Nickel merger is a mining disaster

Nickel merger is a mining disaster

What started last fall as a straightforward merger between Sudbury’s two long-time nickel producers threatens to become a sell-off to U.S. interests of a huge chunk of Canada’s mining industry ”” one of our few industries in which Canadians still call most of the shots.

The proposed $40 billion (U.S.) mega-merger announced yesterday among the Canadian industrial icons Inco Ltd. and Falconbridge Ltd. (the latter incorporating the equally historic Noranda Inc.) and the Phoenix-based copper giant Phelps Dodge Corp. would bring an end to Canadian decision-making at two the nation’s largest miners, firms with combined revenues of $15.3 billion (Cdn.).

And by depriving Toronto of its two biggest locally headquartered mining firms, the planned deal would greatly diminish the city’s stature as one of the world capitals of mining finance.

It also represents a further hollowing out of Corporate Canada, which recently has seen completed and pending foreign takeovers of firms as varied as Hudson’s Bay Co., Dofasco Inc., tech firm Hummingbird Ltd., paint maker Sico Inc. and housing materials firm Royal Group Technologies Ltd.

From their boardrooms in downtown Toronto, the top executives at Inco and Falconbridge currently make decisions affecting more than 25,000 employees at remote locales at home and abroad, from Thompson, Man., to the Chilean mountains, and from Voisey’s Bay in Labrador to the French island of New Caledonia in the South Pacific Ocean.

All that changes if competition regulators in Ottawa, Europe and the United States approve the creation of Phelps Dodge Inco Corp. announced yesterday.

The new company, to be the largest mining firm on the continent, would be based in Phelps Dodge’s hometown of Phoenix, and run by the CEO of the U.S. firm ”” even though Phelps Dodge is the size of only Falconbridge alone.

In yesterday’s announcement of the blockbuster deal, Inco chief executive Scott Hand, an American and a trained lawyer like his CEO counterpart at Phelps Dodge, asserted that the new firm “will maintain a very strong commitment to and presence in Canada.”

But Hand is in no position to offer any such assurances. Under the terms to which the merging firms have agreed, both Hand, 64, and Falconbridge chief executive Derek Pannell, 61, would be relegated to observer status in the new company, as chairman and president, respectively. (Phelps Dodge CEO Steven Whisler is 51.)

Given their proximity to retirement age, and the tradition in which CEOs of acquired firms seldom remain at the merged enterprise for more than a year or two, Hand and Pannell would soon be out of the picture entirely, and decisions about production and employment levels in the Sudbury nickel basin, for instance, would be made in Arizona.

Widely described in media accounts yesterday as a “white knight,” Phelps Dodge is in fact just as predatory as the unwanted suitors that Inco enlisted Phelps Dodge to scare away. Originally envisioned as a joint-venture partner to assist Inco with its long-delayed union with Falconbridge, the U.S. firm, at its insistence, will take control of all three firms in the deal, leaving behind a token Toronto branch office to deal with some of the new firm’s nickel issues.

Yet despite the confidence with which the CEOs of all three firms spoke of their handiwork yesterday, there’s no assurance this deal will go through.

On Wall Street yesterday, shares in Phelps Dodge fell 8.1 per cent. The shares of acquiring companies usually fall on merger announcements, but the drop is usually in the 3 per cent to 5 per cent range.

The qualms are understandable.

For its role in this mã©nage-ã -trois, Phelps Dodge must take on a staggering $22 billion (U.S.) in new debt to finance the deal. Yet it also said yesterday it plans to drain its treasury by as much as $5 billion in a buyback of shares. The unspoken purpose of the latter step is to prop up the firm’s share price, and is a signal to any future suitors that might emerge for any of the three companies that Phelps Dodge has the resources to increase its already rich bid.

Yesterday’s headlines were impressive, as intended by the deal makers. Phelps Dodge Inco would be the world’s biggest nickel firm, eclipsing Russia’s OAO Norilsk Nickel, and the largest publicly traded copper producer.

With combined sales of about $22 billion, the new company would join an expanded global Big Four alongside BHP Billiton PLC, Anglo American PLC and Rio Tinto PLC, all based in London.

It would indeed, in Whisler’s claim to investors in a conference call yesterday, “vault (the new company) into super-major status within the global mining industry.”


“Suppose Falconbridge disappeared, or Inco disappeared. You would have hollowed out the corporate headquarters and Canada would be lesser as a result”

Inco CEO Scott Hand, above, in October 2005 on the necessity of Canadian ownership of a merged Inco and Falconbridge

The deal is priced to perfection, as they say on the Street. It assumes that metal demand from the overheated economies of China and India will remain insatiable ”” that the mining sector’s traditional cyclical rises and plunges in commodity prices have been replaced by a “super-cycle” of permanently high prices.

