MAC: Mines and Communities

Inco Update

Published by MAC on 2006-05-29

Inco Update

29th May 2006

Earlier this year, the world's biggest nickel producer, Inco, was ejected from the Financial Times "ethically sound" list of companies (FTSE-4-Good) accused of "human rights violations". It's an accusation which won't come as a surprise to those living close to the company's Goro nickel project in New Caledonia, nor many residents near its Port Colbourne refinery in Canada.

However, as Inco and its compatriot, Falconbridge, try to stave off unwelcome bids from Xstrata and Teck Cominco, some Canadians are rallying behind the "Big Nickel".

Maybe this is partly a case of "the devils you know" being superior to those you don't?

Xstrata brings the green

Falconbridge flashes the cash

By Ryan Walker, The Northern Miner

29th May 2006

Surprising few, Xstrata has launched a $16.1-billion, all-cash bid for the 80.2% stake in Falconbridge it doesn't already own.

The Swiss-based diversified miner's offer of $52.50 per share trumps Inco's recently increased cash-and-share bid of $51.17 or 0.6927 of one of its own shares accompanied by a nickel. In all, Xstrata's bid values Falconbridge as a whole at around $20 billion, whereas Inco's friendly offer rings in at just more than $19 billion.

Xstrata says that Inco's offer for Falconbridge has enjoyed a knock-on premium owing to Teck Cominco's $17.8-billion bid for Inco, which has boosted Inco's shares. Teck's bid requires Inco to drop its plans with Falconbridge.

Inco has urged its shareholders not to tender their shares until it has issued its evaluation of the proposal. Teck's bid expires on July 24.

Stripping out that premium, Xstrata's bid beats Inco's fully pro-rationed offer by around 12.3%, based on Inco's closing share price in Toronto on May 5, the day before Teck unveiled its offer. It also represents an 11.2% premium over Falconbridge's closing share price that day.

Xstrata's offer is conditional on at least 66.67% of Falconbridge's fully diluted shares being handed over. Xstrata will put the plan to a shareholder vote in June; the company has already locked in the support of Glencore International and Credit Suisse Securities, which, together, own around 37.57% of Xstrata's shares.

The offer expires on July 7, unless extended.

To succeed, the bid must absorb a US$450-million break fee payable by Falconbridge to Inco. Inco retains the right to match any competing offer.

"I believe our all-cash offer of $52.50 per share delivers to Falconbridge shareholders a compelling opportunity to realize a guaranteed cash value with no market and minimal regulatory risk and is significantly superior to the revised offer that Inco has made for Falconbridge," said Xstrata chief executive Mick Davis. "I have no doubt that Xstrata has today made a superior and more certain offer to Falconbridge shareholders."

Falconbridge disagreed, saying the offer does not reflect the full and fair value of the company, given its current earnings prospects. To prove it, Falconbridge took the rare step of releasing a single month's financial results.

During April, the company earned US$238 million (or 63¢ per diluted share), nearly triple the amount it earned in April 2005. Revenue between the two periods nearly doubled to US$1.3 billion, while cash flow from operations more than doubled to US$422 million.

Falconbridge says it will use some of the extra cash flow to redeem its remaining junior preference shares for US$253 million.

"While we realize that the release of monthly results is unusual, and we will not make a habit of it, we felt it was important that shareholders understand the magnitude of the earnings that we are generating at this crucial time," said Falconbridge CEO Derek Pannell in a statement.

Conditional offer

Pannell also said Xstrata's offer is conditional, and doesn't provide the same "unique and real synergies" as those expected from the combination of Inco and Falconbridge's Sudbury, Ont., operations. Inco recently upped its estimate of annual synergies to US$375 million from US$350 million.

He added that, unlike the proposed union with Inco, Xstrata's offer does not allow his shareholders to participate in "the growth of a global mining company and in an industry that is consolidating."

Still, the company said it would evaluate a formal offer, once received, and provide its shareholders with a formal response.

Inco echoed Falco sentiments in its own statement, and defended its bid, calling it the best alternative for Falconbridge shareholders. The nickel miner also hammered home the enormous Sudbury basin synergies it says are available only under an Inco-Falconbridge marriage. The company estimates the after-tax net present value of those savings at around US$3 billion, based on current metal prices.

Xstrata says its plan delivers "immense value" via the combination of each company's Latin American copper assets. It also provides for potential expansions of the Las Bambas, Collahuasi or the recently acquired Tintaya operation using Falconbridge's Chilean or Canadian processing facilities.

The addition of Tintaya and Falconbridge would increase Xstrata's annual attributable copper production capacity to around 1 million tonnes.

Xstrata recently agreed to buy the Tintaya copper mine in central Peru from Anglo-Australian giant BHP Billiton (bhp-n) for up to US$860 million, including deferred payments geared to the price of copper. During the year ended March 31, the mine produced 51,600 tonnes of copper-in-concentrate and 28,700 tonnes of copper cathode.

