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Introduction

The horizon clears

Inco sees its future

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After days of murky weather, a wool fog lifted off central Labrador, revealing the bald rugged terrain explorer Jacques Cartier dismissed as "the land God gave to Cain." The momentary clearing allowed a clutch of travellers to dash to two turbo props marooned at Happy Valley Goose Bay airport.

These were no ordinary tourists. Leading the parka-clad pack was Scott Hand, patrician chief executive officer of the world's second-largest nickel producer, Inco Ltd. Behind him, eager to explore Cain, were an elite corps of international executives. Rick Waugh, CEO of Bank of Nova Scotia, a man who is gobbling up more Latin American banks than Butch Cassidy and the Sundance Kid, was here. So was David O'Brien, chairman of EnCana Corp. and Royal Bank of Canada. Joining them were Glen Barton, retired chief of Illinois' Caterpillar Inc.; John Mayberry, onetime CEO of Hamilton steel maker Dofasco Inc.; and Francis Mer, retired boss of European steel maker Arcelor SA and a former finance minister of France. Inco directors one and all, they scrambled to the Dash 8s under an uncertain sky to see for themselves the 21st century's first great mining startup: Voisey's Bay.

Mr. Hand, however, wanted his directors to see more than a prosperous mine on the afternoon of Sept. 20, 2005. Although Inco was still digesting the $4-billion, 1996 purchase of Voisey's Bay, he believed it was time to deal again. Rival Falconbridge Ltd. was in play, presenting Inco with an opportunity to forge a global powerhouse by bringing some of the world's richest copper and nickel deposits under one corporate entity. Worried board members weren't so sure. Inco had been burned by plunging nickel prices after the Voisey's Bay deal, and the directors were nervous about risking an even bigger bet. Mr. Hand had two days to win them over. His message: "If we don't do something on our own, somebody will do something to us."

Once upon a time, his company monopolized world nickel sales by virtue of its claims to the Sudbury Basin, one of the planet's biggest and richest mineral deposits. He was convinced it could be a titan again. Acquiring Falconbridge might even dispel Canada's reputation as a place where companies are incapable of eating their way to the top of business food chains. If Inco's blue-ribbon panel of powerful directors couldn't control the destiny of one of the country's few global heavyweights, then who could?

Just as the fog lifted temporarily that day in Labrador, the window for buying Falconbridge would not be open long. The battle for mineral assets was a lighting-fast Risk game involving ever fewer, more powerful takeover players. Reaching the Dash 8s, Inco's top officials filed onto separate planes so the company would not be leaderless in case of a crash. Soon they were airborne, headed for a corporate turbulence that none of them could have imagined.

The Inco directors would travel into the heart of the most complicated takeover battle of our time. They would enter a world of colourfully named but mostly futile corporate projects, from Talon to Albatross to Sudbury Sangria. They would taste triumph, defeat, betrayal and, worst of all, a dismaying government indifference that reached up to the Prime Minister's Office. Their burden was a fading national dream that saw Canada's few remaining independent corporate giants as contenders on a global stage dominated by predatory raiders.

There would be no happy ending, however. Instead, a debilitating mix of corporate caution, personality clashes, political naiveté and shareholder revolts would weaken Canada's mining contenders at the very moment they needed to be strong. In the first decade of the 21st century, Canadian greats - from the Hamilton steel maker Dofasco Ltd. to the Vancouver resort operator Intrawest Corp. - were being gobbled up by foreigners. And mining, so quintessentially Canadian, was to be no exception. A business fantasy, of creating a Canadian global giant, was about to disintegrate into a Canadian tragedy. This is the full story of how it unfolded.

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Chapter One

Better together

Historic rivals secretly plot a marriage

The battle for Canada's mining giants began with a small idea. Scott Hand wanted to do a deal. Inco's chief had been eyeing a Canadian merger since the summer of 2003, when Derek Pannell, his counterpart at Falconbridge, approached him with a suggestion. The unflappable metallurgical engineer from the English port city of Southampton had been parachuted into Falconbridge in 2002 after he distinguished himself as a tenacious manager who could launch new mines ahead of deadline and under budget. In 2003, Mr. Pannell told Mr. Hand he wanted to launch something else. It was time, he argued, for the mining rivals to bury a century of grievances and explore a joint venture in Sudbury, Ont., home to the Sudbury Basin and its vast treasure trove of minerals. On the surface, the two men had little in common. Mr. Pannell is a no-nonsense engineer who worked his way to the top by honing his skills as a hard-nosed mining operator. Mr. Hand is a stiff U.S. lawyer who was raised in an affluent New York suburb and earned the trust of Inco's powerful board by distinguishing himself as a cautious and loyal executive. In some business quarters, the reliable executive was known as "Steady Hand."

Despite their differences, the two men were unified in their desire to forge a Canadian mining legacy. To Mr. Pannell, it was lunacy that Falconbridge and Inco lived alongside each other with so many redundant operations. "We kept looking over the fence at Inco and saying, 'This is so strange,'" he said. For a century, the foes had mined ore side by side from the Sudbury Basin, jealously protecting adjacent mining claims like squares on a checkerboard. Inco and Falconbridge had tentatively explored joint operations in the Northern Ontario city in the past, but were hampered by Inco's historic disdain for its competitor's smaller mines and reserves in Sudbury. To make matters worse, Falconbridge infuriated Inco in the mid-1990s when it lobbed a surprise competing bid for the Voisey's Bay deposit, forcing Inco to dig deeper into its pocket to buy the Labrador prize. A subsequent billion-dollar hit, triggered by a humiliating overpayment for the project, fostered dark suspicions within Inco's ranks that Falconbridge wanted to wound its competitor.

The timing for Mr. Pannell's proposed truce, in the dog days of 2003, was perfect. Inco, which once supplied as much as 90 per cent of the world's nickel supplies, had seen its market share slip to 17 per cent in 2003, putting it in second place behind Russian behemoth Norilsk Nickel Group. Compounding Inco's problems, its fledgling nickel mining project in New Caledonia had been sandbagged by a billion-dollar cost overrun and local resistance to the megaproject. A big cost-cutting push in Sudbury would be welcome news for Mr. Hand to take to a board grappling with mounting losses and a swooning stock price.

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Mr. Pannell knew it would take more than a friendly reception to overcome the long history of distrust between the companies. So in the late summer of 2003, the two men went to unusual lengths to launch the elusive quest for a joint venture in Sudbury. Operating under the code name Project Pentlandite, a reference to the brassy, yellow mineral that houses most of the world's nickel, the two companies quietly recruited two dozen managers from Inco and Falconbridge to secretly gather and share their mining secrets. To enforce co-operation between the corporate antagonists, the companies hired one of the world's most respected mining engineers. Graham Farquharson, 65, is the man mining companies around the world turn to when they want a trusted assessment of exploration results or mine operations. The president of Toronto's Strathcona Mineral Services Ltd. leapt to global prominence in 1997 when he exposed the Indonesian gold-salting scam at Bre-X Minerals Ltd., triggering the biggest mining failure in history. Mr. Farquharson's challenge in Sudbury would prove to be no less daunting.

The lean and weathered engineer met Project Pentlandite's recruits for the first time in October, 2003, under cover of Sudbury's Howard Johnson Plaza Motel, a one-storey motor inn in the city's west end. Mr. Farquharson explained that the team's mission was to study both companies' operations along the northern ridge of the Sudbury Basin, near the small leafy mining town of Levack. The economics of two companies mining the same ore body had become so dysfunctional that every day Inco trucks drove thousands of tonnes of ore from its Coleman/McCreedy East Mine along a paved road that winds around Falconbridge's underused Strathcona processing mill. The trucks dumped the ore onto nearby rail cars that then crawled to Inco's Clarabelle Mill, 50 kilometres to the south. A fortune could be saved if the men in the room could figure out how to eliminate the ridiculous overlap.

From the beginning, Project Pentlandite was infected with a paranoia that slowed the progress of information-sharing to a glacial pace. Falconbridge and Inco executives were so afraid that leaks about a Sudbury cost-cutting venture might spark a union revolt that they went to extraordinary lengths to camouflage the team's work. Project members were told to invent excuses when asking superiors for time off work or requesting company data. If they wanted to exchange or review data, they were confined to an office rented near the outskirts of Sudbury. Further frustrating the venture were old complaints between hostile neighbours. Some executives at Inco's Toronto head office were so worried that Falconbridge was duplicitously gathering information for a hostile takeover bid that they wasted many weeks arguing to no avail that Falconbridge sign an agreement restricting it from launching a bid. It wasn't easy for Inco officials to abandon old suspicions, Mr. Hand said, because "it was never clear whether you could open your kimono and be sure that someone wouldn't take advantage of you."

The result? A simple review of one mine and mill site dragged on for nine months, "bogged down by the baggage of the past," Mr. Pannell said. Slowly, the two sides opened up and, by July, 2004, Mr. Farquharson had enough material to make a powerful case for co-operation on the northern ridge of the Sudbury Basin. He estimated that if the companies worked together to improve mine ventilation, and shared equipment and mine access, they could boost output and save close to $50-million annually in capital expenses. Even greater savings could be had, he believed, if Inco shipped ore from the Coleman/McCreedy mine to Falconbridge's adjacent mill.

