Mining giants slug it out as metals reach records

TORONTO - Shares of Falconbridge may rise after Inco sweetened its takeover offer to C$19.6 billion ($28.3 billion), signalling a possible bidding contest for mining assets after copper, zinc and nickel prices rose to records.

Inco chief executive Scott Hand on May 13 increased a friendly offer for Falconbridge by 11 per cent, making it the biggest mining takeover ever. Hand wants to create the world's largest nickel producer, while fending off a hostile bid for Inco by Teck Cominco and a possible competing offer for Falconbridge by Xstrata.

"Let the games begin," said Gavin Graham, director of investments at Guardian Group of Funds in Toronto, which manages about C$5.9 billion, including Teck Cominco and Inco. "So, what will Teck and Xstrata do?"

Falconbridge and Inco, both based in Toronto, agreed to revise their deal six days after Vancouver-based Teck Cominco made an unsolicited bid to buy Inco for C$17.8 billion in cash and stock, provided the Falconbridge transaction is dropped.

Switzerland-based Xstrata owns 20 per cent of Falconbridge and hasn't ruled out trying to buy the rest.

Copper and zinc prices have more than doubled since Inco first bid for Falconbridge on October 11, and nickel is up 66 per cent. The rallies were fuelled by rising demand, particularly from China, and by investors who are buying commodities seeking better returns than on stocks or bonds.

The rising value of mineral assets, and the failure of mining companies to boost output enough to keep pace with demand, has led chief executive officers such as Falconbridge's Derek Pannell and Teck Cominco's Donald Lindsay to add reserves and increase production through acquisitions.

"In a bull market, you have boom cash flow in the near term, and if prices remain high for two years, you'll pay off an acquisition," said Peter Chilton, at Constellation Capital Management in Sydney. "Some companies are thinking it will be stronger for longer."

Inco and Falconbridge agreed to a revised offer of C$51.17 in cash, or 0.6927 of an Inco share plus C$0.05 for each Falconbridge share, the companies said in separate statements. The previous offer was C$34 in cash, or 0.6713 Inco share plus C$0.05. The October offer valued Falconbridge at C$12.8 billion at the time. As Inco's shares rallied, the value of the offer reached C$17.7 billion as of May 12.

Inco's new bid is still 4.1 per cent below the May 12 price of Falconbridge shares, which have jumped 73 per cent since the first bid seven months ago. Falconbridge fell C$0.11 to C$53.38 on May 12, valuing the company at C$19.9 billion. Inco fell C$0.74 to C$73.80, valuing the company at C$14.3 billion.

"The recent gains in copper and nickel markets and their outstanding prospects make our transaction look even better today than when it was first announced," Hand, 64, said in a statement.

Teck Cominco, the world's biggest zinc producer, sought Inco to add nickel to its current assets, which also include copper, coal and precious metals.

Doug Horswill, Teck Cominco's senior vice-president of environment and corporate affairs, said the company would continue to pursue its bid for Inco, which "represents full and fair value".

Xstrata is preparing a possible £9.5 billion ($28.8 billion) bid to take control of Falconbridge, the London-based Sunday Times reported.

Xstrata chief executive Mick Davis said on March 1 that he did not intend to be a "long-term minority holder in any other company".

Inco and Falconbridge said their union would generate the best returns for shareholders. The companies agreed that Falconbridge would pay Inco a US$450 million breakup fee, up from US$320 million, if the acquisition is not completed.

Inco has delayed the acquisition of Falconbridge three times to give regulators in Europe and the US time to review the transaction. Regulators are concerned that the combined company would dominate the specialty cobalt and nickel super alloys markets.

- BLOOMBERG