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Molten copper is poured at Xstrata's Kidd Creek facility in Timmins, Ont.
Molten copper is poured at Xstrata's Kidd Creek facility in Timmins, Ont.

Takeovers

Broken promises mark foreign mining deals Add to ...

On a cross-country Canadian tour last month aimed at winning support for its hostile $38.6-billion offer for Potash Corp. , the head of Australia's BHP was making promises to anyone who would listen.

At stops in Saskatchewan, Toronto and Ottawa over three days, chief executive officer Marius Kloppers vowed that if successful in its takeover, BHP would maintain Potash Corp.'s employment levels, increase investment in the company's Canadian mining operations and create a so-called "centre of excellence" in Saskatoon that will serve as BHP's global potash headquarters.

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For Mr. Kloppers, those commitments are one part of the effort to win federal approval for the buyout of one of the mining industry's crown jewels. The other part, he insists, is BHP's stellar behaviour in other foreign countries. "The best predictor of future performance is past performance," he said in an interview.

The record of global mining companies in keeping their promises, however, might give the government second thoughts. An investigation by The Globe and Mail has found that commitments made under the Investment Canada Act are not only difficult to enforce but also provide ample room to be breached, amended or even rescinded. Most foreign resource companies that have taken over major Canadian metals and mining firms in the past decade have been able to avoid living up to at least some of the undertakings that were made to the Canadian government. And in most cases, the undertakings, which are confidential and not accessible to the public even under freedom of information requests, were contravened with Ottawa's blessing.

Foreign mining firms including Vale SA of Brazil, Anglo-Swiss miner Xstrata PLC and London-based Rio Tinto PLC have all been able to cut Canadian jobs and, in some cases, reduce spending in Canada, less than three years after taking over Inco, Falconbridge and Alcan respectively, despite undertakings made to Investment Canada to maintain staffing and spending. But this is also true of BHP Billiton. The Globe has learned that 10 years ago, the company made a commitment to the government to locate a global headquarters for base metals in Toronto, in return for permission to buy copper producer Rio Algom - but it sought, and received, federal permission to break that pledge less than a year later.

Under the Investment Canada Act, BHP must show there's a "net benefit" to the country. However, "the net benefit test has not worked well," said Dominic D'Alessandro, the former CEO of Manulife Financial Corp., who has long called for takeover protections for Canada's largest resource firms, similar to those enjoyed by the country's major financial, cable and telecom companies.

"We need something else."

Given its bid for Saskatoon-based Potash Corp., previous commitments made by BHP Billiton to Industry Canada under the Investment Canada Act are particularly relevant. And in the Rio Algom case, the Australian mining giant was able to convince Ottawa to let it renege on a commitment.

The story began in August of 2000, when Billiton PLC of London struck a friendly $1.7-billion deal with Toronto-based Rio, trumping a hostile bid by Canada's Noranda.

In a press release announcing the deal, Billiton said Rio Algom's copper mines and its "experienced and skilled operational and technical management team" were "expected to form the nucleus of Billiton's global copper and base metals business."

According to sources who worked on the deal as well as former executives from Billiton, Rio Algom and current officials from BHP Billiton, an official undertaking was made with Industry Canada to locate Billiton's global base metals business in Toronto.

With Investment Canada approval in place, the Rio Algom takeover closed in October of 2000 and, according to former employees, about 120 Rio Algom staff continued to work at Billiton's new base metals headquarters in Toronto.

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