Canada's base metal riches are now the sport of the largest mining companies on the planet.
Brazil's Companhia Vale do Rio Doce (CVRD), the world's fourth-largest miner, muscled its way into the Canadian mining-merger fray yesterday with a $19.4-billion cash bid for Inco Ltd.
CVRD said it expects to table its offer formally next week. Its arrival at the bidding table could excite a new round of mining merger proposals at a time when industry convictions are deepening that the rally in base metal prices could continue for a few more years. China and India are so hungry for stainless steel and other products there is currently less than a day's supply of some metals on the London Metal Exchange.
"I think this cycle can be a long cycle," said CVRD chief executive officer Roger Agnelli during a press conference in Rio de Janeiro yesterday. CVRD has been stalking Canadian base metals assets since 2004, and Mr. Agnelli described the confluence of soaring metal prices and Inco's availability as a "dream."
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CVRD's bid substantially raises the stakes in the bidding for Inco, which has extensive nickel and copper mining reserves in Canada, New Caledonia and Indonesia. The Brazilian company's market capitalization of about $55-billion (U.S.) is more than twice that of Vancouver-based Teck Cominco Ltd. and Phoenix-based Phelps Dodge Corp., which each have cash-and-stock offers for Inco.
Its $86-a-share (Canadian) offer ranks slightly below the end-of-day value of Teck's and Phelps's bids, both of which rose with the value of their stocks Friday. Teck's bid stood at $86.04 a share, while Phelps's was $88.45 a share. Investors, however, will be strongly attracted to the all-cash CVRD bid.
The presence of such a big player as CVRD pushes the cost of bidding for Inco into a league where only a handful of the world's so-called super major mining companies can afford to play.
A few months ago, it appeared that Canada had a shot at building a world-class mining goliath with the proposed merger of Sudbury's Inco and its cross-town rival Falconbridge Ltd. When Inco saw its Falconbridge bid bested by Swiss-based Xstrata PLC earlier this month, Teck kept the hopes for a Canadian giant alive with a sweetened cash-and-stock offer for Inco.
Indeed, Teck appeared so hopeful of winning this week that its chief executive officer Don Lindsay told reporters at a conference in Australia that he believed his tender offer would succeed next Wednesday, when it is due to expire. Yesterday, Mr. Lindsay said in a statement that Teck is "evaluating" CVRD's offer and the company would remain "disciplined" about future bids. People familiar with the company said it is doubtful it will table a higher bid on its own.
"The only way Teck can come back is with a partner," said one person involved in the takeover discussions. At current prices, it is likely that only the world's biggest mining companies, such as BHP Billiton Ltd. and Rio Tinto Ltd., could afford to join the Teck bidding.
Other mining companies could have their hands full fending off new takeover overtures. Even though Xstrata is busy preparing to digest Falconbridge after its takeover offer closes Monday, rumours are already circulating that Xstrata is weighing a run at rival giant Anglo American. Adding fuel to fire, Anglo American recently moved defensively to bolster its stock price by investing $5-billion (U.S.) in a share buy-back program.
In the U.S, investors and some analysts are speculating that copper giant Grupo Mexico is on the verge of making an offer for Inco suitor Phelps Dodge.
While the fevered speculation has driven mining company stock prices to record levels, some observers have become wary about whether the euphoria is justified. Reflecting on a bull market that has seen base metal prices soar by 182 per cent in the past three years, JPMorgan analyst Joe Bergtheil recently referred in a report to some commodities as "Crazy Copper" and "Zany Zinc." He might well have added "Nutty Nickel" had he seen the exuberant jump in Inco's stock price yesterday.
In trading on the Toronto Stock Exchange yesterday, Inco's stock soared above CVRD's proposed offering price of $86 (Canadian) a share to close at $89.08, up $2.97 on heavy trading. The increase reflected investor expectations that a higher bid will emerge for Inco.
The full value of CVRD's $19.4-billion proposal is based on Inco's 225,000,000 outstanding shares on a fully diluted basis.
While takeover experts cautioned that CVRD has offered what one person described as "a very full offer," Inco's suitors have a number of options.
Yesterday Phelps shares rose more than 2 per cent as investors gambled the company would bow out of the hotly contested battle for Inco. The Arizona copper producer's quest has faced vociferous opposition from several of its large shareholders, including Atticus Capital LLC, its largest, with just under 10 per cent of Phelps stock. Atticus is now threatening to rally Phelps stockholders together to oppose the Inco bid with a proxy battle if the company doesn't pay a fat dividend or put itself up for sale.
"We reserve our right to take all necessary actions to oppose the acquisition up to and including the solicitation of proxy from Phelps Dodge shareholders against the acquisition," said Atticus spokesman Rob Coburn in an interview.
Phelps declined to comment.
Despite the pressure, however, people familiar with Phelps Dodge said the company's executives have indicated in recent days that they are confident they have sufficient shareholder support to sweeten a takeover offer if they so choose.
Although Teck's offer is due to expire on Wednesday, the company could easily extend the deadline to mull a variety of options, including inviting a partner to its bid. Time may be on Teck's side because CVRD will have to give regulators and shareholders at least a month to review its planned takeover.
CVRD also has the option of negotiating a friendly and sweetened merger agreement with Inco. This is a tricky alternative because under the terms of Inco's June agreement to merge with Phelps, Inco is required to share with Phelps details about any talks with a rival. Indeed CVRD is so cautious about the rigid disclosure terms that its CEO, Mr. Agnelli, said yesterday that he did not contact Inco CEO Scott Hand to inform him about the offer, a customary takeover courtesy.
CVRD and Teck would have more freedom to negotiate a friendly offer with Inco if Phelps retreated and its restrictive merger agreement was terminated.
While CVRD has arrived late in the takeover game, it has been seeking to acquire a major Canadian platform for more than two years. The Brazilian firm was in serious discussions in 2004 to acquire a majority stake in Toronto-based miner Noranda, and last year acquired Vancouver-based Canico Resource Corp. for $865-million.
If CVRD is successful in acquiring Inco, it's understood the Brazilian firm may use Inco as a platform for expanding internationally. Although CVRD is the fourth-largest mining company in the world, its ability to raise debt and equity is somewhat restricted. Brazil's lower credit rating has suppressed CVRD's ability to raise the rating of its debt, and its stock is not widely followed by investors or financial analysts because it is only available in North America through depository receipts on the New York Stock Exchange. If it acquired Inco, CVRD would be able to tap into the wide circle of global investors familiar with the Canadian company.
Compania Vale do Rio Doce:
$17.2 billion cash, or $86 a share.
Expires around the end of September.
Brazilian firm is the world's biggest iron-ore producer.
Entered bidding battle Aug. 11.
Phelps Dodge Corp.:
$17.8 billion in cash and shares, or $89.47 a share.
Expires in September.
Value varies with share price.
Offer supported by Inco.
Initial bid valued at $15.9 billion, or 0.672 share of Phelps Dodge plus $17.50 in cash.
Entered battle June 26.
Teck Cominco Ltd.:
$17.7 billion in cash and shares, or $88.56 a share.
Expires Aug. 16.
Value varies with share price.
Initial bid valued at $17.8 billion, or $28 in cash and 0.6293 of a Teck share.
Entered battle May 8.
(The Canadian Press)