On July 9, 2004, Mr. Farquharson sent a report on his findings to Inco and Falconbridge executives and waited for their reply. But nothing would come. Falconbridge's controlling shareholder had lost patience with Sudbury-style intransigence. Incredibly, Inco and Falconbridge officials did not jump on the opportunity to save perhaps $100-million. Instead, one year later, in June, 2005, the two companies announced a smaller co-operation agreement to save $15-million annually by shipping Inco copper to a modern Montreal refinery owned by Falconbridge. As for Project Pentlandite's promise of a much grander joint venture, Mr. Farquharson said, "It just sort of died."

Chapter Two

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Back from the brink

Brascan rears its head

As one corporate vision faded in early 2004, another sprang to life. This one was orchestrated by Brascan Inc., the once-mighty Toronto conglomerate that was reinventing itself after a near-death experience. Plunging real estate prices in the early 1990s nearly toppled Brascan and its sprawling collection of North American office buildings, forest products, mining and financial companies. When Bruce Flatt was named Brascan's chief executive officer in 2002, the conglomerate had sold most of its natural resource and finance holdings to concentrate on a core collection of high-end office towers and low-cost hydroelectric power companies. Brascan's Old World mining interests, a 42-per-cent stake in Noranda, which in turn owned a 59-per-cent interest in Falconbridge, simply didn't fit with Mr. Flatt's New World vision.

An accountant by training, Mr. Flatt had impressed his Brascan bosses with his unflinching management style and strategic foresight during the dark 1990s. He transformed Brascan's scattered real estate portfolio by shedding buildings and focusing exclusively on premier office towers in major North American cities. To Mr. Flatt, modern skyscrapers were the ultimate annuities, delivering a predictable stream of income from reliable long-term leases. Mining companies are vulnerable to the whims of metals markets and they burn through billions of dollars for projects perpetually delayed by political and environmental conflicts. When the time was right, Noranda would be jettisoned.

The right time arrived, Mr. Flatt and his partners agreed, in early 2004. Metals prices were climbing out of the basement and cash-rich mining titans in Australia and the United Kingdom were shopping for acquisitions. It was a seller's market. Because Noranda was a patchy collection of aging copper and aluminum mining and processing assets, Brascan executives sought to attract buyers by packaging it with the more prosperous Falconbridge. In early 2004, Brascan launched an auction to sell its mining orphans under the code name Papa Bear. It hired CIBC World Markets and Toronto law firm McCarthy Tetrault LLP to contact buyers and set up a data room for Noranda and Falconbridge, or what would be known as the Brascan mining block.

By the summer of 2004, three serious suitors were vying for the Brascan block. The most obvious was Inco, Falconbridge's Sudbury neighbour. Having missed the shot for a Sudbury joint venture because of the sluggish pace of Project Pentlandite, the nickel giant now had to weigh a run at both Noranda and Falconbridge. Its lead investment bankers at RBC Dominion Securities were urging Inco to acquire the entire block, but they were meeting resistance. Many Inco officials had no interest in Noranda's mixed portfolio of mining assets. And despite the huge Sudbury cost savings identified by Project Pentlandite, a small but vocal group of Inco executives still dismissed Falconbridge as an inferior nickel company with second-class reserves. Compounding matters, Inco didn't have much of a shopping budget - it was losing money after being hit by writedowns at Voisey's Bay and cost overruns in New Caledonia.

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Another hurdle was Inco's conservative, long-serving board of directors. Any future talk of takeovers would be haunted by fears of repeating the costly blunder that came to a head in 2002, when the company had to write down a third of the value of the $4-billion Voisey's Bay acquisition only six years after the purchase. Despite the obstacles, CEO Scott Hand believed there were enough cost savings to be wrung from a Falconbridge acquisition to make a bid worthwhile. Using the code names Nest for Inco and Bird for Falconbridge, Inco's board of directors agreed to proceed cautiously toward an offer. After months of studying a takeover, Inco submitted a written offer for control of both Noranda and Falconbridge that was so voluminous, at more than 100 pages, that it was dubbed a "load of lumber."

According to people familiar with the midsummer proposal, it was complex, highly conditional and light on cash. Inco was only offering a few billion dollars of cash for control of the two companies. The rest of the purchase price would be paid through a combination of Inco stock and shares in a new company consisting of a mixed bag of assets to be spun off from Noranda and Falconbridge. On paper, Inco called the new company "Spinco." In private, its advisers dubbed the entity "Crapco." Smelling a bad deal, Brascan's executives did not invite Inco to the negotiating table. Project Bird never took flight.

Brascan could afford to give Inco the cold shoulder because two other secret suitors had come forward that spring. One was Xstrata PLC, a holding company based in Zug, Switzerland, that had been devouring mining companies ever since it hired a pugnacious and predatory South African deal maker named Mick Davis in 2001. The other was Brazil's Companhia Vale do Rio Doce (CVRD), which was creating a sensation in the mining world with its aggressive acquisitions and finesse at locking up long-term sales contracts under the leadership of an ambitious former banker, Roger Agnelli.

Xstrata and CVRD were well-matched with their acquisition expertise and huge cash coffers. But according to people familiar with the discussions, the Swiss company took the initial lead with a tentative proposal to pay cash for control of Noranda and Falconbridge. In the summer, however, Xstrata dropped out of the race to quietly hunt prey on a different continent. Within a few months, Xstrata would explain its sudden departure by launching a hostile bid for Australia's WMC Ltd., known also as Western Mining. CVRD, on the other hand, had tremendous motivation to bid for a North American mining giant. After two decades of depressed commodity prices and economic turbulence in Latin America, the Brazilian company and its charismatic CEO had become symbols of the southern continent's new economic prowess. Mr. Agnelli had simplified CVRD's convoluted ownership structure to reduce his government's influence, shed the company's unproductive assets and, with the help of rising metals prices, finance an aggressive program of mining acquisitions in Brazil. By 2004, CVRD had grown to become the world's largest iron-ore producer and one of the world's top five mining companies.

But Mr. Agnelli wasn't finished. He wanted to merge CVRD, which had virtually no market profile outside of Latin America, with a prominent global player that could raise the Brazilian company's stature with investors and lenders. In 2004, this quest brought him to the door of Brascan, which ironically had started life 100 years earlier as a Toronto company financing the production and sale of electricity in Brazil. CVRD submitted a takeover proposal for Brascan that it code-named Project Walking, or Andar Do Projecto in Portuguese. But the project was not destined to be an easy trek. According to people involved, talks with Brascan were prolonged and difficult because the Canadian executives kept pushing CVRD to put more on the table to match competing offers. Brascan's multiple negotiations were confidential so CVRD and its advisers were never entirely sure of the identity or terms of other bids.

After months of difficult on-again, off-again talks with Brascan, members of the CVRD team began to complain among themselves that they were being used as a stalking horse to squeeze higher bids from other suitors. Underlining this suspicion was a series of embarrassing leaks about the negotiations in the Brazilian financial press, which created a political headache about the risks and costs of a multibillion-dollar foreign takeover for the partly government-owned CVRD. It also didn't help that other Noranda suitors were getting a peek at CVRD's hand. "It was a mess," Mr. Agnelli recalled in an interview.

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With so many clouds darkening the talks, CVRD officials began to privately refer to the takeover bid as Project Raining. Despite the turbulence, the Brazilians remained at the negotiating table and, by summer's end, had hammered out an offer that appeared to meet with Brascan's approval. Under a two-step proposal, CVRD would pay cash to acquire a 40-per-cent stake in a combined Noranda and Falconbridge. The South American company would then transfer its domestic Sussego copper mine to the new company in exchange for boosting CVRD's stake in the Canadian miner to 50 per cent. CVRD was so confident that a deal was at hand that it hired a Toronto public relations firm to prepare press kits for the takeover and laid plans for a celebratory party in Rio de Janeiro.

To close the deal, Mr. Agnelli entered a final round of negotiations with Mr. Flatt and some of his deputies. But the Brascan boys had a surprise. According to people familiar with the meeting, Brascan officials advised Mr. Agnelli that if CVRD wanted to prevail, it would have to pony up a little more money. According to people familiar with the session, Brascan was seeking less than a dollar a share more from CVRD on a bid that sources said was valued at about $7-billion, or $23 a share. The Canadians felt they needed a bigger premium to win the support of minority shareholders at Noranda and Falconbridge.

What they hadn't calculated on, however, was Mr. Agnelli's pride. According to one person familiar with the meeting, the Brazilian "blew up" when Brascan tabled its 11th-hour demand. "He thought he had a deal and, when they demanded more, he walked away. He was furious," said one person involved in the talks. There would be no going back. Mr. Agnelli won't discuss details of the breakup other than to say, "We walked away. I said, 'This is not the right moment.'" The outraged Brazilian told his takeover team that the proposal was dead and CVRD would sever all communications with Brascan.

CVRD's withdrawal left Brascan in a very vulnerable position. Almost a year after it had launched a private auction to sell its mining holdings, Brascan was still the reluctant owner of Noranda and Falconbridge. The stalled sale came with some good news. Soaring metals prices had pushed Noranda's stock price up by more than 65 per cent in a year. The bad news: Only one interested buyer was left, and Brascan's executives were far from convinced that China Minmetals Corp. would make it to the altar.