That’s the rationale that briefly kept the shares of long-forgotten dot-com firms afloat a few years ago ”” that the Internet had forced a permanent higher price for tech stocks, including, most notoriously, Nortel Networks Corp.

It assumes that production from new mine openings worldwide, including Inco’s own Voisey’s Bay and New Caledonia projects, won’t ease the current supply squeeze that has caused a tripling and even quintupling of certain metals over the past 18 months.

That the U.S. economy, a huge market for residential and office construction using base metals, will not slide into a downturn later this year, as widely predicted. And that current, hugely inflated commodity prices are based on economic fundamentals and not the irrational exuberance of speculative traders.

Phelps Dodge’s major institutional shareholders may sit Whisler down and explain to him that the firm he is privileged to lead, created in 1834 when New York cotton and metals trader Anson Greene Phelps joined forces with sons-in-law William Dodge and Daniel Jones, hasn’t survived these past 172 years by falling victim to the irrational exuberance infecting hedge fund and other short-traders these past 18 months.

And to remind Whisler that in copper slumps in 1984 and again just a few years ago, Phelps Dodge was forced to resort to mine closings and layoffs.

Politics and public pressure is another wild card. Unionized workers with the threat of shutting down Sudbury as leverage, who have already objected to foreigner Xstrata’s designs on Falconbridge, could try to disrupt a further hollowing out of the Canadian economy. They would have as allies the NDP, which has called for a probe into Xstrata’s shady background, along with any Liberal leadership candidates choosing to wrap themselves in the flag.

The latest chapter in a months-long saga over the future of Canada’s mining sector is the culmination of failures in strategy by Inco.

The original Inco-Falconbridge marriage made sense. Inco has long coveted its Sudbury neighbour because of the hundreds of millions of dollars in annual savings to be achieved through merger by streamlining operations in their flagship Sudbury operations, where an end could be made to illogical trucking routes and abrupt mine shaft blockages due to strict observance of property lines between the two firms.

But Inco totally misread the sentiment of European competition regulators, who thwarted none other than Jack Welch in his swan-song ambition to merge his General Electric Co. with Honeywell Corp. By holding up the original Inco-Falconbridge combination for eight months and counting, the European regulators gave rival bidders plenty of time to pounce. Teck Cominco Ltd. launched a bid for Inco, while Swiss-based miner Xstrata PLC bid for Falconbridge. Both bids are still outstanding.

That wasn’t the only blunder. In pursuit of Falconbridge last year, Hand managed to put both his own firm and Falconbridge in play by making a low-ball offer for its fellow Sudbury nickel giant. And that gave Teck Cominco and Xstrata their opportunity to come forward with much richer offers for Inco and Falconbridge, respectively.

How big was that bidding gap? When it finally came to its senses with a higher bid last month, Inco placed a new value on Falconbridge of $19.6 billion (Cdn.), a whopping 63 per cent more than its initial bid in October of last year.

Inco’s share price weakened in recent weeks as doubts grew that it could pull off its Falconbridge deal, further jeopardizing its cash-and-share offer. In desperation, Hand recruited fellow lawyer Steven Whisler to help Inco beef up its Falconbridge offer.

When the U.S. firm rejected any idea of a joint bid for Falconbridge, however, Hand settled for shepherding both companies into Whisler’s now-eager embrace.

(Phelps Dodge has sought for years to diversify from copper and its notorious cyclical price swings.)

It’s more than odd that the Big Three London-based giants have kept their distance from the farce over the future of Canadian mining industry that has been playing out since last fall, when Inco first bid for Falconbridge. Hyper-acquisitive of late, they have stubbornly failed to enter the lists and see the value in Inco and Falconbridge that suitors Phelps Dodge, Teck Cominco Ltd. and the Swiss-based Xstrata PLC evidently do.

Possibly they have a better grasp of the cyclical volatility of commodity markets, and will happily pounce on Phelps Dodge Inco during the next downturn. And aren’t impressed by a new company with roughly 80 per cent of its assets concentrated in the Western Hemisphere, what with Russia, Africa, Australia, Southeast Asia and other regions being the source of so much action in new-mine development.

One almost wishes for the consummation of this deal, however, if only to see the back of Scott Hand’s head for the last time.

It hardly matters how he characterizes this deal, after describing the original one as a “made-in-Canada” reaction to the global consolidation underway in mining.

As a mediocre manager of Inco’s assets in New Caledonia, Goro and Voisey’s Bay and an almost comically inept dealmaker, Hand’s legacy is secure as the mining executive who wasn’t able to pull off a friendly deal between two venerable neighbours, and ended up trading two Wayne Gretzkys of the Canadian mining sector to a U.S. buyer with a fatter wallet.


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