Higher energy costs strain metals producers' costs Wednesday November 22, 1:27 PM EST (All figures in U.S. dollars unless otherwise noted)

By Lesley Wroughton

TORONTO, Nov 22 (Reuters) - Canadian base metals producers -- among world leaders in the industry -- are at pains to conserve energy as spiraling oil prices dent operating costs and threaten to do the same next year.

U.S. Benchmark West Texas Intermediate crude oil in the first nine months of this year averaged $29.73 a barrel compared with $17.52 in the same period in 1999 -- a 70 percent increase. Canadian spot natural gas averaged C$4.23 per gigajoule versus C$2.67 in nine months of 1999.

The increases took most Canadian producers in this energy intensive industry by surprise.

"There is a big effort under way to conserve energy in the company and find ways to use energy more efficiently in all of our operations," said Steve Mitchell, spokesman for Inco Ltd. (N), the Western world's biggest nickel producer.

Inco and Falconbridge Ltd. (FL), another major nickel producer, are particularly sensitive to energy costs because of their remote nickel laterite operations, which need more power to extract the nickel from the rock.

Falconbridge said higher oil and gas prices drained operating costs by about C$41 million ($26.4 million) in the first nine months this year -- C$11.1 million alone in the third quarter ended Sept. 30.

The company has already warned it might have to suspend operations at its Falcondo laterite mine in the Dominican Republic if oil prices rise too high and nickel prices fall.

For every $1 a barrel increase in the oil price, Falcondo's cash operating cost per pound of nickel rises five cents, the company said. During the third quarter, Falcondo's cash operating cost was $2.96 a pound of nickel, compared with an overall cash costs range of around $2.60 a pound.

"If oil prices do go down, they would have an immediate effect on our Falcondo operations because we buy oil every second week at market price," Falconbridge spokesman Craig Crosby told Reuters.

Inco, the Western world's biggest nickel producer, has said it expects energy costs to hit its unit cash cost in 2000 by about eight cents a pound of nickel for the whole year.

Inco said its Indonesian unit PT Inco, a laterite mine, had been hardest hit. The company said the average costs of crude oil was $31.58 a barrel in the third quarter of 2000, which drove PT's unit cash cost up by 16 cents a pound of nickel.

For every $1 increase in the price of oil per barrel, PT Inco's costs rise two cents a pound of nickel produced.

Inco said it spent 80 percent more on natural gas supplies at its large Sudbury, Ontario, mines in 2000 than in 1999. This increased the unit costs by five cents a pound for nickel.

Inco is looking to identify ways to offset the increase elsewhere in its business.

Zinc miner Cominco Ltd. (CLT) said higher fuel prices will affect the company by about C$10 million in 2000.

Cominco has operations in Canada's frozen North which are resupplied only during summer months, a time when energy prices were at their highest.

Its Red Dog mine in northwestern Arctic, for example, consumes about 17-18 million gallons of fuel a year.

"At Red Dog, for example, half of their oil consumption this year was cheaper oil that was brought in last year so we're really going to see the full impact of the higher oil prices for the balance of this year and into next year," a company official said.

Not all is bad for Cominco. It benefited from sales of surplus power into the U.S. Pacific Northwest at rates far exceeding normal levels, which offset the negative effect of higher oil costs.

Noranda Inc. (NOR), the base metals and mining company which operates in eight countries, said higher energy costs depressed its cash operating margins by about C$16 million in the third quarter of this year.

Spokesman Denis Couture said the higher prices mainly affected its Altonorte smelter in Chile, which is a net importer of oil.

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-- Martin Thompson (mthom1927@aol.com), November 22, 2000