The Chinese company had made its first overture to Noranda in March, 2004, at the Prospectors and Developers Mining Conference, which annually attracts an eclectic and international pilgrimage of prospectors, promoters and top mining executives to Toronto. Frank Xu, the key Chinese executive on the deal, talked with enthusiasm about buying the Brascan mining block, while Mr. Pannell and his top executive Aaron Regent met frequently with him and other Minmetals officials in Beijing and Toronto.

By September, Minmetals indicated that it was interested in buying all of Noranda's shares for cash, but only at a small premium above its $23 stock price at the time. The disappointing offer barely matched Noranda's net asset value and represented little improvement on CVRD's earlier proposal. It was, however, the only prospect at hand. On Sept. 24, Noranda entered exclusive takeover negotiations with Minmetals, and its Toronto executive team rolled out the welcome mat for its Asian suitor. Noranda executives travelled several times to Beijing, toured the Great Wall with Mr. Xu, spent hours every week learning Mandarin from private tutors and took waves of Chinese officials on tours of its operations.

But after nearly two months of negotiations and visiting delegations, Noranda was no closer to a sale in November. Minmetals' interest in Canadian mining assets had sparked a small political backlash against China in Ottawa. Backbenchers blasted a deal that would hand control of a premier domestic mining operation to a company controlled by a state with a record of human-rights abuses. Behind the scenes, Minmetals officials assured Mr. Pannell and his executives that they were lining up a syndicate of Chinese partners to finance the takeover, and a call would come shortly confirming the terms of a takeover bid.

A call did finally come in early November, but it was not what Mr. Pannell was expecting. The Chinese wanted him and Mr. Regent in Cuba. A few hours later, the two Canadians were marooned in the lobby of an aging hotel in downtown Havana. They had rushed there on a chartered jet because they had been promised a meeting with one of China's most powerful business leaders, the kind of man whose blessing was vital to the success of a Minmetals takeover offer. The meeting was set for the early afternoon, but the two men waited hours in the lobby before they were invited into a hotel boardroom.

Greeting them was the Bank of China's governor, Chen Yuan, a respected banker who had been credited with turning around the troubled state-owned institution and who enjoyed impeccable political connections. Mr. Chen's late father was Chen Yun, one of the Immortal Eight Communist Party elders who helped found the People's Republic of China in the 1940s. The younger Mr. Chen had come to Cuba to meet with his father's old friend Fidel Castro, to explore local investment opportunities and to learn, if possible, more about the Canadian takeover plan.

After a round of introductions, Mr. Pannell and Mr. Regent were asked to make a presentation about their mining operations. When they finished, Mr. Chen followed a script the Canadian executives had heard many times before. China, he explained, had a great desire to secure raw materials for its booming economy. About an hour after the meeting began, the Noranda executives found themselves back in the lobby.

"What just transpired in there?" Mr. Pannell asked.

"Very little," Mr. Regent replied.

On Nov. 16, Noranda issued a press release stating it was no longer in exclusive talks with Minmetals. Behind the scenes, the Chinese company continued to discuss takeover options with Noranda officials, but nothing materialized. A novice at the North American deal table, Minmetals had taken too long to secure the support it needed from the Chinese government and banks to finance the Canadian takeover. When frustrated Noranda officials terminated the exclusive talks, Minmetals lost the leverage it needed to forge a syndicate. The political storm died in Ottawa, and Noranda and its affiliate Falconbridge ran out of suitors. Brascan was stranded.

Chapter Three

Inco goes Down Under

And once again, it comes up short

Scott Hand had not been idle while Brascan courted the foreign suitors. In fact, by the time Falconbridge was abandoned on the dance floor, the Inco CEO was waltzing with another potential partner. In November, 2004, Mr. Hand flew to Arizona to sit down with Steve Whisler, his counterpart at the world's third-largest copper producer, Phelps Dodge Corp. The two CEOs had much in common. Both men were U.S.-trained lawyers. Their companies had been founded a century earlier by Wall Street financiers, were dependent on century-old mineral discoveries and, in recent years, had seen their dominance eroded by more acquisitive global giants. The gulf between the traditional North American miners and aggressive global super majors was rapidly widening.

Inco, Mr. Hand told the Phelps' executive, was not going to be a spectator in the takeover arena. The Toronto company had been quietly wooing the Australian giant Western Mining, but it was getting nowhere. The game had changed days earlier when Xstrata lobbed a hostile $5.7-billion (U.S.) bid to acquire Western Mining. The Australian copper and nickel company was in play, but Mr. Hand doubted he could get his board to support a higher bid. If Phelps joined Inco in a deal, Mr. Hand proposed, they could share the costs and divide Western Mining's assets. If they didn't take action, he told Mr. Whisler, "We will lose control of our destiny."

Mr. Whisler agreed and, within a few weeks, the boards of both companies were exploring a possible joint bid for Western Mining that could top Xstrata's $5.7-billion offer and see Inco and Phelps divide the Australian company's assets. The pursuit was named Project Cork in honour of Australia's world-renowned wineries. Talks soured, however, in December when Inco and Phelps couldn't agree on how much money each would ante up for a joint bid. While the two companies bickered, the world's largest mining company, BHP Billiton PLC, unveiled a blowout $7.3-billion (U.S.) bid in January that ultimately succeeded. Having burnt their fingers overpaying for Voisey's Bay, Inco's senior executives and directors had little appetite for the financial risks of what had become a very expensive takeover match. "WMC was very attractive to us we just couldn't get there," said Inco director and former Caterpillar Inc. CEO Glenn Barton. For the second time in two years, Inco's tentative attempt at a takeover had failed. The Inco and Phelps generals called off the troops and retreated to their camps in Toronto and Phoenix. On the northern coast of Washington State, where a mile-long natural spit juts into the Puget Sound, a new mining force was making battle plans in the final week of April, 2005. The north tip of the spit is home to the sprawling Semiahmoo Resort, which offers breathtaking views of the Straits of Georgia and a renowned seaside golf course. More than a dozen executives and directors of Teck Cominco Ltd. had driven from their home base in Vancouver to gather in one of Semiahmoo's conference rooms to chart an ambitious future.

Leading the session was Don Lindsay, Teck's recently appointed chief executive officer, who in January had left a 20-year career as an investment banker with Toronto-based CIBC World Markets to start a job that, as he put it, he had been "training all my life for." The driven and unpredictable executive is one of a new breed of investment bankers transforming old-fashioned mining companies into modern trading houses that buy, sell and swap mining assets. He had advised audacious promoters such as Robert Friedland and the hard-nosed deal makers at Brascan. Now he was itching to quarterback his own acquisition strategy for the world's largest zinc and metallurgical coal producer.

Mr. Lindsay had prepared a Power Point presentation to outline his vision for Teck, and it began with a history lesson. Since 2000, he explained, Australia had seen its fragmented mining industry shrink dramatically after 10 of its leading companies were consumed by acquirers. As a result of the buying binge, a powerful trio of super majors ruled the mining industry. The three raiders were Rio Tinto PLC, Anglo American PLC and BHP Billiton - a group known as the Werewolves of London. The most impressive of them was BHP Billiton, which started life in southeastern Australia as Broken Hill Proprietary and grew to become the world's largest mining company through a number of takeovers, including its 2001 merger with London-based Billiton PLC. If Australia could produce a global powerhouse, so could Canada, Mr. Lindsay told the directors. Metals prices were soaring after decades of decline, and Mr. Lindsay predicted the boom would last for years because of the insatiable demand in China and India for raw materials. Mining companies were swimming in cash, and it was only a matter of time before the super majors set their sights on Inco and Falconbridge.

Unlike most of its Canadian competitors, Teck is protected from raiders because its dual-class share structure gives the founding Keevil family and a few other shareholders voting control of the company. Leading the family is Teck chairman Norman Keevil Jr., son of company founder and legendary mining promoter Norman Keevil. Although shy and soft-spoken, Norm Jr. shares some of his father's legendary taste for business gambles. He bet the company in the early 1990s by buying a major stake in Cominco Ltd., and he had purchased a 10-per-cent stake in the fledgling Voisey's Bay discovery in the mid-1990s without eyeballing a single drill core. When falling metals prices in the late 1990s pummelled Teck's stock price and financial health, the company and its directors got a painful lesson on the dangers of betting on big acquisitions in the cyclical mining business. Despite the history, Mr. Lindsay wanted his board to get ready for a new round of takeover gambles. "We had to do whatever we could to prepare ourselves," he said.

By the end of the meeting, a number of directors, including Mr. Keevil, agreed to help Mr. Lindsay launch case studies of, among other things, the booming nickel market and the rapid expansion of BHP and Xstrata, another global consolidator. Enlisting directors in the study was a shrewd move. Two months earlier, Mr. Lindsay had come to Teck's board with a proposal to acquire the Brascan mining block, but the plan was rejected by some directors who didn't share his bullish outlook on metals prices. They dismissed the takeover as too costly at a time when Teck's cash reserves were low. A leading voice of caution was David Thompson, Teck's former CEO, who had spent years digging the company out of heavy debts. Mr. Thompson is such a disciplined consumer that he held on for 15 years to a celebratory bottle of vintage champagne received as a gift from Mr. Keevil, before uncorking it at his daughter's wedding. If Mr. Lindsay wanted to push Teck onto the takeover field, he needed to convince Mr. Thompson there was a once-in-a-lifetime opportunity to acquire a premier Canadian mining company.

