The board of Phelps Dodge Corp. has directed its executives and advisers to review some new strategies for its attempted takeover of Inco Ltd., one of which calls for the addition of a bidding partner.
According to people familiar with the discussions, the board of directors of the Phoenix-based copper producer met Monday night after rival bidder Teck Cominco Ltd. renewed its pursuit of Inco by adding an additional $2.7-billion in cash to an offer that is now valued at about $16.9-billion. A spokesman for Phelps said the company would not comment on what he called market rumours.
There was also growing speculation Tuesday that Brazilian mining giant Companhia Vale do Rio Doce (CVRD) is working frantically with its advisers to prepare a run at Inco, which has suddenly found itself at the centre of a fierce bidding war.
Inco bidders are under pressure to table cash-rich offers, which investors favour at a time when takeover speculation has inflated the value of so many stocks in the mining sector.
Phelps, however, may have limited financial flexibility to increase its offer for Inco, given concerns by some of its largest shareholders that the bidding has become too expensive.
Phelps's board is considering teaming up with another, unidentified buyer, to share the burden of a higher bid, the sources said. It is understood that Phelps's directors will review new bid alternatives this week.
After 10 months of heated bidding and counterbidding, the race for Canada's mining riches appears to be growing even more intense.
Mexico's Grupo Mexico, the world's third-largest copper producer, is also weighing a potential run at Phelps, the world's second-largest producer, sources have told The Globe and Mail.
The wild card right now could be CVRD. The firm has been rumoured to be circling Inco for some time, although industry experts familiar with the Brazilian mining giant say it tends to favour a cautious, slow-moving approach to acquisitions.
Last year, it demonstrated a willingness to both expand abroad and diversify by shelling out $876-million to acquire Canico Resource Corp., a Vancouver-based company with a nickel project in Brazil.
CVRD is the world's top producer of iron ore and pellets, and a successful play for Inco would instantly make it the No. 2 player in nickel. It would also reduce CVRD's reliance on the Brazilian economy and provide it with additional products to sell to its main customers in the steel industry, suggested Bear Stearns analyst Daniel Altman.
Mr. Altman speculated in a research note this week that CVRD could join the bidding war for Inco and afford to make an offer of $80 (U.S.) a share, or approximately $90.43 (Canadian), which is a healthy premium to current offers from Phelps and Teck.
In trading on the Toronto Stock Exchange Tuesday, Inco's stock closed at $88.25, up 80 cents.
Mr. Altman cautioned that CVRD lacks experience with such large-scale foreign acquisitions, and that the firm could be concerned about losing its investment-grade status if it tried to pull off such a major deal.
The other issue for CVRD is time. Teck, as a domestic player, does not need to navigate the Investment Canada review process, which typically takes 45 days. Instead, it is playing the time card, asking Inco investors to support the deal before it expires on Aug. 16. Phelps, meanwhile, has already submitted its application for review, and is waiting to hear back from Ottawa.
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