried on, in Canada and, in the case of insurers, will not carry on an
insurance business in Canada with which such debentures are effectively
connected or in respect of which the debentures would be designated insurance
property for the purposes of the Canadian Tax Act (each, a "Holder").
This summary is based upon the current provisions of the Canadian Tax Act
and Regulations thereunder and on counsel's understanding of the current
administrative and assessing practices and policies of the Canada Customs and
Revenue Agency published in writing prior to the date hereof. This summary takes
into account specific proposals to amend the Canadian Tax Act and the
Regulations thereunder publicly announced by or on behalf of the Minister of
Finance prior to the date hereof. This summary is not exhaustive of all Canadian
federal income tax considerations and, except as mentioned above, does not take
into account or anticipate possible changes in the law or in administrative or
assessing practices and policies whether by legislative, regulatory,
administrative or judicial action. This summary does not take into account
foreign (i.e., non-Canadian) tax considerations or Canadian provincial or
territorial tax considerations which may vary from the Canadian federal income
tax considerations described herein.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER AND
NO REPRESENTATION IS MADE WITH RESPECT TO THE CANADIAN TAX CONSEQUENCES TO ANY
PARTICULAR HOLDER. ACCORDINGLY, PROSPECTIVE PURCHASERS SHOULD
41
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE CANADIAN TAX CONSIDERATIONS
RELEVANT TO THEM, HAVING REGARD TO THEIR PARTICULAR CIRCUMSTANCES.
Under the Canadian Tax Act, interest or premium payable on the debentures
to Holders will be exempt from non-resident withholding tax. No other taxes on
income (including taxable capital gains) will be payable under the Canadian Tax
Act in respect of the acquisition, holding, redemption or disposition of the
debentures, or the receipt of interest, premium or principal thereon by a Holder
solely as a consequence of such acquisition, holding, redemption or disposition
of the debentures.
42
UNDERWRITING
Citigroup Global Markets Inc. is acting as sole bookrunning manager of
the offering and with J.P. Morgan Securities Inc. acting as representatives of
the underwriters named below.
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has agreed to
purchase, and we have agreed to sell to that underwriter, the principal amount
of debentures set forth opposite the underwriter's name.
PRINCIPAL AMOUNT
OF DEBENTURES
UNDERWRITER ----------------
Citigroup Global Markets Inc. .............................. $105,000,000
J.P. Morgan Securities Inc. ................................ 105,000,000
Merrill, Lynch, Pierce, Fenner & Smith
Incorporated................................... 22,500,000
Morgan Stanley & Co. Incorporated........................... 22,500,000
RBC Dominion Securities Corporation......................... 22,500,000
Scotia Capital (USA) Inc.................................... 22,500,000
------------
Total..................................................... $300,000,000
============
The underwriting agreement provides that the obligations of the
underwriters to purchase the debentures included in this offering are subject to
receipt of legal opinions and to other conditions. The obligations of the
underwriters under the underwriting agreement may be terminated if in their
reasonable opinion there is any development or occurrence which materially
adversely affects or involves the U.S. financial markets or upon certain other
stated events. The underwriters are obligated to purchase all the debentures if
they purchase any of the debentures. The issue price of the debentures was
determined by negotiations between the underwriters and us.
The underwriters propose to offer some of the debentures directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the debentures to dealers at the public offering price
less a concession not to exceed .425% of the principal amount of the debentures.
The underwriters may allow, and dealers may reallow, a concession not to exceed
..25% of the principal amount of the debentures on sales to other dealers. After
the underwriters have made a reasonable effort to sell all of the debentures at
the initial public offering price, the price may be decreased, and further
changed from time to time, to an amount not greater than the initial public
offering price, and the concession and discount may be changed. The compensation
realized by the underwriters will be decreased by the amount that the aggregate
price paid by purchasers for the debentures is less than the gross proceeds paid
by the underwriters to us.
The following table shows the commissions that we are to pay to the
underwriters in connection with this offering (expressed as a percentage of the
principal amount of the debentures).
PAID BY INCO
------------
Per debenture............................................... .675%
In connection with the offering, Citigroup, on behalf of the
underwriters, may purchase and sell debentures in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of debentures
in excess of the principal amount of debentures to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the debentures in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids or purchases
of debentures made for the purpose of preventing or retarding a decline in the
market price of the debentures while the offering is in progress.