Chapter Four

Another Odyssey begins

Teck comes calling

In the summer of 2005, Brascan needed a new strategy. It had been left holding the gavel in its unsuccessful auction of Noranda and Falconbridge, and it would need a new approach to lure suitors back. Brascan dressed its orphan mining holdings up on June 30 by merging Noranda and Falconbridge into a diversified copper, nickel and aluminum powerhouse that adopted Falconbridge's more admired name. Brascan's stake in the new company shrank to about 20 per cent, and Mr. Pannell found himself at the helm of a widely held company that now boasted a bigger market capitalization than its old rival Inco.

Shortly after the merger was completed, Brascan's phones began ringing. One of the first calls was from Mick Davis. Xstrata's driven chief executive officer was licking his wounds after BHP Billiton won the race to acquire Western Mining. Unlucky in Australia, Mr. Davis had his eye on Canada and the Falconbridge stake. Xstrata opened a file that it would eventually code-name Project Odyssey to stalk Falconbridge. Once again, however, Xstrata did not have the field to itself. Some other former suitors were calling. According to people familiar with the talks, Teck's chief executive Mr. Lindsay dispatched a team of investment bankers and lawyers to assemble a potential bid for Falconbridge and, by the end of July, talks were so advanced that the Vancouver company had drafted a term sheet outlining an offer for Brascan's Falconbridge stake. "The only thing missing from that sheet was the price," said one person involved in the discussions.

Something far more important was also absent: the seal of approval from Teck's board of directors. Brascan was seeking close to $2-billion for its 19.9-per-cent interest in Falconbridge, and sources say a majority of Teck directors thought the price was too high. Moreover, some directors argued Brascan was demanding too high a premium for its Falconbridge stake. "The board didn't share Don's view about metals prices. They thought they would be overpaying," said one person involved in the talks. In retrospect, Mr. Lindsay said, "We wish we had done it in July."

Blocked again by his directors, Mr. Lindsay lost to another suitor. At 2 a.m. Toronto time on Aug. 15, just five months after it lost the race for Australia's Western Mining, Xstrata's London office issued a press release announcing that it had purchased the 19.9-per-cent stake in Falconbridge for $28 a share, or $2.07-billion. In a wrinkle that made Brascan's demanding negotiators look like geniuses at the time, Xstrata revealed that it had agreed to pay the conglomerate a so-called "top-up" that called for Xstrata to hand over a premium to match any price offered for additional Falconbridge shares within the next nine months. For no extra money, Brascan had effectively locked up a future option on Xstrata's takeover ambitions. "It was a huge coup for us," said one Brascan official. "We thought we were protected."

If Don Lindsay was devastated by Xstrata's successful Falconbridge grab, he didn't show it. Hours after the Swiss miner announced its acquisition on Aug. 15, Teck's CEO was sitting in the small spare Toronto office of Inco's Scott Hand. Only a few weeks after Teck's board had put the brakes on a $2-billion Falconbridge investment, the indefatigable Mr. Lindsay was gunning for bigger game. Xstrata's toehold in Falconbridge could only mean one thing, he told Mr. Hand: The war for Canada's premier mining assets had begun. If the domestic companies didn't move quickly, much bigger foreigners would take control. To prevent that from happening, Mr. Lindsay urged Mr. Hand to consider a three-way "merger of equals" with Falconbridge and Teck.

Mr. Hand thanked his guest for the overture and promised to discuss the matter with Teck's chairman, Norm Keevil, whom he had known for years. A few days later, Mr. Hand telephoned Mr. Keevil to thank him for the offer and say "we are going to look at a lot of things, including what you indicated to me." Inco, he said, would get back to Teck.

Anyone who knew Inco understood that Mr. Lindsay's overture was likely doomed from the start. Inco executives and directors viewed Teck's core metallurgical coal and zinc reserves as inferior and illogical partners for its nickel operations because the world's biggest metals consumer, China, was rich in zinc and coal. As well, Teck's stock price was trading below Inco's, and its dual-class share structure was a deal-stopper for Inco's powerful institutional shareholders, who would see their votes virtually wiped out in a Teck merger. Compounding matters, there was bad blood between Inco executives and Mr. Lindsay. A decade earlier, when he was an investment banker, Mr. Lindsay had been Falconbridge's lead adviser on its competing bid for Voisey's Bay that had forced Inco to overpay for the Labrador discovery. Mr. Hand had been a senior Inco executive at the time, and suspicions still lingered. When Inco officials later opened a confidential file on Mr. Lindsay's proposed three-way merger, they gave it the code name Project Talon.

Inco's paranoia was exacerbated by a wave of trading in the nickel company's stock. After several uneventful months of trading, unusually high volumes of Inco shares were being bought and sold in late August and early September following Xstrata's investment in Falconbridge. By Sept. 7, one buyer alone had spent $190-million to accumulate a 4.9-per-cent stake in Inco. Falling slightly below the regulatory disclosure threshold, the owner would remain anonymous for months.

The trading set off alarms in Inco's Toronto head office. Mr. Hand and his advisers suspected that Xstrata was accumulating a position in Inco as part of an audacious strategy to acquire both Falconbridge and Inco. It made perfect sense. Xstrata had a strong grip on Falconbridge with its 19.9-per-cent stake, and the best way to make money on the acquisition would be to buy Inco, force the two companies to co-operate in Sudbury and unlock the windfall. It was just the sort of strategy envisioned by Project Pentlandite. Mr. Hand and his team agreed they would have to move quickly if they wanted to craft their own deal.

Chapter Five

Project Bird

Scott Hand wins over his board but not the prime minister

In the last week of August, the directors of Falconbridge walked up a flight of stairs from their second-floor offices at Toronto's BCE Place. They were gathering in The Gallery, a Brascan boardroom named for its collection of vintage oil paintings of early Canadian native life that was assembled by the late Peter Bronfman, the company's major shareholder. Waiting near an oil portrait of Mr. Bronfman himself was a man known around the mining world as Big Mick, Xstrata's tall, burly chief who wanted to be Falconbridge's next controlling shareholder. Mr. Davis began the session with a Power Point presentation. Xstrata had just purchased a minority stake in Falconbridge, he explained, because he believed the Swiss and Canadian miners would have a great future together. "I'm not making any commitments about a takeover," one person in the room recalled Mr. Davis saying. Rather, he said he had come to meet them "to build a bridge" between the two companies. "I'm neither friend nor foe, this is just a business proposition."

Derek Pannell was very pessimistic. The Falconbridge CEO later huddled with his lead investment banker Paul Spafford of CIBC World Markets and legal counsel Gary Girvan of McCarthy Tetrault. Xstrata, he predicted, was going to sit on its Falconbridge shares and wait for metals prices to sag before launching a full, and cheaper, takeover bid. If Falconbridge wanted to get a sweeter deal for shareholders, he said, the company had to start an auction.

Falconbridge's advisers put out calls, and one of the first to answer was Scott Hand. Within days of the Davis meeting, Inco's chief was visiting Mr. Pannell in his Toronto office. Mr. Hand reminded Mr. Pannell that it had been two years since the two men had launched Sudbury's Project Pentlandite. Maybe, Mr. Hand offered, "we should go for the whole thing." Soon, Inco executives would be opening another confidential takeover file, this one code-named Project Bird II.

The first challenge Mr. Hand faced before Bird II could take flight was to secure the support of Inco's board. The previous year, the 12 directors had resisted tabling anything but a low-ball bid for Noranda and Falconbridge because new mines in New Caledonia and Labrador had drained the company's cash coffers. A leading voice of caution was David O'Brien, a flinty businessman who oversaw the breakup of Canada's largest and oldest conglomerate, Canadian Pacific Ltd., in 2001 to maximize returns for shareholders. The conservative Mr. O'Brien was not a champion of major takeovers, and people close to Inco's board said his views carried enormous weight. "David drove the board throughout this whole process," said one person close to the board. By the summer of 2005, however, even Mr. O'Brien agreed that the economics of a merger with Falconbridge had sharply improved. An unprecedented rally in nickel and copper prices and the recent startup of the much-delayed Voisey's Bay nickel mine in Labrador had sent Inco's stock price and cash levels into orbit. One year after its limp bid for Falconbridge foundered, Inco could afford to be a serious buyer.

Xstrata's surprise purchase of a minority stake in Falconbridge a month earlier had prompted a fresh round of Inco board discussions about the company's future. Mr. Hand told the board about Mr. Lindsay's proposed merger of equals, and a majority of directors agreed that a marriage with Teck's coal and zinc assets was a poor fit for the nickel company and offered almost no opportunities for cost savings. The best bet for improving shareholder values, they agreed, was Falconbridge.

What Inco's board had yet to decide was how much to pay for its competitor. To help solidify the conservative board's support for the big takeover bid, Mr. Hand arranged to spend two days with his directors in Labrador so that he could impress them with a tour of Voisey's Bay, a shining symbol of the company's future. "We were absolutely amazed at the scope of the operation. It was fantastic," Mr. Barton said. By the end of the trip, Mr. Hand said, his directors "began to warm to my idea that we should buy Falconbridge."

Within two weeks, Inco would be putting the finishing touches on an invitation of marriage. A Canadian mining powerhouse was within sight.Scott Hand and his government relations executive Bruce Drysdale, a former lobbyist and political adviser under Conservative Prime Minister Brian Mulroney, moved quickly through the crowds at Toronto's Pearson International Airport. It was the first week in October, and they were racing to catch a flight to Ottawa, where Mr. Hand was scheduled to make the biggest political pitch of his career. Inco and Falconbridge were days away from signing a historic agreement to merge two century-old mining foes, and Inco needed to enlist the Prime Minister's support for the monster merger.