The company also says that its plan would deliver annual savings of around US$120 million via reductions in head office and administrative functions and certain exploration activities outside Canada. It would also achieve a proportion of the savings Inco and Falconbridge have identified in Sudbury, but would do so via optimization rather than layoffs, on which Xstrata has placed a 3-year moratorium.

Greater diversification

If successful, Xstata's bid would create the world's fifth-largest diversified mining company, with an enterprise value exceeding US$50 billion. The company would hold market leading positions in copper, nickel, thermal and metallurgical coal, and zinc. It would also be an important player in the ferroalloys industry. Its operating assets would span North and South America, Europe, Australia and South Africa.

The combined nickel assets would be housed under the Xstrata Nickel banner, which is proposed as a standalone business headquartered in Toronto. Regional offices for the combined copper and zinc units would also reside in Canada; existing Canadian operations would run as usual.

"We believe there is considerable value in growing the Falconbridge nickel assets into a major global business from its Toronto base," Davis said.

The Swiss miner says the deal would be substantially accretive to earnings per share and cash flow per share within a year of completion.

With less overlap than the proposed merger of Inco and Falconbridge, which would create a nickel juggernaut, Xstrata does not expect substantive anti-trust issues in Canada, the U.S. or Europe. In contrast, Inco's bid for Falconbridge has been extended three times to allow for more thorough regulatory review. The lack of overlap is also expected to promote long-term employment growth in Canada.

Xstrata plans to fund the acquisition with new debt facilities underwritten by Barclays, Deutsche Bank, JP Morgan Chase Bank, and Royal Bank of Scotland. The company would then refinance a portion of the facilities via an equity capital raising to maintain an investment grade rating.

Similarly, Xstrata recently placed nearly 62 million shares for gross proceeds of around US$2.5 billion to repay some of the debt associated with the acquisition of its existing Falconbridge stake and one-third interest in the Cerrejón thermal coal operation in Colombia. It paid Glencore US$1.7 billion for that asset earlier this year.

Shares in Falconbridge ended $1.60 better at $55.60, while Inco's issue slipped 31¢ to $73.19 in Toronto following news of Xstrata's bid. For its part, Teck dropped $2.83 to $67.15. Xstrata finished 92 pence cheaper at 2,009 pence in London.

New Caledonia's Rheebu Nuu lodges corruption complaint

23rd May 2006

The Kanak group Rheebu Nuu has lodged complaints of corruption against the president of New Caledonia's southern province, Philippe Gomes, and the director general of the Goro Nickel company, Ron Renton.

This comes amid a conflict between Rheebu Nuu and Goro which nearly two months ago saw Rheebu Nuu activists destroy 10 million US dollars worth of vehicles and installations at the Goro construction site.

Rheebu Nuu has hired a French lawyer to draft the complaint which alleges that Mr Gomes has mixed his political post with his business interests.

It claims that he got a contract with Goro to supply 900 air-conditioning units.

The daily newspaper, Les Nouvelles Caledoniennes, reports that the complaint against Mr Renton alleges that he committed an act of active corruption by accepting the contracts to win favours with the southern province.

The paper says it's not clear whether the judiciary will accept the complaint.

Inco hid emissions problem, papers reveal

Farmers' complaints called 'disturbing'


Toronto Globe and Mail

18th May 2006

WELLAND, ONT. -- Inco first realized in 1946 that nickel accumulations in the soil around its Port Colborne refinery were damaging local crops, but for decades afterward it didn't want farmers seeking compensation to know, documents filed in a lawsuit show.

In a $100-million suit against Inco, members of the Augustine family claim that the company used their farm for waste disposal by failing to take effective action to collect its dust.

"Inco has permitted the emissions and has gone to some trouble to ensure that metals were emitted into the community rather than incur costs to moderate them, because it was cheaper to pay small damages to the farmers," said Augustine lawyer Linda McCaffrey, who finished yesterday introducing into evidence hundreds of internal Inco documents from the 1950s through to the 1980s.

The documents detail Inco agronomists' concerns about a growing area of nickel accumulation. "Unless dust losses from the plant are reduced it would be only a matter of time until more of the soils become useless in the area," agronomist Clare Young wrote in 1957.

The documents also make clear that Inco officials were hardnosed in negotiating down farmers' compensation claims.

Ruth Kramer came close to tears as she listened to Ms. McCaffrey read the company's view of the farmers' complaints. She remembers her father-in-law, Otto Kramer, a former Inco foreman who, as a decent, gentle man, viewed Inco agronomists as his friends. He and his brother, Edgar, feature repeatedly in the memos.

"It's extremely upsetting," Ms. Kramer said in an interview afterward. "What bothered me was that these people had worked hard to make a living from the land."

In November of 1957, Ms. Young expressed concern about the white leaf striping that's typical of nickel contamination being found in wheat on Edgar Kramer's farm.

"This is the first time that we have found wheat showing such markings and since wheat has proved more tolerant to soluble nickel than oats, it indicates a continued nickel buildup in the soil." This meant the area of nickel contamination was likely to spread "unless our loss of high nickel dust is stopped," she stated.

