The Dominican nickel dispute

D'ARCY JENISH February 22 1988

The Dominican nickel dispute

D'ARCY JENISH February 22 1988

The Dominican nickel dispute


After running a ferronickel mine in the Dominican Re public for 15 years, Torontobased Falconbridge had achieved a dismal profit and loss record. In seven profitable years the mine had earned $53 million, but in eight unprofitable years the mine had lost $197 million on its ferronickel, a form of nickel combined with iron. Throughout 1987, world nickel prices

Throughout 1987, world rose, demand was high and inventories low. As a result, Falconbridge completed a profitable year in the Dominican Republic for only the first time since 1979. Then, in late November the country’s 80-year-old, legally blind president, Joaquin Balaguer, imposed the nation’s first export tax on ferronickel, one of the country’s two main exports. But the action led to a major dispute with Falconbridge, the Dominican Republic’s sole producer of the commodity.

The tax was unexpected—and for the Dominican Republic, unprecedented-leading to a high-stakes confrontation between Balaguer’s government and Falconbridge. Falconbridge suspended shipments three weeks later, and that put further upward pressure on prices. Now both sides

are trying to negotiate a settlement by the end of March.

Canadian diplomatic sources, as well as some Toronto mining analysts, contend that both the Balaguer government and Falconbridge are anxious to reach a face-saving compromise. Dominican presidential adviser Mario Read Vittini told Maclean's that the government needs money to finance an ambitious public works program. Officials at Fal-

conbridge, the second-largest nickel producer in the non-Communist world after Toronto-based Inco Ltd., want to resume regular shipments because nickel demand and prices remain strong. And the mine should be profitable again this year. Most observers say that the company can only stockpile nickel ore for another month before it will have to suspend operations, but Falconbridge chairman William James declined to

disclose his strategy. Said James: “I do not threaten governments. That would be counterproductive.” Caribbean-watchers have traditionally regarded Balaguer, a conservative politician now serving his fifth term as president, as receptive to foreign investment. And Read Vittini said that the government has no intention of nationalizing the mine. But the tiny nation of 6.5 million, which shares the island of Hispaniola with impoverished Haiti, faces huge economic problems. Since he was elected in May, 1986, for a fifth term as president, Balaguer has tried to stimulate economic growth through public works projects. The economy grew by nine per cent last year, but the gains were offset by a falling peso, a $l.l-billion trade deficit and 35-

per-cent inflation. Said Read Vittini: “The state needs more revenues. We have to draw from our natural resources.”

That was the reason that the government abruptly imposed export taxes on minerals, as well as sugar, the country’s other leading export. Because the largest sugar plantations are stateowned, the sugar tax has not been con-

troversial. But the ferronickel tax led to an outburst of anti-Falconbridge hostility in the republic. Labor leaders and some church officials, traditional adversaries of Balaguer, have applauded the tax. They say that Falconbridge has never paid royalties or export duties on its Dominican production and only rarely paid income tax.

Falconbridge chairman James told Maclean 's that an agreement signed with the Dominican government in 1969, while Balaguer was president, exempted the mine from import and export taxes forever. The agreement also stipulated that Falconbridge would pay income tax at a rate of 33 per cent of net profits. By comparison, the company pays about 37 per cent combined federal and provincial tax on its Canadian profits. But Falconbridge has lost far

more money on its Dominican mine than it has made, and it has had to pump in money to cover operating costs and interest payments. In fact, the debt on the mine has risen to the current $277 million from $180 million when production began.

Although Falconbridge holds the rights to huge deposits of high-quality Dominican ore, the company has endured 15 years of adverse market conditions. Falconbridge has to import oil in order to generate electricity at its Dominican mine, and oil prices began rising shortly after the mine opened in 1972, continuing to increase until the early 1980s. At the same time, world demand for nickel, which had grown at an annual rate of roughly six per cent since 1950, began to stagnate in 1974 and did not recover until 1984, said James. During that decade of low prices and overproduction, nickel producers closed or curtailed operations at high-cost mines and smelters, reduced their debts and laid off workers in order to survive. In Sudbury, Ont., where one of Falconbridge’s major Canadian mines is located, the company has slashed its workforce to 2,200 from 4,000 in 1982. Falconbridge has also spent about $100 million on new buildings and equipment in Sudbury, which have allowed the company to maintain its output with far fewer workers.

According to several industry ana-

lysts, Falconbridge has emerged from the downturn with one of the strongest balance sheets of any Canadian basemetals producer. Ernest Nutter, mining and metals analyst with Torontobased Davidson Partners Ltd., said that the company has reduced its debt to about $530 million from roughly $1.4 billion in less than two years by selling assets and issuing shares. The number of Falconbridge

shares outstanding jumped to 74 million in September, 1987, from 57.4 million at the end of 1986. And early last month the company issued another six million shares, which raised another $142 million. Said Nutter: “These guys are coming into an earnings situation in the next year that is very strong.”

The impact of Falconbridge’s internal restructuring, combined with improved world market conditions, was evident by last October when the company reported a profit of $30 million for the first nine

months of the year. During the same period, the company earned nearly $3 million on its Dominican mine, compared with a loss of just over $1 million for all of 1986. Less than one month after the results were announced, the Balaguer government proclaimed its export duty. Said Read Vittini: “Falconbridge exploits a nonrenewable resource and in almost 20

years has paid the government less than $4 million. Do you think Canada would accept having its resources taken without getting anything?”

Falconbridge responded by suspending shipments from the Dominican Republic, which account for about five per cent of the world supply. With inventories already at their lowest levels in years, the action drove up the international spot-market price to $5.51 per pound. A year earlier, nickel had languished at $2.21 per pound. James said that the company has shipped three freighters of ferronickel since Dec. 11, but that it still has a two-month supply stockpiled and that the mine is operating at full capacity. James would not disclose how long the company can continue storing the material before it would be forced to close the mine.

He also said that he could accept “some reasonable type of tax that is fair.” But he added that he objects to the current tax for two reasons: it is imposed on revenue, rather than profit; and it fluctuates with changes in the value of the Dominican currency. James said that as the peso falls against the U.S. dollar, the export tax rises. At current exchange rates, the Dominican government could skim off 20 per cent of Falconbridge’s revenue from the mine, or about $35 million per year. And if the value of the peso continues to decline, the tax could climb to 30 per cent of revenues.

Meanwhile, the Balaguer government has appointed a four-member negotiating team, which includes Read Vittini and Finance Minister José Carlos Asias. So far, said James, the two sides have only held preliminary discussions to set the terms for the resumption of regular shipments. Falconbridge has also deposited $3.8 million with the government as a show of good faith.

Representatives from both sides have declared that they want a settlement by the end of March. But they are still far apart. Falconbridge officials insist that only profits can be taxed. Government negotiators insist that the company can no longer extract a mineral resource without contributing to the national treasury, and that a revenue tax is needed to accomplish that. Unless the two sides can reach a compromise, the dispute could trigger another major disruption of world nickel markets—and Falconbridge’s anticipated profits from the Dominican Republic will likely disappear.