Normally a laggard at the bargaining table, Inco and its financial and legal advisers had moved with uncharacteristic speed to consummate a deal. The company's executives knew they would have to be nimble if they wanted to seal a deal with Falconbridge because Teck and other potential suitors were bearing down on them. At Teck, Don Lindsay and Norm Keevil had continued to call and send letters about the three-way merger, but Mr. Hand and Inco's directors, not keen on Teck to begin with, mostly ignored the overtures that might complicate their immediate plans. Their first priority in August, 2005, was to close the Falconbridge deal. There would be plenty of time later to talk to Teck.

As the two men neared the Ottawa departure gate, Mr. Hand stopped in his tracks. A group of travellers was disembarking from a Vancouver flight, and near the head of the line was the man whose phone calls and messages he had been dodging for weeks. Don Lindsay was heading straight towards him. Mr. Hand braced himself to meet Mr. Lindsay, but just when eye contact seemed inevitable, Mr. Lindsay pivoted and walked into a washroom. What did the CEO of Inco do when presented with Mr. Lindsay's sudden about-face? He ran. Before Mr. Lindsay re-emerged, Mr. Hand and Mr. Drysdale had sprinted to the safety of the Ottawa gate. The elusive Inco CEO had slipped out of Teck's reach again.

Hours later, the Inco executives were sitting in an office inside Ottawa's stately Langevin Block, which houses the Prime Minister's offices across the road from Parliament Hill. They had come to meet with Paul Martin's zealously protective chief of staff, Tim Murphy, to brief him about Inco's takeover plans. The mining world was rapidly consolidating, Mr. Hand told Mr. Murphy, and if Inco and Falconbridge didn't merge, the companies would soon be takeover bait. Inco and Falconbridge wanted to "create a Canadian champion" that could compete with the so-called super majors, Mr. Hand said, but the homegrown deal was threatened by Xstrata, a ferocious raider that would likely launch a competing bid for Falconbridge and possibly Inco.

There was a political option. Following in the shoes of protectionist European politicians, American leaders - even erstwhile free traders - had begun to balk at foreign takeovers of strategic companies. The outbursts had derailed a Chinese bid for California-based oil and gas giant Unocal and an Arab bid for the U.S. division of a ports company. Mr. Hand urged Mr. Murphy to ask Prime Minister Martin to follow the trend by sending a strong public signal that Ottawa favoured a takeover that would create a Canadian mining champion. After all, Xstrata's past association with onetime fugitive financier Marc Rich, and its controlling shareholder's alleged role in the Iraqi oil-for-food scandal, were fertile grounds for political opposition. A negative public signal from Ottawa, Mr. Hand suggested, could "spook" possible predators such as Xstrata from launching hostile takeover raids. For example, he explained, Australia's BHP Billiton enjoyed enormous government support a year earlier when politicians publicly opposed Xstrata and its ultimately unsuccessful bid for Western Mining. If Ottawa did not signal its concern, Mr. Hand warned, Canada's premier mining assets would likely be devoured by a foreigner that had been thwarted in Australia.

Mr. Murphy took Inco's plea to other senior officials in the Prime Minister's Office. The advisers were keen to support the proposal for a Canadian mining powerhouse, but they were reluctant to have the Prime Minister speak out publicly or, as one said, "Ex Cathedra" - outside the traditional takeover review process at Industry Canada. The minority Liberal government was struggling to stay in power, and it didn't want to risk alienating senior bureaucrats outside the PMO or reopen old feuds between pro-free trade and anti-free trade Liberals. Inco was a big international company, the staff concluded; it seemed to have everything under control. The Prime Minister would not get involved. Instead, the Inco file was sent to Industry Minister David Emerson.

Inco announced its $34-a-share, or $12.5-billion, cash-and-stock merger agreement with Falconbridge on the morning of Oct. 11, sparking a frenzy of trading in the companies' stocks. When markets closed that afternoon, about $1.2-billion, or 30 million shares in both companies, had changed hands. The hectic trading continued for days as some of the world's most powerful hedge funds plowed billions of dollars into Canada's grand old mining companies in anticipation of a takeover battle. Inco's executives waited patiently for federal politicians to cool the fevered speculation with a dose of nationalist concern.

Finally, on Oct. 26, David Emerson stood up in the House of Commons to speak about the Inco and Falconbridge merger. "It is very important," the minister said, "to have Canadian champion companies." Inco officials were bitterly disappointed with the limp remarks. Nothing was said about the Xstrata threat, and only one newspaper, the Toronto Star, bothered to quote the statement. The trip to Ottawa had accomplished nothing. On Nov. 21, the board of directors of Teck had a decision to make. Its chief executive officer, Don Lindsay, and the company's financial and legal advisers had completed a presentation on a stunning proposal. The man who had pleaded with Inco's Mr. Hand in August for a Canadian mining threesome had abruptly changed tacks. He had been snubbed by Inco and was ready to play hardball with a strategy that could derail Inco's homegrown play for Falconbridge. After numerous meetings with Xstrata's CEO Mr. Davis in London and his advisers in Toronto, Mr. Lindsay recommended that the two companies mount a pair of daring bids. Teck would bid for Inco, and Xstrata would simultaneously run at Falconbridge. The plan, code-named Sudbury Sangria, also included a proposed agreement under which Falconbridge and Inco would combine and jointly manage the mining companies' Sudbury operations. It had taken the two companies mere weeks to strike a Sudbury agreement that had eluded Inco and Falconbridge for years.

Teck's directors weighed the pros and cons of the proposal. On the positive side, the inventive parallel takeover strategy offered a speedy route to cost savings in Sudbury that would help pay back some of the debts Teck would incur to buy Inco. But Teck's directors were troubled by a number of issues. The biggest, according to people familiar with the talks, was Xstrata's insistence that Teck release Falconbridge from a $320-million so-called break fee it was under contract to pay Inco in the event the all-Canadian merger pact failed. Xstrata's Mr. Davis had no desire to help Teck finance its Inco takeover by paying the break fee. Teck's directors, however, countered that there was no point in signing a co-operation agreement to cut costs in Sudbury with a partner that was refusing to honour a fee it was legally obligated to pay. It was not a good portent for a future alliance. For the third time in a year, Mr. Lindsay had failed to win the board's support for his ambitious expansion strategy.

When Mr. Davis was contacted later that day by an intermediary bearing the bad news, his fury was uncontrollable. He had devoted weeks to the Teck agreement, and now he poured his rage into an e-mail to Teck's CEO that savaged him for failing to win board consent, sources said. Shortly afterward, Mr. Lindsay said Xstrata's chief tried unsuccessfully to retract the flame mail. An hour later, Mr. Lindsay said, Mr. Davis phoned to apologize. "It's all distant history," Mr. Lindsay said recently. But it would be months before the two men spoke again, a critical winter of silence.

Chapter Six

Blowing it in Brussels

The all-Canadian dream comes unstuck

When Inco and Falconbridge struck their friendly takeover agreement in October, the companies' executives assumed the greatest threat to their marriage would be a hostile raid from another suitor, most likely Xstrata. But months slipped by with no sign of a competing bid. Even Teck seemed to have lost its ardour for Inco. Mr. Hand had met with Teck's CEO in early December, and, according the Inco chief, Mr. Lindsay reassured him that "I won't interfere" with the Falconbridge merger.

In January, however, another more serious threat emerged. This time the problem was in Brussels, headquarters of the European Union and its antitrust cops. Inco and its large international legal team had known from the beginning that the planned merger with Falconbridge would trigger antitrust concerns with the EU and the U.S. Department of Justice. The biggest competition issue posed by the merger was Falconbridge's Nikkelverk refinery in Norway. If Inco acquired the facility, the merged company would produce, according to sources, more than 80 per cent of the world's supply of precision nickel alloys, which are sold mostly to aerospace and armaments manufacturers. Even though Nikkelverk's sales amounted to less than 5 per cent of the world's nickel sales, the concentration of power in the precision alloys was so huge that legal experts warned Inco's bid could be either rejected or dragged through an intensive EU review that could delay the merger for six months.

Inco deployed an armada of three law firms and 25 competition lawyers and consultants who concluded the fastest way to strike a deal with the EU was to propose selling Nikkelverk before the merger was completed. But according to sources, Falconbridge executives vehemently opposed the strategy. The company had owned the profitable refinery since 1929, and it was not going to risk selling the historic operation before any merger with Inco was closed. To overcome the dispute, a compromise was struck. Inco highlighted the potential Nikkelverk issue in its regulatory filings and offered up an advance commitment to sell the refinery if antitrust authorities became concerned. Inco's legal team hoped the unusual gesture would speed up competition reviews, particularly in Europe. Although the EU had blocked major U.S. and Canadian takeovers several years earlier, recent court rulings and the appointment of a new EU antitrust enforcer, former Dutch politician Neelie Kroes, had shifted the regulator to a more laissez-faire stance.

