Sudbury gears up for another 100 years

Sudbury has been a mining town for over a century. The merger of Falconbridge Ltd. and Inco Ltd., which should be finalized early this year, will strengthen the town’s foundations, which are built on natural resources. Once again this Northern Ontario region will be the undisputed Nickel Capital of the World. Residents can look forward to new headframes rising over the landscape and steady employment in all sectors.

The region that is home to the City of Sudbury was explored by the French and Jesuit missionaries as early as the 17th century. The rich fur trade attracted the Hudson’s Bay Company in 1849. Thirty years later when the trading post closed, the area was known for lumbering and mining. The railroad arrived in 1883, and the Canadian Pacific Railway made Sudbury its regional headquarters.

The same year the trains arrived, the first discoveries of rich copper-nickel ore were made by the Canadian Copper Company, which became International Nickel and is today Inco. In 1896 the Copper Cliff mine began production, and it continues to this day. The First World War increased the strategic importance of nickel. Between the wars, in1928, Falconbridge Nickel Mines was incorporated. Its first mine, the Falconbridge mine, began production in 1930 and continued until reserves were exhausted in 1984.

The merger

In mid-October, 2005, Inco launched a friendly takeover bid for Falconbridge. The US$9.4-billion deal will make Inco the world’s largest nickel producer (a position it lost to Norilsk in the early 1980s) and eighth largest copper producer. By 2009, the company’s annual output is projected to be 1.0 billion lb of nickel and 2.4 billion lb of copper.

Representatives of both Inco and Falconbridge who were interviewed for this story say they began to seriously toss around the idea of a merger as early as the summer of 2005. Noranda had broken off takeover talks with China Minmetals, owned by the communist government of the world’s most-populous country. Instead, in June Noranda merged with Falconbridge, an arrangement that went very smoothly. Then, in September Xstrata of Switzerland bought about 20% of Falconbridge’s common shares, and the possibility of a creeping takeover was raised in the press, because Xstrata is seldom content with a minority interest. That prospect died with the announcement of the Inco-Falconbridge merger, which keeps strategic Canadian resources under Canadian control.

“In acquiring Falconbridge we know we’re getting truly excellent assets, some of the best in the world. But we know we’re getting much more than that,” said Inco’s Scott Hand. “We’re getting great people with a great tradition and a great culture, one that will fit very well with ours.

“Of course, in a lot of mergers and acquisitions what sounds great to shareholders often doesn’t sound nearly as good to employees and to communities. This time it’s different,” he said. “Our solution is good news for our employees and for our mining communities. Over the medium and longer term, this combination will mean growth in Sudbury, because we will be bringing on new mine development [e.g., Totten and Kelly Lake] sooner.”

The new Inco management will include many familiar faces. Scott Hand remains chairman and CEO, and Derek Pannell will move from Falconbridge into the job of Inco president. Other members of the team, the executive vice-presidents, will be Ron Aelick and Mark Cutifani (nickel opErations), Peter Kukielski (copper and other metals operations), Aaron Regent (strategy and corporate development), Peter Goudie (marketing), and Steve Douglas (chief financial officer).

The merger announcement was greeted with smiles all around. Executives of both companies are eager to put their plans in motion. In Sudbury, the Steelworkers union, which represents Inco employees, is in favour of the merger. The Mine Mill local whose members are Falconbridge workers gave the deal a qualified endorsement as long as members’ jobs are protected. On a combined base of some 6,000 employees, about 100 to 150 jobs will disappear as a result of the integration, largely through attrition, a number that is less than the 200 or so retirements from Inco last year. Over the longer term, the more competitive new Inco organization expects to add jobs. In the meantime, the company promises to respect the collective bargaining agreements negotiated with both locals.

It is too early to say if administrative offices of either company will be closed, or whether the Falconbridge name will disappear from the landscape.

What Sudburians can expect to see are new headframes above development projects. One of the first will likely be the Totten deposit located on the southwest rim of the Sudbury Basin. It could be followed by two or three more new mines. Deposits that were of marginal interest because they were shared by two owners, now have economy of scale under the control of a single owner. Inco has already advanced timelines for new development, and could ramp up its investment in Sudbury to open two new mines as well as expand existing mines.