43
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Citigroup, in covering syndicate short positions or making stabilizing
purchases, repurchases debentures originally sold by that syndicate member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the debentures. They may also cause the price of
the debentures to be higher than the price that otherwise would exist in the
open market in the absence of these transactions. The underwriters may conduct
these transactions in the over-the-counter market or otherwise. If the
underwriters commence any of these transactions, they may discontinue them at
any time.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the debentures. In addition, neither
we nor any of the underwriters described above makes any representation that the
underwriters will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
The debentures are a new issue of securities with no established trading
market. We do not intend to apply for listing of the debentures on any
securities exchange or for quotation of the debentures on any automated dealer
quotation system. We have been advised by the underwriters that they currently
intend to make a market in the debentures after completion of the offering.
However, they are under no obligation to do so and may discontinue any
market-making activities at any time without notice. We cannot assure the
liquidity of the trading market for the debentures or that an active public
market for the debentures will develop. If an active public trading market for
the debentures does not develop, the market price and liquidity of the
debentures may be adversely affected.
We estimate that our total expenses for this offering will be $800,000.
The underwriters have performed investment banking and advisory services
for us from time to time for which they have received customary fees and
expenses. The underwriters may, from time to time, engage in transactions with
and perform services for us in the ordinary course of their business. Each of
Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Merrill, Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, RBC
Dominion Securities Corporation and Scotia Capital (USA) Inc. is an affiliate of
a bank that is a lender to us under certain bank facilities under which no
amounts are currently outstanding.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters.
This prospectus forms part of a registration statement on Form F-9 filed
with the SEC and with the Ontario Securities Commission to register the
debentures under the United States Securities Act of 1933, as amended. This
prospectus does not qualify the distribution of any securities in any province
of Canada. The debentures may only be offered or sold, directly or indirectly,
in Canada, or to or for the benefit of any resident thereof, pursuant to
exemptions from the prospectus requirements of Canadian securities laws, and
only by securities dealers registered in the applicable province or pursuant to
exemptions from the registered dealer requirements.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the United States Securities Act of 1933, as
amended, or to contribute to payments the underwriters may be required to make
because of any of those liabilities.
44
VALIDITY OF THE DEBENTURES
The validity of the debentures under New York law will be passed upon for
us by Sullivan & Cromwell LLP, New York, New York. Certain other legal matters
will be passed on for us by Stuart F. Feiner, Inco's Executive Vice President,
General Counsel and Secretary, Julie A. Lee Harrs, Inco's Associate General
Counsel and Assistant Secretary, and Osler, Hoskin & Harcourt LLP, Toronto,
Ontario and New York, New York. As of the date hereof, lawyers with Osler,
Hoskin & Harcourt LLP own, directly or indirectly, in the aggregate, less than
1% of our outstanding common shares. Certain legal matters will be passed upon
for the underwriters by Shearman & Sterling LLP, Toronto, Ontario.
EXPERTS
The consolidated financial statements of Inco and our subsidiaries as of
December 31, 2002, 2001 and 2000 and for each of the years in the three year
period ended December 31, 2002, which appear in the 2002 10-K, have been
incorporated herein by reference in reliance upon the report of
PricewaterhouseCoopers LLP, independent auditors, incorporated herein by
reference, and upon the authority of said firm as experts in accounting and
auditing. The statements as to our reserves which appear in our 2002 10-K have
been incorporated by reference herein upon the authority, as experts, of Robert
A. Horn, Vice-President, Exploration and Robert C. Osbourne, Consulting
Geologist, Laterites, to the extent described in our 2002 10-K.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the United States
Securities Exchange Act of 1934, as amended, and in accordance therewith file
reports and other information with the SEC. Our recent SEC filings are available
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
and copy any document we file with the SEC at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on
the operations of the public reference facilities and copying charges. Copies of
reports and other information concerning Inco may be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
This prospectus constitutes part of a registration statement filed by us
with the SEC under the United States Securities Act of 1933, as amended. As
permitted by the rules and regulations of the SEC, this prospectus does not
contain all of the information contained in the registration statement and the
exhibits and schedules thereto and reference is hereby made to the registration
statement and the exhibits and schedules thereto and further information with
respect to us and the debentures offered hereby. Statements contained herein
concerning the provisions of any document filed as an exhibit to the
registration statement or otherwise filed with the SEC are not necessarily
complete, and in each instance reference is made to the copy of such document as
so filed. Each statement is qualified in its entirety by such reference.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, filed with the applicable securities commissions
or similar authorities in all of the provinces of Canada, are incorporated by
reference herein and form an integral part of this prospectus:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
2002;
- our Proxy Circular and Statement dated February 10, 2003, other than
the sections entitled "Report of the Management Resources and
Compensation Committee on Executive Compensation" and "Comparative
Shareholder Return";
- our material change report dated March 4, 2003 relating to the issuance
of our 3 1/2% Subordinated Debentures due 2052 and Convertible
Debentures due 2023 (and our related Form 8-K filed with
45
the SEC on March 11, 2003 but only to the extent the information
contained therein is also contained in our material change report dated
March 4, 2003);
- our Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2003; and
- our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2003.
