DOING SOME DIGGING – Is the white knight Mr. Right?

The biggest news story this week continues to be the takeover of Toronto-based INCO LIMITED by PHELPS DODGE, the hu...
The biggest news story this week continues to be the takeover of Toronto-based INCO LIMITED by PHELPS DODGE, the huge U.S. copper producer, proposed on Sunday, June 25. In a deal worth US$40 billion, the latter has agreed to buy up the former after Inco completes its merger with FALCONBRIDGE, also of Toronto. This staves off hostile offers for Inco from Vancouver-based TECK COMINCO and from Swiss-based XSTRATA for the 80% of Falconbridge it does not already own. (See CMJ Headline News of June 26, 2006.)

But in choosing this white knight, has Inco found its Mr. Right?

For those among us with strictly pecuniary motives, the answer is "yes". The deal with Phelps Dodge will put more money in shareholders' pockets. Inco has been able to raise its offer for Falconbridge considerably thanks to the promise of money from Phelps Dodge. The Phelps Dodge offer for Inco is also richer than Teck Cominco's proposal.

For those others among us with a sense of Canada's place in the world mining industry, the answer is less straightforward.

Part of the reason the Phelps Dodge offer came as such a surprise is that Phelps Dodge has not been much of a player on the Canadian scene. In my 30 years as an industry observer, the company has stuck to its U.S. business and has grown in a southerly direction, not north. The name Phelps Dodge just hasn't come up all that often in the context of the Canadian mining industry. That makes the company a relative unknown.

Phelps Dodge has a long history, one that dates back to 1834 when Anson Phelps and his son-in-law created an import-export business that traded American products to England in return for copper and other metals needed in the fledgling United States. The company entered the mining industry when it purchased an interest in a company mining copper in Morenci, Arizona.

The next 50 years were spent in open pit copper mining in the American Southwest. The Depression spurred Phelps Dodge's entry into the copper refining and manufacturing business. In 1984, at 150 years of age, the company set its sights on the Candelaria development in Chile. Seven years ago Phelps Dodge swallowed Cyprus Amax Minerals and its molybdenum mine in Colorado.

Phelps Dodge prides itself on technological innovation. The earliest example might be the creation of cost-effective open pit mines from what had been expensive underground workings in Arizona. One of the more recent innovations would be the Phelps Dodge/Placer Dome partnership that created a method of hydrometallurgical treatment for sulphide copper ores.

An examination of Phelps Dodge's mission and values finds them compatible with what we have come to expect from Canadian minersan emphasis on safety, being a good corporate citizen, excellent and ethical management, employee participation, and sustainability.

If it creates the new company, PHELPS DODGE INCO, and its Canadian wing, INCO NICKEL, the copper giant will become at a stroke the largest nickel producer in the world. Phelps Dodge Inco would list on the Toronto Stock Exchange as well as in New York, which means the familiar name "Inco" would not disappear entirely from the scene. PDI would be the fifth largest mining company in the world with a capitalization of US$56 billion.

I wish I had been privy to the thought processes of Inco executives that led to the selection of Phelps Dodge as the company's white knight. The choice appears to be a good one: good for shareholders in that it puts money in their pockets, and good for the business in that it creates a competitive global giant without compromising social values.

I think that I have convinced myself that the creation of Phelps Dodge Inco is the way to go. We will have to wait and see if the drama plays out as expected or if there are more offers and plot twists yet to come.


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