DOING SOME DIGGING – Inco vaults to top with Falconbridge takeover (October 11, 2005)

Toronto-based INCO LTD. is not afraid to declare it intends to be the world's largest nickel producer. With today's...
Toronto-based INCO LTD. is not afraid to declare it intends to be the world's largest nickel producer. With today's announced friendly takeover of FALCONBRIDGE, Inco looks to become top dog by the end of this year.

And what a deal it is. Inco is offering cash and its own shares worth approximately Cdn$34 per Falconbridge common share. Taking into account certain financial intricacies, the deal could cost Inco Cdn$2.87 billion plus the issuance of 200.7 million common shares. The agreement hinges on at least 66.67% of Falconbridge shareholders tendering their shares, pending regulatory approval. If all Falconbridge shares are not tendered now, Inco will conduct a mop-up operation to buy out the remaining shareholders, achieving 100% ownership. On a fully diluted basis, Falconbridge investors will hold 46% in the combined company, worth US$24 billion. Business will continue under the Inco name.

The takeover will create an international powerhouse. It will be the world's largest producer of nickel (735 million lb) in 2005, and output will reach 1.0 billion lb in 2009. Copper production this year will be 1.33 billion lb, rising to 2.4 billion lb in 2009. Inco will have a leading position in proven and probable nickel reserves from both sulphide and nickel laterite deposits and an impressive portfolio of projects in the development and exploration phases. The financial future of the combined company looks rosy, with projected pro forma combined revenues of US$6.4 billion for the first six months of this year, and cash flow from operations reaching US$1.25 billion for the same period.

Some have argued that the Inco/Falconbridge merger should have happened long ago. The two have extensive and complementary operations in the Sudbury Basin of Northern Ontario. Our readers will recall that Falconbridge and its parent company NORANDA INC. concluded their merger only last May, and by all accounts that transaction has gone smoothly. In June, Inco announced it would be closing its venerable Copper Cliff refinery in Sudbury; instead its copper anodes are now sent to Noranda's CANADIAN COPPER REFINERY (CCR) located in Montreal East. Then in August the Swiss mining company XSTRATA snapped up approximately 20% of Falconbridge's common shares, and Xstrata is not known for being content with a minority holding in any company.

Whether Inco liked what it saw as it got to know Falconbridge's copper refining abilities better, or Falconbridge was fearful of a creeping takeover by a foreign company, we don't know. We do know that the deal came together the evening of Oct. 10 when, instead of lingering over Thanksgiving turkey, the boards of both companies unanimously agreed to combine their businesses.

Today's announcement was the occasion of much good will. "I am fully committed to working hand in hand with Scott," said Falconbridge president and CEO Derek Pannell. He is among four new directors from Falconbridge to be named to the Inco board.

"We've already identified US$350 million in annual synergies," Inco president and CEO Scott Hand told listeners.

The synergies he speaks of are all in the Sudbury area, a logical first place to look for savings. Each company has several nickel-copper mines, a concentrator and a nickel smelter. Combining the assets will allow specialized treatment in facilities tweaked to peak efficiency. Ore with higher copper content might go to one mill. One smelter might be tuned to recover nickel by-products efficiently, and the other to maximize copper by-product recovery. The big savings come in not having to transport ores or concentrates out of the area for treatment.

Inco will effectively rule the mining industry in the Sudbury Basin, but it won't be the only player. FNX Mining and FIRST NICKEL have already made their marks by reopening mines that the larger companies were no longer interested in. The entry of more small, nimble miners in the area is not improbable.

As for jobs, about 100 to 150 will disappear in Sudbury. Attrition should take care of most of that number. But over two or three years, the total number of jobs is expected to grow as greater operating efficiencies allow some otherwise uneconomic deposits to be mined profitably. There may also be jobs lost as head office functions are combined, but no one was saying how many.

Beyond the glowing outlook for Sudbury, Inco and Falconbridge have identified, but not quantified, other synergistic possibilities. Inco's operation at Thompson, Man., could benefit from Falconbridge's experience treating ore with high levels of magnesium oxide. Both companies have nickel laterite projects in New Caledonia, Inco which will bring Goro on-stream in 2007, and Falconbridge with Koniambo in the wings. The best-case scenario would be to time the development at Koniambo so that the Goro engineering and construction team could move from the first to the second project with their skills sharp and ready to go.

In Newfoundland, where Inco announced it has begun concentrate production from the rich Voisey's Bay deposit, the company also has a commitment to the province to build a downstream processing plant there to complement mine production. Hand says his company remains committed to its agreements with the province, and the commercial facility at Argentia will be built.

Both Hand and Pannell said there are no plans to sell off assets after the takeover. Hand, in particular, said "What we've announced is what you're going to get." The exception is Falconbridge's Nikkelverk refinery in Norway and certain related marketing organizations. Inco would divest itself of Nikkelverk if the European Union so required, but it would continue to operate as a custom refinery.

Maybe it was the alignment of the stars, faith in a continuing strong nickel price or Inco's increased cash flow from Voisey's Bay that make this deal attractive now. The economics appear excellent Inco diversifies it global production, lowers production costs for all metals and benefits from some of the best R&D work in the world. More than that, Inco expects to pay off any takeover debt it incurs within two years.

"The new Inco will be a powerhouse and a home to terrific people in crucial roles like exploration, process and product R&D, project development and marketing. Management expertise is a key to growth and we will deploy talented individuals to shape an exceptional management team," said Hand. "I see us as the mining and metals company of choice for investors and employees, with a strong presence in and commitment to Canada and a global reach."


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