The new direction, however, was not enough to withstand an angry outpouring from Inco's competitors and customers. Consumers of stainless steel, partly made of nickel, were reeling from rocketing steel prices, which had more than doubled between 2003 and 2005. When antitrust regulators began asking those businesses about the potential impact of an Inco and Falconbridge marriage, they tapped into deep-seated fears that the merger would only further inflate nickel and steel prices. According to people familiar with the competition reviews, the EU in particular was deluged with complaints. One opponent that submitted a written complaint was Glencore International AG, a Swiss-based commodity trader that happens to own about 40 per cent of Falconbridge's other suitor, Xstrata. Glencore and other European companies complained at length about the virtual monopoly Inco would have in specialty alloys if it acquired Falconbridge's Nikkelverk refinery.

Competition experts said Inco made it easy for competitors to undermine its case by preannouncing its willingness to sell the Norwegian refinery. "Usually it takes months to dissect potential antitrust issues in a merger agreement, but Inco handed us our arguments on a silver tray," said one person who opposed Inco's merger.

By early February, the EU's antitrust review had become so bogged down by constant demands for information that Inco's legal Rottweiler, Stuart Feiner, flew to Brussels and took up temporary residence in the city with a team of lawyers and economic consultants to argue the company's case. An exhaustively thorough lawyer whose constant attention to detail once prompted mining promoter Robert Friendland to furiously thrash a meeting table with his shoe, Mr. Feiner learned in Brussels that he had badly miscalculated the European review process. Until that point, he and his team had spent most of their time in Washington selling the merits of the merger to antitrust regulators in the Department of Justice. Mr. Feiner believed that if they could convince Washington, the EU would follow suit. And indeed, by February, Washington officials were privately advising Inco that they were close to approving the marriage. But when Mr. Feiner carried the good news to Brussels, he realized to his dismay that the European regulators had their own timetable, as they hunkered down for a lengthy investigation of the deal. The Inco team was too late. They should have been making their case in Europe months earlier.

Publicly, Inco executives said they were confident that regulatory approval was imminent, but, behind the scenes, gloom pervaded. The timing of the delay couldn't have been worse. Nickel prices were soaring again after a six-month swoon, pushing Falconbridge's stock price above Inco's offering price and stoking speculation that competing bids were imminent. Inco needed swift approval from antitrust regulators, and that, company executives knew in early 2006, would take a miracle. Inco went looking for divine intervention from Ottawa, on the eve of Valentine's Day.

Stephen Harper's Conservatives had just defeated Paul Martin's Liberal government, so, for the Feb. 13 meeting, Mr. Hand and his government relations adviser found themselves huddling with a new regime. Their counterparts this time consisted of senior advisers to Peter MacKay, the newly appointed Foreign Affairs Minister. Mr. MacKay joined the session by conference call because he had been delayed by a snowstorm at his home in Nova Scotia. Mr. Hand explained Inco's frustration that government officials in Brussels and Washington had put up roadblocks to a merger that had been designed and approved in Canada. The delays left Inco and Falconbridge vulnerable to competing takeover offers that could shatter the dream of a Canadian mining powerhouse. Was there any way, Mr. Hand asked, for Mr. MacKay or Mr. Harper to use their influence in Washington and Brussels to speed up the interminable antitrust reviews?

Like the Liberals before them, the Conservatives chose not to get involved. The fledgling minority government, consumed with striking a truce on the fractious softwood lumber dispute with the United States, was not going to be distracted by a corporate deal. Inco's plea for intervention, one company official said, "would not get any traction."

Once again, timing was not on Inco's side. It had waited too long to strike a merger agreement with Falconbridge, dragged its feet with Phelps when they were eyeing Australia's Western Mining, and reached out for government support when one administration was sinking and another emerging. Unable to muster sufficient political backing, Inco saw its worst fears realized on Feb. 24 when the EU announced it was extending its initial investigation of Inco's takeover plan into a lengthy review that could drag on for months.

Inco and Falconbridge scrambled to find a buyer for Nikkelverk to accelerate the review, but time was against them. At first, they negotiated with a short list of private equity and other financial buyers. But that was vetoed by EU regulators who said the Norwegian refinery had to be owned by a viable mining company that produced sufficient levels of ore to keep the refinery in business. Months dragged by before finally, in early June, Falconbridge announced a deal to sell Nikkelverk to LionOre Mining International Ltd., a medium-sized nickel producer with operations in Africa and Australia. Behind closed doors, Inco and Falconbridge executives railed against Ottawa's "boy scouts," who remained clean on the sidelines rather than enter the muddy political ground of international takeovers. Ottawa's indifference, Inco director Glen Barton said, "was very disappointing. It was hard for us to understand why. We used our governmental contacts, but they weren't prepared to help. To be put through such an extensive [EU review]process was ludicrous. We could have put the deal to bed."

Chapter Seven

Mixing Ice and Tea

Don Lindsay's moment arrives

Mired in the quicksand of an international antitrust review, Inco and Falconbridge knew they were easy prey. Rumours of a competing bid were flying after the EU delay in February. Xstrata topped the list of potential buyers. Behind the scenes, however, the Swiss company's chief executive officer Mick Davis was in no hurry to pull the trigger. According to people involved, the company came close several times to launching a bid. But volatile metals prices and increasing signals of a delayed competition review at the EU convinced Mr. Davis to hold his fire. Showing nerves of steel, Xstrata's senior executives calculated they could afford to wait because there was a good chance the EU wouldn't be finished its review for months. The delay was convenient for Xstrata because it was on the hook to pay the expensive premium to Brascan if it waded back into the market with a takeover offer for Falconbridge before May 14.

While Xstrata lurked in the shadows, another bidder began to assemble a rearguard attack. On the evening of Apr. 25, directors and executives of Teck gathered in the company's Vancouver boardroom. Don Lindsay's night had finally arrived. After turning down two proposals for the Brascan mining block and a co-ordinated run with Xstrata for Inco, Teck's board was finally warming to Mr. Lindsay's acquisition ambitions. Mr. Lindsay's ebullient forecasts of record-high metals prices were proven true in 2006, with zinc prices rocketing more than three times above their historical averages. Teck's cash coffers had swollen to nearly $3-billion from $1-billion in a year, and its stock price had more than doubled to $86 by April. The stock price was also nearly double that of Inco's, giving the company a powerful currency for acquisitions.

The time was ripe for Teck to make its move for Inco. "The numbers had improved so much," Mr. Lindsay recalled. "We were very comfortable that this was a good thing for our shareholders." That night, Teck's board authorized Mr. Lindsay and the company's legal and financial advisers to prepare a potential bid for Inco. The bid would be code-named Project Mix, and Teck's elusive prey dubbed Ice. Optimistic that it could thaw Inco's frosty demeanour, Teck gave itself the nickname Tea.

In the early morning of May 8, Ice's Scott Hand was warming himself at the annual Merrill Lynch metals and mining conference near Miami at the exclusive beachside Fairmont Turnberry Isle Resort. Hundreds of influential investors were mingling with top mining executives at the luxurious Mediterranean-style hotel, which features two championship golf courses, a 117-slip marina and freshwater swimming pools on 300 tropical acres. That morning, Mr. Hand was scheduled to tee off with a portfolio manager from Fidelity Investments. But before he headed to the first tee, he slipped into his hotel room to check e-mails. Waiting for him was an urgent message from one of Inco's investment bankers at Morgan Stanley. Teck, the e-mail read, had just announced a hostile takeover bid for Inco. It was offering $78.50 in cash and stock for each Inco share, or a total $17.8-billion. Inco's chief was stunned. Teck and Mr. Lindsay, the man who kept pushing for a three-way Canadian merger - who in December had promised he wouldn't interfere with Inco's plan to merge with Falconbridge - had just gone hostile.

There was more shocking news to come. Days later, Teck would reveal that it had been the stealth buyer of the 4.9-per-cent Inco block back in September, 2005. At the same time that Mr. Lindsay was proposing a friendly three-way merger with Falconbridge, Teck had been accumulating a stake in Inco. Mr. Hand knew immediately what the betrayal meant. Inco was in play, and its board of directors would be obligated by their duty to shareholders to beat the bushes for the highest possible bid. With an offer on the table, the board's appetite for spending more shareholder money on a Falconbridge merger would be very limited. Mr. Hand's legacy of a Canadian mining powerhouse was in jeopardy.

Shortly after he read the e-mail, Mr. Hand strode across the hotel lobby to check out and return to Toronto. There he bumped into the Fidelity Investment manager, Jody Simes, whom he had been forced to jilt on the golf course. Hearing the news about Teck's bid, Mr. Simes blurted "Congratulations" to Mr. Hand. "Congratulations?" Mr. Hand thought to himself. "That is not the word I would use." Two days after Teck's surprise offer, a pair of corporate jets taxied down a runway at Miami's airport. The first one to take off carried Falconbridge's Derek Pannell; the second, Mr. Lindsay from Teck. Both men had been attending the Merrill Lynch conference, and Mr. Pannell had suggested they meet with Mr. Hand in Toronto to discuss Teck's bid. The planes left within minutes of each other and, a few hours later, the two were sitting in a room at the Toronto Gateway Sheraton Hotel with Mr. Hand.

It is hard to imagine a trio of chief executives less suited for the challenge of negotiating a friendly three-way merger. Mr. Hand had spent nearly two years fighting to build a Canadian powerhouse, and he had virtually no freedom to negotiate a new deal without the approval of Inco's powerful board. Mr. Pannell had plenty of authority to negotiate a merger, but his priority was to land the richest bid possible. Mr. Lindsay was the savviest deal maker of the three, but, like Mr. Hand, he was kept in check by his board.