The savings

Combining the two companies will rationalize production, cut costs, speed development projects, secure resources for the future, and enhance employment opportunities. All of this adds up to good news for the 131,500 residents of the city.

Inco said from the start that there will be savings upward of US$350 million yearly for the combined company. The lower costs will translate into reduced costs per unit of metal produced, greater profitability, and a stable mid- to long-term outlook for the company.

About 70% of the savings will come from improving operational efficiency, primarily in Sudbury, and the rest from overheads. Three areas are targeted.

First, US$120 million will be saved by optimizing feed flow. Ore from the former-Inco mines of Coleman and McCreedy East could be treated in the nearby former-Falconbridge Strathcona mill. Likewise, there would be no further need to truck ore from the Thayer-Lindsley mine to Falconbridge’s Strathcona mill; it could be treated at the former-Inco Clarabelle mill. Traffic on Highway 144, which links the two processing sites, could be reduced by thousands of truckloads a year, as a result.

As Pannell explained to CMJ: “The feed flow optimization thrust is based largely on our ability to mix and match Falconbridge processing facilities with Inco feeds, and vice versa. For example, Inco’s McCreedy East mine is far from the Inco mill and has a much higher than average copper and PGM content, which causes variability of feed into Inco’s mill. Falconbridge’s Thayer-Lindsley mine has a nickel content consistent with other mines in the area and is close to the Inco mill. If we swap the feeds we can save on freight costs, reduce feed variability and, very importantly, improve mill recoveries.”

Second, savings of US$90 million per year will be realized from cost and other improvements.

“Another example of the operational opportunities created by this combination,” Pannell continued, “is our plan to reconfigure the Clarabelle mill processing circuit to produce a separate copper concentrate. This will allow us to raise nickel smelting capacity and production in Sudbury while avoiding capital expenditures. The Inco copper concentrate would feed Falconbridge’s Kidd Creek smelter, thereby reducing the freight charges and working capital currently associated with Kidd Creek’s South American feed.”

And third, about US$30 million will be saved by maximizing throughput.

“Maximizing throughput involves matching assets to processes and feeds in a manner that enhances our performance overall,” said Pannell. “An example of this would be improving the economics of Falconbridge’s Fraser Morgan mine, based on its proximity to and ability to share infrastructure with Inco’s Coleman-McCreedy East mine–a mine that,
in turn, can avoid US$15 million in capital spending by using Falconbridge’s existing ventilation system.”

“Even before we realize any synergies from the transaction, we expect the new Inco’s nickel and copper cash production costs per pound to be in the lower end of the Brook Hunt cost curve,” said Hand, “assuming that uncontrollable costs like energy prices and currency levels remain within estimated levels. Once we have realized the synergies, which we estimate will be $350 million a year by year-end 2007, our cost picture will look even better.”

An economic powerhouse

The City of Greater Sudbury is among the best Canadian cities for economic activity, according to a report released by CIBC World Markets in May 2005. Total employment reached 78,100 in the first quarter of 2005, a 2% increase compared with the first quarter of 2004.

No longer are the mining companies the largest employers in Sudbury. Inco and Falconbridge, which had almost 22,000 workers in 1974, now together employ about 6,000 people. These reductions over 30 years reflect productivity gains and the use of modern technologies. Of the total city workforce, slightly less than 8% work directly in mining.

Meanwhile, other sectors have grown. The mining services and supply sector has prospered over the past 25 years as producers have reduced their in-house contracting. Those businesses employ 12,000 to 15,000 people, and the firms are well positioned to benefit from a continuing strong mining sector in Sudbury. The city successfully promotes itself as a leading tourism destination, health and biotechnology centre, and call centre location. The provincial government is a major employer because its Ministry of Northern Development & Mines is located there. Economic diversity is welcome.

The support of the mining, retail, service, hospitality, health and government sectors is real. Here’s wishing Sudbury another prosperous 100 years.

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