The company was losing large quantities of nickel and copper through its stack, an internal summary of "annual accounting metal losses" shows. From 1919 to 1981, the total comes to £149-million (approximately $313-million Canadian). In 1929 alone, £6.5-million of nickel went up in smoke; up to 1960, the annual amount was around £3.5-million. That dropped to £2.6-million in 1960 and continued to decline, to £1.8-million in 1970 and £967,926 in 1981.

In 1960, Inco installed a Cottrell dust collector. Nickel emissions continued, but at a somewhat lower level. Complaints continued as well, as the new system did nothing to reduce toxic levels of nickel in the soil.

A 1985 Inco memo notes the emissions are "largely but not exclusively pre-1960." Nickel emissions were reduced again in 1984, when electrolytic refinery of nickel ceased at Port Colborne, but the refinery still produced "utility" nickel.

The internal memos express continuing dissatisfaction about Lorne Augustine, who in 1994 launched the suit that is being pursued by his sons after his death in 1987. News that a group of farmers, including Mr. Augustine, were contemplating legal action in the late 1950s to force Inco to clean up its emissions is described as "disturbing."

In 1962, Ms. Young recorded a discussion about increased emission-control options with another Inco official but dismissed them as "fairly expensive and not too practical."

Voisey's Bay stalling over first contract: union

By CBC News

17th May 2006

The union representing workers at Voisey's Bay says the mine's operator is taking too long to reach a contract.

The United Steelworkers union was certified in a vote last summer to represent about 115 employees at Voisey's Bay, which began shipping nickel concentrate last fall.

However, Voisey's Bay Nickel - a subsidiary of Inco Ltd. - is challenging the validity of that vote in court.

The Steelworkers are calling that move a stalling tactic, and are displeased with a letter that mine management sent to employees saying that the union is manoeuvring to be in a legal strike position by the end of the month.

"We certified the members last August of '05, and here we are in May of '06, and we still don't have an agreement," said representative Ken Dawson.

"They need to get focused, they need to get moving, and we need an agreement."

The Steelworkers want to have an agreement in place by June.

Mine manager Bob Cooper says that is not enough time to deal with complex issues.

"We have a union and we'll negotiate with them, and in due time we will have a deal with our unions," Cooper said.

Management and union officials are negotiating at a hotel in Happy Valley-Goose Bay. Talks are scheduled to continue for the rest of this week.

Worker Terry Decker was happy to move back to Labrador after two decades of working in Yellowknife. However, like many at the mine, he is not satisfied with the wages.

"Moneywise, I took a big drop to come here from what I was used to in the Northwest Territories," Decker said.

The union says hourly rates of pay at Voisey's Bay are about $3 lower than rates paid at the Iron Ore Company of Canada mine in Labrador City.

Xstrata: Wrong for Falconbridge, Workers and Sudbury

Steelworkers intensify opposition to Xstrata Plc bid to take over Falconbridge

Toronto Globe and Mail

17th May 2006

SUDBURY, ON - United Steelworkers' Ontario/Atlantic Director Wayne Fraser said Wednesday that the long-anticipated bid by Xstrata Plc to overtake Falconbridge is "a nightmare come true" and cannot be allowed to proceed.

"The United Steelworkers has been consistent - we have opposed Xstrata from day one" said Fraser. "For Falconbridge employees, an Xstrata takeover is the worst of all the options that are on the table.

"Our members at Falconbridge know that if Xstrata wins, their workplace here in Sudbury will be a tiny cog in a huge Swiss machine - a machine with a worrisome history and no commitment to Sudbury."

Myles Sullivan, president of the Steelworkers' Local 2020 at Falconbridge, repeated his position that a merger with Inco is better than being overtaken by Xstrata or indeed any other company.

"Inco has new mines waiting to be developed," said Sullivan. "And Inco's larger infrastructure can also offer a chance for the members to bid, transfer or post to operations closer to their homes. Inco is just a better option for our younger members and our senior members too."

Sullivan added that these considerations are over and above Xstrata's disastrous record in labour and community relations.

The United Steelworkers represents close to 8,500 workers in 15 Inco and Falconbridge bargaining units across North America, as well as 20,000 retirees.

In December 2006, the Steelworkers Inco/Falconbridge Council endorsed the proposed acquisition of Falconbridge by Inco. The rank and file council also detailed the Union's opposition to Xstrata.

The Steelworkers' opposition to Xstrata is based on:

* the superiority of the Inco-Falconbridge merger for mining employees' bargaining power
* the superiority of the Inco-Falconbridge merger for the job and retirement security of mining employees in Sudbury.
* Xstrata's poor labor, environmental and community record.

"Earlier in this debate, senior CAW spokespeople seemed to take the position that it made little difference what company bought Falconbridge." said Fraser, " But recently, local Mine Mill leaders have come out in support of the Inco bid. We welcome that support, however belated. We all need to work together to defend this community."

"We don't wear rose-coloured glasses - we've had to fight Inco in the past and we're ready to do so again," Fraser added. "But this union was never afraid to take a position on who should own Falconbridge - and who shouldn't."

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