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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the Investment Canada Act are not only difficult to enforce but also provide ample room to be breached, amended or even rescinded.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.

Just a few months later, however, in March of 2001, Billiton and BHP Ltd. of Australia agreed to a blockbuster $28-billion (U.S.) merger to create one of the world's largest resource companies. BHP already had a significant base metals division with major mines in Chile and elsewhere. Once the deal closed in June, it was decided that Billiton's Toronto base metals headquarters would be moved to Houston, Tex., where it would share back office facilities with the merged company's oil and gas division.

"The idea was that Toronto was going to be the headquarters for the copper division of what was then Billiton. Then the BHP merger happened and, of course, they had a much bigger copper division already. So it was a case of Mohammed and the mountain," said Paul Blythe, CEO of Canada's Quadra FNX and a former Billiton employee.

Like the majority of the staff at the Toronto office, Mr. Blythe was offered a job in Houston, but elected not to go.

"I wasn't very interested in that move ... basically we were offered positions in Houston but most people didn't take them," he said.

Undertakings made under the Investment Canada Act are supposed to be binding even if the foreign company that made them falls under new ownership. So how was a merged BHP Billiton able to close the Toronto office? According to BHP, changes were made to the original undertakings after the acquisition was completed.

"These changes were made with the full agreement of the Investment Review Division and Minister of Industry and were the result of the significant changes that arose from the combination of the BHP and Billiton businesses," BHP spokesman Ruban Yogarajah said in a statement.

Reached on a business trip in China, Brian Tobin, who served as Canada's industry minister at the time, said he didn't recall the changes that were made to Billiton's original undertakings. But he said the amendments would have been made "inside the department," and, he added, "it would not have been a political decision."

According to Mr. Yogarajah, BHP agreed to "maintain an exploration presence" in Vancouver in exchange for moving the Billiton base metals office to the U.S. Even before the Billiton merger, however, BHP already had an exploration office in Vancouver with about 35 to 40 staff, former employees have told The Globe and Mail.

More recently, foreign mining giants Xstrata, Vale and Rio Tinto have been able to close mines, shutter production and lay off workers, even though all had committed to Ottawa that they would maintain previous staffing levels.

Citing the financial crisis and plunging prices for nickel, Xstrata cut 700 jobs in Sudbury and closed nickel mines in February, 2009. Xstrata had paid $18-billion for Falconbridge in the summer of 2006 and made an undertaking to Industry Canada not to cut jobs for three years.

Industry Minister Tony Clement allowed Xstrata to cut the jobs after the company said it would spend $250-million to build a new mine in Sudbury. The funds, however, were not the "new money," as the minister had insisted. Xstrata had already said it would spend the money on the Nickel Rim South mine in Sudbury in its annual financial statements, which had been published a few weeks earlier.

Brazil's Vale was also able to lay off mine workers in Sudbury and cut Canadian jobs to counter the global economic downturn, even though it had made commitments to Industry Canada to maintain staffing levels for three years after taking over Inco. In March, 2009, Vale cut 463 jobs in Canada, including 261 in Sudbury.

Mr. Clement initially demanded answers from the company and vowed to investigate. But in June of that year, the Industry Minister said he was satisfied that Vale had lived up to its commitments in the face of the market downturn, and that the pain had been felt equitably across the company's operations.

Cuts at the former operations and headquarters of Alcan came even faster following Rio Tinto's blockbuster $38-billion (U.S.) takeover in the summer of 2007. By December of 2008, the new Rio Tinto Alcan halted more than $7-billion of spending to build and upgrade smelters in Quebec and British Columbia in response to the global financial crisis. The spending commitments had been part of Rio Tinto's undertakings to Industry Canada to win approval for the takeover.

By January, 2009, Rio Tinto Alcan was cutting jobs including 300 in Quebec and closing smelters in the province. By April of that year, 18 per cent of the head office jobs at the company's "Maison Alcan" headquarters in Quebec were chopped. Rio Tinto also decided to halt a $50-million expansion of the headquarters that would have seen the renovation of a historic former church next door to the Alcan offices. Today, the church, one of the last architectural jewels from Montreal's storied "Golden Square Mile" along Sherbrooke Street, remains largely unchanged from when Alcan bought the property in 2007.

Rio Tinto Alcan's Montreal office now has 700 employees, according to a recent speech given by the division's CEO Jacynthe Côté. In 2007, before the Rio Tinto takeover, it had 854 employees, according to regulatory filings.

"The decision to reduce our work force was difficult but necessary. It complies with both the terms of the continuity agreement signed with the Government of Quebec and commitments made to the Government of Canada when Alcan was acquired by Rio Tinto," Bryan Tucker, a company spokesman, said in a statement.

John Manley, who served as industry minister from 1993 until late 2000 and oversaw a number of foreign takeovers of Canadian companies, says commitments made under the Investment Canada Act are problematic because a shift in economic fortunes can make them untenable.

"It is always in the minister's mind that an undertaking is only effective as the business conditions allow it to be. When you have a major downturn in the economy and the business prospects of the Canadian branch are in decline, the ability to fulfill some undertakings is going to be compromised from the outset," Mr. Manley said.

Only once in the 25-year history of the Investment Canada Act has the federal government tried to use the act's legal powers to force a company to live up to its commitments. Ottawa sued U.S. Steel for shutting down Stelco's operations and cutting jobs and reneging on spending commitments. But the case is still inching its way through the courts and it is unclear if the government will be able to force the American company to change course.

Both Mr. D'Allesandro and Mr. Manley believe that BHP's attempted acquisition of a Canadian global champion such as Potash Corp. may finally invoke a different response from the federal government rather than its usual takeover rubber stamping and willingness to allow vague and difficult to enforce commitments.

"If I were in BHP Billiton's position, I would not presume that this is a done deal. I would presume that there is a lot of work to be done to convince everybody. Any day is a potential election day and in that environment this could be easily politicized," Mr. Manley said.

When reviewing BHP's application, Ottawa might also want to consider comments made in 2008 by BHP's chairman at the time, Don Argus. Calling on his fellow Australians to continue investing in domestic mining assets, he cautioned that Australia's resource sector was at risk of becoming globally irrelevant - just like the mining sector of another former British colony.

"If we fail to remain competitive," the BHP chairman warned, "Australia will incur a substantial opportunity cost and in the worst-case scenario, our resources will fall into overseas hands and we will also become a branch office - just like Canada."

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