Although not incorporated by reference, a technical report pertaining to
our Goro nickel-cobalt project, dated effective as of December 31, 2002, and a
technical report pertaining to our Voisey's Bay project, dated effective August
31, 2003, have been filed with the Canadian securities regulatory authorities.
Material change reports (other than confidential reports), annual and
interim financial statements, annual information forms and information circulars
which are filed by us with a securities commission or any other similar
authority in Canada after the date of this prospectus and prior to the
termination of the distribution under this prospectus shall be deemed to be
incorporated by reference into this prospectus. All documents to be incorporated
in this prospectus after the date of this prospectus (or documents containing
the same information) will be filed with the SEC.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED
FOR THE PURPOSES OF THIS PROSPECTUS TO THE EXTENT THAT A STATEMENT CONTAINED
HEREIN, OR IN ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH ALSO IS OR IS DEEMED
TO BE INCORPORATED BY REFERENCE HEREIN, MODIFIES OR SUPERSEDES THAT STATEMENT.
THE MODIFYING OR SUPERSEDING STATEMENT NEED NOT STATE THAT IT HAS MODIFIED OR
SUPERSEDED A PRIOR STATEMENT OR INCLUDE ANY OTHER INFORMATION SET FORTH IN THE
DOCUMENT THAT IT MODIFIES OR SUPERSEDES. THE MAKING OF A MODIFYING OR
SUPERSEDING STATEMENT SHALL NOT BE DEEMED AN ADMISSION FOR ANY PURPOSES THAT THE
MODIFIED OR SUPERSEDED STATEMENT, WHEN MADE, CONSTITUTED A MISREPRESENTATION, AN
UNTRUE STATEMENT OF A MATERIAL FACT OR AN OMISSION TO STATE A MATERIAL FACT THAT
IS REQUIRED TO BE STATED OR THAT IS NECESSARY TO MAKE A STATEMENT NOT MISLEADING
IN LIGHT OF THE CIRCUMSTANCES IN WHICH IT WAS MADE. ANY STATEMENT SO MODIFIED OR
SUPERSEDED SHALL NOT BE DEEMED, EXCEPT AS SO MODIFIED OR SUPERSEDED, TO
CONSTITUTE A PART OF THIS PROSPECTUS.
This prospectus has been filed under procedures in Ontario that permit
certain information about these securities to be determined subsequent to the
date of this prospectus and that permit the omission of that information from
this prospectus. A supplemented prospectus containing the omitted information
will be prepared and delivered to purchasers. All disclosure contained in any
supplement to this prospectus or supplemented prospectus that is not contained
in this prospectus will be incorporated by reference into this prospectus as of
the date of the supplement or supplemented prospectus.
Upon a new annual information form and annual financial statements being
filed by us with, and where required, accepted by, the Ontario Securities
Commission during the currency of this prospectus, the previous annual
information form, the previous annual financial statements and all interim
financial statements, material change reports and information circulars filed
prior to the commencement of the then current fiscal year will be deemed no
longer to be incorporated by reference into this prospectus for purposes of
future offers and sales of debentures hereunder.
INFORMATION HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS FROM
DOCUMENTS FILED WITH SECURITIES COMMISSIONS OR SIMILAR AUTHORITIES IN CANADA AND
FILED WITH THE SEC. COPIES OF THE DOCUMENTS INCORPORATED IN THIS PROSPECTUS BY
REFERENCE MAY BE OBTAINED ON REQUEST WITHOUT CHARGE FROM THE OFFICE OF THE
SECRETARY, INCO LIMITED, 145 KING STREET WEST, SUITE 1500, TORONTO, ONTARIO, M5H
4B7, TELEPHONE (416) 361-7511.
DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT
The following documents have been filed with the SEC as part of the
Registration Statement of which this prospectus forms a part: the documents
referred to under the heading "Documents Incorporated by Reference"; consents of
independent accountants, experts and counsel; powers of attorney; the indenture
(as supplemented); the underwriting agreement; and the statement of Eligibility
of the Trustee on Form T-1.
46
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
ANY OFFER HEREUNDER. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREUNDER IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
47
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$300,000,000
INCO LIMITED
5.70% DEBENTURES DUE 2015
INCO LOGO
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PROSPECTUS
SEPTEMBER 23, 2003
------------
CITIGROUP
JPMORGAN
MERRILL LYNCH & CO.
MORGAN STANLEY
RBC CAPITAL MARKETS
SCOTIA CAPITAL
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