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DOING SOME DIGGING Chinese Offer $6.7 Billion for Noranda

A thousand years ago the Chinese invented fireworks, which delight and surprise people all over the world. Today, t...


A thousand years ago the Chinese invented fireworks, which delight and surprise people all over the world. Today, the Chinese have launched an equally explosive idea: the purchase of Canada’s largest mining company, NORANDA INC., by CHINA MINMETALS, an enterprise controlled by the communist Chinese government. The price tag: $6.7 billion.

The Canadian press has reacted to the proposal with horror. To see Canada’s flagship miner pass into foreign control is unthinkable. The National Post has demanded that the Canadian government put a stop to the takeover. Yet Noranda is a global company, employing 15,000 people in 17 countries. Those people, too, may have reservations about the deal. (I can’t imagine the American employees wanting anything to do with a communist-owned company.)

The foreign press is more analytical, noting that China is cash-rich and commodity-starved. The 1.3-billion-plus Chinese citizens need more raw materials than the country can supply domestically to support economic growth. The Noranda offer is merely one, although so far the largest, excursion into foreign enterprise. Buying the world’s third-largest zinc producer and ninth-largest copper producer is sound strategy from the Chinese point of view. The cash comes from ballooning foreign exchange reserves, estimated to be $630 billion in the first seven months of 2004.

The sweetener in the deal is FALCONBRIDGE, which is controlled 59% by Noranda. This copper/nickel producer plays a large part in Noranda’s profitability. With revenues of $2.9 billion in 2003, Falconbridge contributed substantially to Noranda’s $6.5 billion income. All together, Noranda is a producer of gold, copper, nickel, zinc, lead, cobalt, silver and aluminum. No wonder the Chinese are interested.

CMJ readers are familiar with Noranda’s business, but what of China Minmetals? It’s a 50-year-old company that had production revenues of nearly $14.5 billion in 2003. The same year, its metals futures business amounted to $35 billion. Clearly Minmetals is a global player.

Questions about the future of Noranda as we know it are many. It seems unlikely that Minmetals would break up the company, with the stated exception of its aluminum interests. The Chinese have cash, so they don’t need to sell off bits and pieces of Noranda to pay for it. Whether the Noranda and Falconbridge corporate identities will remain intact is not known. The thought of melding Canadian and Chinese business management styles boggles the mind.

Thinking back on some of the corporate shuffling Noranda did over the past year or so makes more sense now that we know the company is for sale. (Word of a potential sale was leaked as early as June 2004.) The slate of officers and directors of the two companies became nearly identical. The Noranda Income Fund was created to distribute profits from zinc refining. The result was to streamline management and tighten Noranda’s control over Falconbridge.

The sale of Noranda to Minmetals is not yet a done-deal. Talks between the two companies are exclusive, meaning that other offers will not be entertained at this time. Minmetals wants to buy 100% of Noranda’s outstanding shares at a small premium over the common share price. Today it is reported that Minmetals has lined up the financing, perhaps from the China Development Bank.

Noranda’s parent company, BRASCAN, supports the Chinese offer. Brascan holds about 41% of Noranda shares and would profit handsomely from the sale.

Personally, I think the Minmetals deal will go through. It won’t happen overnight; there will be stiff opposition and the federal government will wade into the fray. But in the end I may be buying fireworks to mark the successful outcome.


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