DOING SOME DIGGING – Phelps Dodge bids US$40B for Inco-Falconbridge

PHELPS DODGE of Phoenix, Arizona, has stepped forward and offered US$40 billion for a combined INCO-FALCONBRIDGE co...
PHELPS DODGE of Phoenix, Arizona, has stepped forward and offered US$40 billion for a combined INCO-FALCONBRIDGE company. That move should end the hostile takeover attempts of Vancouver's TECK COMINCO for Inco and of Swiss-based XSTRATA for the 80% of Falconbridge not currently under its control. (But nothing is certain as merger mania continues unabated.)

If Phelps Dodge succeeds in buying up the Inco-Falconbridge combination, it will become the world's largest nickel producer, second largest molybdenum and copper producer, and third largest cobalt producer. By its own admission, Phelps Dodge will become the pre-eminent North American-based mining company. And it will vault itself into the ranks of the "super majors" in terms of market capitalization. Worth US$56 billion, the combined enterprise, PHELPS DODGE INCO (PDI), will rank fifth in the world behind BHP BILLITON ($123 billion), RIO TINTO ($80 billion), ANGLO AMERICAN ($68 billion) and CVRD ($59 billion).

Phelps Dodge Inco will be headquartered in Phoenix; the Canadian arm, INCO NICKEL, will have its head office in Toronto. Phelps Dodge Inco stock will continue to trade in New York, and the company will apply for a listing on the Toronto Stock Exchange. Management of the new company will include Steven Whisler as PDI chairman and CEO (the titles he holds at Phelps Dodge); Inco's chairman and CEO Scott Hand will become PDI vice-chairman; Tim Snider will be president and COO of PDI (as he is now at Phelps Dodge); Falconbridge's CEO Derek Pannell will become president of Inco Nickel; and Rami Peru, the Phelps Dodge CFO, will retain that title at PDI.

The executives at Monday morning's (June 26) press conference could hardly talk fast enough to say all the good things they wanted to about each other's companies during the "landmark" announcement. The deal to create a "world-beating" company will bring only good things for Canada, they promised. Phelps Dodge will retain Canadian management at Canadian operations. It promises no Canadian layoffs for three years. A strong company will actually create more jobs.

Phelps Dodge says it has a corporate culture that emphasizes safety and health, community involvement, risk management and environmental protection; it fits right in with the Canadian corporate culture.

Synergies within the combined company will not only realize the US$550 million in annual savings outlined by Inco and Falconbridge, but will also realize additional savings of US$350 million, bringing the annual total saved to US$900 million as early as 2008. Phelps Dodge imagines it can made concentrator improvements in Sudbury, apply its "one-mine" operating philosophy to the mines of the Sudbury Basin, rack up savings in sourcing materials and supplies, and use Inco's and Falconbridge's existing marketing teams particularly for cobalt.

The executives of all three companies have made big promises. The real question is whether or not they can deliver as many benefits for Canadian operations as they say they will. Only time will tell time and the approval of three sets of shareholders; the three boards have already given the nod. The Phelps Dodge deal for Inco is not contingent on Inco's acquisition of Falconbridge, and with the money promised from Phelps Dodge, Inco has upped its offer for Falconbridge shares.

Meanwhile, let's take a closer look at Phelps Dodge for our readers who are not familiar with it.

Phelps Dodge ( 2005 financials in brief: Sales and operating revenues US$8.29 billion (US$2.38 billion from its mining operations); Net income US$1.56 billion; and Assets US$10.36 billion. Production figures in 2005 included 1.12 million tonnes of copper and 28.26 tonnes of molybdenum.
- PHELPS DODGE MINING. A) Annual capacity of 2.0 billion lb of copper (about 60% of the U.S. total but only 7-8% of the world total, from five operating mines in Arizona and New Mexico. B) Yearly capacity of 1.0 billion lb of copper from five mines in South America producing. C) A copper smelter in Arizona, copper refinery in Texas and four rod mills scattered around the U.S. D) the Henderson molybdenum complex near Denver, Colorado.
- CLIMAX MOLYBDENUM, the business unit which operates the Henderson complex.
- CLIMAX ENGINEERED MATERIALS, which offers advanced metals and nanomaterials for a wide range of industries.
- PHELPS DODGE WIRE AND CABLE, which supplies building wire, power cable, telecom cable, copper and aluminum rod, electroplated conductors, ultra-fine wire, polyamide tubing, etc.
- PHELPS DODGE INTERNATIONAL, which has manufacturing and sales operations in the Americas, Asia and Africa.

By comparison, Inco ( has 2005 numbers like so: Net sales US$4.52 billion; Net earnings US$836 million; and Assets US$12.01 billion. Production of nickel was 220,727 tonnes and of copper 125,595 tonnes in 2005.

Nor was Falconbridge ( slouching in 2005: Revenues US$8.15 billion; Retained earnings US$288 million (before accounting change); and Assets US$12.49 billion. Last year's copper production was 462,000 tonnes, nickel was 114,000 tonnes, 454,000 tonnes of zinc, and 246,000 tonnes of aluminum.

There is no doubt that this three-way deal will create a real powerhouse, one that will have a diversified product mix capable of withstanding commodity price fluctuations. This may be the best opportunity for the continued operation of many of Canada's best-known mines.


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