Exacerbating the differences was the festering sore of betrayal. Mr. Hand was furious that Inco's long-sought merger with Falconbridge was threatened by Teck's rearguard raid. Mr. Pannell had his own reasons for being sore with Mr. Lindsay. While he was in Miami, Falconbridge's chief operating officer Peter Kekielski phoned to say he was resigning. The young executive was one of Mr. Pannell's closest and most trusted lieutenants, and he was crossing the battlefield to join Teck as a senior executive. Although Mr. Pannell won't talk about Mr. Kekielski, associates said he was devastated by the defection.

Mr. Hand walked into this extraordinary brew of tensions with his anger in check and a fistful of conditions. If a three-way merger was going to succeed, Mr. Hand told Mr. Lindsay, Teck's non-voting shares had to go; it had to put more cash and a higher premium on the table for Inco's stock; and a decision had to be made about board representation and management of the new company. Teck's major shareholder, Norman Keevil, could be chairman of the new company, and the 64-year-old Mr. Hand indicated he would likely retire. He barely disguised his concern that Mr. Lindsay lacked the experience or ability to steer the merged companies. The three men discussed the issues cordially for about an hour, Mr. Pannell said, later observing: "There was a lot of talking but not much listening."

At the end of the session, Mr. Lindsay and Mr. Hand agreed to keep talking through the week. Mr. Hand also agreed to contact Mr. Keevil to discuss whether he would endorse a plan to phase out the Vancouver company's dual-class share structure. What happened next is still disputed. Mr. Lindsay says Mr. Keevil waited in vain for days for Mr. Hand to call. To bolster his case, Mr. Lindsay has since shown journalists copies of May e-mails to him from Mr. Keevil expressing his frustration that Mr. Hand had not called. Mr. Lindsay argues Inco "stonewalled" Teck and prevented a three-way merger.

For his part, Mr. Hand counters it was Mr. Keevil who was unreceptive. He says he did call Mr. Keevil two days after the Toronto airport rendezvous and was told the Teck chairman was in a board meeting and would then be travelling to a conference in the U.S. It was at this point, Inco advisers say, that any lingering hopes of a merger with Teck evaporated. "This could have come together in a heartbeat," one Inco adviser said. "If Norm had got on a plane with some directors, we could have put a sunset on the dual-class shares and negotiated a deal." Two weeks later, on May 17, Mr. Keevil finally communicated with Mr. Hand through an e-mail. The message urged Mr. Hand to keep his tone towards Teck "as friendly as possible" as the takeover battle continued. "Nobody in the end wins from unleashing the dogs," the e-mail said.

When Inco's board sat down to assess Teck's offer, it didn't take long for the board to conclude "that this was not in our best interests," Mr. Barton said. Teck's proposal had three serious knocks against it. Inco's investment bankers told the board the offer was "ludicrously low." Inco shareholders would see their voting stake in the merged company sharply reduced by Teck's dual-class shares, and a union with Teck would offer none of the same cost-saving synergies that could be realized by merging with Falconbridge. The board gave Teck its response on May 13, by increasing its bid for Falconbridge by $2-billion cash for a total of about $19-billion in cash and stock. It still believed Falconbridge offered more long-term value for Inco's shareholders.

Inco would not have the upper hand for very long. After watching the Toronto company struggle for seven months with its Falconbridge merger plans, Xstrata emerged from the sidelines on May 17 and unveiled an all-cash, $16.1-billion offer for the 80 per cent of Falconbridge shares that it didn't already own. The $52.50-a-share offer was nearly twice what Xstrata had paid Brascan in August for its 19.9-per-cent stake. Despite the hefty increase, Xstrata's wait had its benefits. Three days before it launched the hostile takeover play, Xstrata's contract to pay Brascan a top-up premium had expired, meaning Xstrata was not on the hook to pay the Canadian conglomerate an additional $1.8-billion premium over the $2.07-billion it laid out in August. Only nine months after Brascan's management were hailed as wizards for crafting the clever top-up, the executives looked like chumps for selling Falconbridge shares ahead of the biggest metals price run-up in history.

For Inco's executives, the only surprising thing about Xstrata's entry into the mining takeover battle was that the Swiss company had taken so long. The Toronto miner had been bracing for Xstrata to launch a raid for months. When Xstrata finally joined the bidding war, Inco's board had already rewritten the nickel company's battle plan. In the wake of Teck's hostile offer, the company's board authorized management to solicit better offers from other suitors. With Teck gunning for Inco and Xstrata aiming at Falconbridge, Inco's cautious board concluded that Inco needed reinforcements to stay in the takeover battle.

Inco's advisers hit the phones in late May and, within days of contacting some of the world's largest mining companies, hooked two serious bidders and had another nibbling. The most interested suitor submitted a proposal under the code name Project FIFA, borrowing the acronym from another dramatic international contest that was under way, the World Cup soccer tournament. The suitor was Phelps Dodge, Inco's partner on the aborted plan to acquire Australia's Western Mining a year earlier.

There was another buyer that wasn't on anyone's radar screen. In late May, Montreal-based Alcan Inc. retained a team of investment bankers and lawyers to assemble a bid that could transform the world's second-largest aluminum producer into a global mining conglomerate with a dominant share of aluminum, nickel and copper markets. Knowing that the ambitious takeover would burden Alcan's management with an enormous challenge, some of the company's advisers code-named the potential bid Project Albatross. Indeed, after weeks of investigating a deal for Inco and Falconbridge, one person close to Alcan said its management decided Project Albatross was more than it could manage in the short time Inco had allotted for offers. The aluminum maker had not conditioned its own shareholders for a major acquisition that was bound to be controversial and potentially opposed by investors who were caught off guard. "They just couldn't get there fast enough," said one person involved in the talks. In an interview several months later, Alcan's CEO Richard Evans said the company ultimately decided that the purchase price was too lofty. "In our view, you don't buy these kind of assets at the top of the cycle," he said. "I have seen companies that have done that and lived to regret it."

A third curious admirer was CVRD, the Brazilian iron-ore giant that had taken a futile run at Noranda and Falconbridge in 2004. CVRD was still looking for a major North American foothold, and, in early June, Mr. Hand flew to New York to secretly meet in a hotel with chief executive officer Roger Agnelli. Mr. Hand warmed immediately to the effusive executive, but he would not come away from the meeting with a takeover partner. According to people familiar with the session, Mr. Agnelli signalled that it would be too difficult for CVRD to propose a cash-and-stock merger with both Inco and Falconbridge because the Brazilian company's shares were virtually unknown to North American investors. That meant CVRD would have to pay all cash for a merger that could cost as much as $40-billion, an impossibly expensive price tag even for the world's fifth-largest mining company. Before the two men parted ways, however, Mr. Agnelli offered Mr. Hand the promise of something else: CVRD had its eye on Inco, he said, and would be there for the company if its bid for Falconbridge failed.

Ever since Inco put out the welcome mat in May, Phelps' management team and advisers in Phoenix had moved with remarkable alacrity, having had the benefit of intimate Inco data gleaned during the aborted joint move on Western Mining in 2004. Within four weeks of Inco's invitation, Phelps had lined up more than $10-billion of bank financing, tentative board support and a complex two-step proposal that would see it help finance Inco's takeover of Falconbridge and then acquire the combined two companies through a cash-and-stock bid.

On Friday, June 23, Phelps CEO Steve Whisler was scheduled to fly to Toronto to close the deal with Mr. Hand. It had been a difficult week for the two men. Mr. Whisler had e-mailed a written proposal to the Inco CEO six days earlier, offering to pay $74 a share in cash and stock for the company and to acquire about $3-billion of Inco's preferred shares - an investment that would give the nickel miner more cash to sweeten its Falconbridge offer. Viewing the e-mail as an opening bid, Inco's board dispatched Mr. Hand several times over the next week to squeeze more from the Arizona copper miner. According to people familiar with the discussions, Inco's constant shifts aggravated Mr. Whisler, a demanding executive who is so regimented that he insists meetings start precisely on schedule and be interrupted only by deliveries of Starbucks coffee at regular intervals.

Things came to a head on the evening of Friday, June 23, when Mr. Whisler and his negotiating team prepared to fly to Toronto to seal the takeover offer they believed had finally been settled. Shortly before departure time, however, Mr. Hand called to say that his board wanted more. Mr. Hand explained the board felt Phelps should raise its investment in Inco through a debenture purchase to supplement its Falconbridge bid. It also wanted the Arizona miner to scale back its demands for a break fee that would have seen the U.S. company pocket $1.2-billion if the merger plan failed. Infuriated by the last-minute demands, Mr. Whisler and his team flew instead to New York to reconsider their options at the midtown offices of its law firm Debevoise & Plimpton LLP. In Manhattan, sources say, the Phelps team complained they were being treated like "a blank cheque" for Inco's takeover campaign, while in Toronto, the Inco camp argued they weren't getting what they needed to table a winning offer for Falconbridge.

By Saturday, the two sides had calmed down enough for Mr. Hand and Mr. Whisler to discuss the terms of a possible deal on a conference call with their advisers. Eyeing a legacy deal that would transform his company and push it into the upper ranks of global mining companies, Mr. Whisler agreed to most of Inco's demands by the end of the call. Two days later, on June 26, the three companies announced a two-step, $40-billion cash-and-stock merger to create a new mining giant called Phelps Dodge Inco that would be based in Arizona.

