Inco expects rise in production costs due to higher fuel prices
Leony Aurora, The Jakarta Post, Jakarta
Publicly listed nickel mining company PT International Nickel Indonesia will see a 7 percent rise in its unit cost of production due to the government's decision to apply market prices on fuel supplied to mining companies.
Production costs will rise by 15 U.S. cents per pound, starting with July's delivery of fuel, president director Bing Tobing said on Thursday.
"Energy represents about 40 percent of our costs last year," Bing said.
Unit cost production stood at US$2.23 per pound in the three months ending on June 30.
The Indonesian unit of the world's second largest mining company Inco Ltd. uses about 3.4 million barrels of high sulfur fuel oil (HSFO) and between 80 million liters and 85 million liters of diesel fuel per year in its operations.
State oil and gas firm Pertamina, with leave from the government, has announced that mining companies and exporting industries will have to pay market prices for fuel. Diesel fuel prices more than doubled from the subsidized Rp 2,200 (about 22 U.S. cents) a liter to Rp 4,740 per liter.
The government is seeking to ease pressure on the state budget, which, as oil prices soar to above $60 per barrel, may see fuel subsidies to jump to Rp 138 trillion. It has allocated Rp 76.5 trillion of fuel subsidy in the budget, that presumed an oil price of $45 per barrel.
Inco's chief financial officer Jan Kees van Gaalen said that the company was reviewing three options to cut fuel cost, namely to convert diesel generators to using the cheaper HSFO, convert part of HSFO used in processing to pulverized coal and substitute ore-transporting trucks with a conveyor belt system.
Inco is planning to increase its hydroelectric capacity by constructing a 90-megawatt hydropower plant near its mine in Sorowako, South Sulawesi, to enable it to hike output to 200 million pounds of nickel in matte in 2009 from the 160 million pounds targeted this year.
The increased power surge would reduce production costs by between 10 U.S. cents and 15 U.S. cents per pound, Bing said.
The development of the $280 million dam is stalled as Inco has not secured a permit to increase its mining output from the government, which has insisted that the company double its royalties in the event nickel prices go above $3.50 per pound.
"We have not reached an agreement on the formula (for compensation) for the permit," said Bing.
Inco's realized price for the commodity averaged $5.85 per pound in the second quarter of the year, compared with $5.15 per pound in the first quarter.
The company reported a 13 percent rise in its unaudited net profit in the year's first semester to $141.9 million from $126 million booked in the previous year on strong global prices.