News

A U.S. hedge fund is pressuring FNX Mining Co. Inc. to put itself up for sale in hopes of igniting a bidding war for Canada's last independent nickel producer.

FNX's largest shareholder, New York-based York Capital Management, which says it controls 16.2 million FNX shares or 19.6 per cent of the company, sent a letter to chairman Terry MacGibbon this week, demanding it launch a sale process that would highlight the company's value to strategic buyers.

"Based on our knowledge of the industry and our contacts with key industry players, we believe that there may be significant corporate interest in FNX and any evaluation of strategic alternatives would attract multiple suitors," the letter said.

FNX, which operates the McCreedy West Mine in Sudbury, said it would review the matter with its board and respond shortly. "Management is not entrenched," FNX spokesman David Constable said in an interview, adding "our board is always reviewing strategic options."

Investors seemed doubtful that the tactic would precipitate a sale of the mining firm, which boasts a market value of roughly $2.8-billion. FNX shares fell almost 6 per cent yesterday on the Toronto Stock Exchange.

FNX's Sudbury mining properties sit between mines and smelters owned by Brazil's CVRD Inco Ltd. and Swiss-controlled Xstrata Nickel.

FNX hopes to double production in the next three years once a pair of new mines come on stream. It is expected to produce 12.7 million pounds of nickel and 10 million pounds of copper this year and must deliver all of its ore to CVRD Inco under a so-called "off take" agreement. CVRD processes and sells the finished nickel or copper.

The agreement makes CVRD a potential buyer of FNX, but since it already gets the ore and has relatively strong growth prospects in Sudbury, it may see little need to shell out $3-billion for control of the small producer. Xstrata, however, desperately needs ore to feed its smelters and refineries, but would need to strike a deal with CVRD to process the FNX ore.

Xstrata and CVRD are trying to hammer out a co-operation agreement in Sudbury by the end of the year. Xstrata Nickel CEO Ian Pearce recently said the deal could include asset swaps or see Xstrata process ore from CVRD Inco. Last month, Xstrata bid $2.9-billion (U.S.) for Australia's Jubilee Mines, a company with a similar production profile to FNX.

Other potential FNX buyers could include Canadian miners Teck Cominco Ltd. and HudBay Minerals Inc., analysts said. The heads of both companies have said they are interested in nickel assets.

If FNX does not launch a formal strategic review, the fund, which manages $13-billion in assets, may try to sell its stake. "We'll be hiring our own bankers to identify possible strategic purchasers for our block at a premium," York managing director Michael Weinberger said in an interview.

With a surge in consolidation prompted by an unprecedented boom in metals prices, hedge funds have piled in to mining stocks. Driven by a desire for short-term returns, some hedge funds have taken to agitating management to sell companies or return money to shareholders with dividends or share buybacks.