Mr. Hand's dream of a Canadian champion was dead, but the merger with Falconbridge was still within reach. Shortly after the news was released, Teck's Mr. Keevil vented his anger about the surprise Phelps plan to select reporters. The man who only weeks earlier urged Mr. Hand to be civil went ahead and unleashed the dogs. "Hand gives Canada the finger," Mr. Keevil told the media.

Chapter Eight

Atticus kills the mockingbird

A hedge funds enter the play, unleashing a clash of cultures

The stunning three-way merger proposal from Phelps moved the mining takeover battle from a simple bidding war into a Rubik's Cube of moving corporate parts and shifting deal values that confounded investors. Placing investment bets on the takeover game was risky because three of the bidders - Inco, Phelps and Teck - were offering stock to help pay for their proposed takeovers. The stock component meant that the value of the various takeover offers gyrated each day with the markets.

As if to complicate matters further, stock prices were infected with a surreal strain of takeover fever fed by speculation that two of the hunters, Inco and Phelps, were themselves being hunted by other potential acquirers. The Mexican mining giant Grupo Mexico was rumoured to be stalking Phelps, and speculation was mounting that Brazil's CVRD would lunge for Inco. The extra layer of market chatter made it almost impossible for shareholders to quantify the true value of the stock-and-cash proposals as the bidding escalated in July and August. Paradoxically, the more likely it seemed that Inco and Phelps might lose the race, the higher their stock prices rose as investors anticipated they would soon be at the receiving end of richer takeover offers.

On paper, the pitch from Phelps and Inco looked superior to Xstrata's, but in reality powerful market forces that the two companies badly underestimated were turning against them. When Phelps raced to join the Inco-Falconbridge union in May, it knew it was in a shoving match with one of its largest shareholders. Atticus Capital LLC, a New York investment company that had accumulated an 8.6-per-cent stake in Phelps, took the unusual step in February of writing and publishing a letter to Mr. Whisler, the company's CEO. Months before Phelps announced its play for the Canadian nickel companies, Atticus demanded in its missive that the "bloated" American firm pass on to shareholders some of its copper-rally profits by buying back $2.5-billion of the outstanding shares.

Outraged that a minority shareholder was putting its short-term investment interests ahead of his long-term growth strategy, Mr. Whisler dismissed the pressure tactic as "a reckless bet that could threaten our company's future." Atticus ominously retorted that it had hired outside advisers to "formulate our options." Despite the pressure tactic, sources said Phelps officials were convinced they could win the day. It was rare for minority shareholders of a widely held company to hijack a major transaction that a board believed was in the best interests of all.

The unlikely, however, became likely in the mining merger wars of 2006. Atticus Capital is one of the pushiest of an aggressive breed of investment companies, known as hedge funds, which are changing the balance of power in publicly traded companies. After a decade of spectacularly successful bets on corporate securities, the hedge fund population had exploded by 2006 to include more than 3,000 funds overseeing more than $1-trillion of investments. On a tight leash to produce fast returns for clients, many big hedge funds are flexing their enormous buying power by acquiring large stakes in companies and impatiently agitating for stock gains. Hedge funds, as Inco and Phelps would learn, do not buy stock in acquirers or builders. They pick stocks on the assumption that the companies will soon be acquired and deliver fat takeover premiums to shareholders.

Having surprised investors with its transformational play for Inco and Falconbridge, Phelps found itself in an intensified war with hedge funds. Its chief adversary Atticus was as big as most of its rivals in the mining industry. In the 11 years since it had been founded by Timothy Barakett, a Canadian-born Harvard grad and hockey star, and Nathaniel Rothschild, a descendent of the European banking dynasty, Atticus had become one of Wall Street's most powerful hedge funds, with $10-billion of assets under administration and a reputation for playing rough. Named after Atticus Finch, the fearless lawyer who fights for the underdog in To Kill A Mockingbird, the fund had helped derail a bid by Germany's Deutsche Bourse to acquire the London Stock Exchange and pushed European steel maker Arcelor to merge with rival Mittal Steel Co.

Almost as soon as it announced its Canadian deal, Phelps was on the losing end of a struggle with hedge funds. Many investors were furious with Mr. Whisler when he surprised them in June with the plan to borrow billions of dollars to finance the mergers. Only months earlier, the Phelps chief had said he was opposed to borrowing at the top of the metals cycle, and here he was making the biggest bet in the company's history. After the merger plan was announced, Mr. Whisler confronted the investor fury as he and a team of advisers held a round of meetings in New York with some of their largest shareholders. The most important session was a private luncheon on June 27 at the Park Avenue Café on Manhattan's Upper East Side, where Mr. Whisler was peppered with questions by irate fund managers. But instead of empathizing, he bridled at the challenges and, according to one person present, reproached a fund manager as a nearsighted investor merely looking for a quick payoff.

The Phelps CEO's apparent indifference to his shareholders' concerns hardened their opposition to the merger and put the company in a straightjacket. With such major investors as Atticus and New York's Neuberger Berman publicly opposing the deal, the copper miner's board was reluctant to raise the stakes much higher. In addition, there was a growing friction between the Inco and Phelps teams. Inco's executives bristled at Mr. Whisler's take-charge approach when he visited the Toronto head office and Sudbury operations. For his part, sources said, Mr. Whisler grew exasperated with Inco's demands that Phelps bankroll a higher bid for Falconbridge. Inco was pushing Phelps for more money, but the nickel giant's tight-fisted board was not prepared to ante up its share.

The numbers told the story on July 26, when Mr. Hand sat down with Inco's directors to review the final terms of a marginally improved offer for Falconbridge. Phelps had agreed to toss in another $2.75 per share cash, but Inco's board of directors would only agree to fork over another $1 cash per share to modestly boost the value of their stock and cash merger to about $60.20 a share. The new offer was so threadbare that Falconbridge's board had agreed to fatten it by declaring an unusual special dividend of $284-million, or 75 cents a share. It wasn't much to look at, and a dejected Mr. Hand advised the board "we've stretched ourselves to get this far."

What Mr. Hand didn't say was that it was over. He and his advisers were certain that Xstrata would return with more cash. He knew Phelps' and Inco's boards were not going any further and that, within weeks, the nickel giant would be the target of a new takeover battle. His dream of a mining legacy was shattered. "It was tough," he recalled, "but at some point you have to draw the line, no matter how hard it is to do it."

Three days later, Xstrata delivered the final blow by raising its cash offer by $3.50 a share to $62.50. Mr. Hand and Mr. Pannell dutifully visited investors in Toronto and New York to promote their offer as a superior alternative. But after hours of meetings with portfolio managers and traders who only wanted to talk about the next takeover game for Inco, Mr. Hand said no one was buying the "bullshit." Mr. Pannell was equally discouraged by the lack of support for the creation of a powerful North American mining colossus. "We could have been manufacturers of potato chips as far as they were concerned," he said. On July 27, Inco's merger bid expired with less than 20 per cent of Falconbridge's shares tendered. The next morning, an Inco executive confided to a reporter: "Now I feel like we're Falconbridge."

Chapter nine

The endgame

A meteor strikes Sudbury again, this time from Brazil

With Falconbridge snared by Xstrata, Inco was left facing two takeover offers that its executives viewed as inferior. One was a cash-and-stock proposal of $78.50 a share from Teck, and the other was the $86.67, or $17.3-billion cash-and-stock merger invitation from Phelps. If Inco was going to be sold, Mr. Hand told his advisers he wanted to see a per-share offer that started with the number nine. A week later, on July 31, the goal got closer when Teck announced that it was increasing its cash-and-stock offer to $82.50 a share. Although the offer was smaller on paper than the Phelps overture, Teck's drew more favour from investors because, at $9.1-billion, it offered a substantially bigger pot of cash. Don Lindsay tried to blow some cold air on the speculative steam that was building in Inco's stock by warning in media interviews that his company, Teck, would not "chase" higher bids for the nickel miner.

When the Teck team increased its bid for Inco, Mr. Lindsay's greatest concern was that he would be trumped by another buyer. Few expected Phelps to return to the table, but he was aware of a dark horse in the distance. As a former investment banker to the Brascan group, Mr. Lindsay knew that CVRD had come close to acquiring Noranda and Falconbridge in 2004. CVRD had yet to acquire a major presence in North America, and it only made sense that it would be drawn to Inco. The puzzling thing was that the Brazilian company had been eerily quiet all year. After the flood of Brazilian media leaks in 2004 about the Brascan talks, Teck's executives interpreted the silence as a sign that its interest in Canada had cooled. The days slipped by in early August, and Teck grew so confident its offer would prevail that Mr. Lindsay turned its nose up at Inco's offer to explore a friendly merger agreement and flew instead to a conference in Australia.

Unbeknownst to Teck, though, CVRD had already met with Mr. Hand weeks earlier and had quietly opened a takeover file called Project Meteor. Like the flaming ball of rock from outer space that created the Sudbury Basin, the Brazilian company knew its takeover bid would have an enormous impact. If its offer prevailed, it would mark the largest foreign takeover in Latin American history and create the most powerful Brazilian corporate presence in North America. Wary after its roller-coaster ride with Brascan a year earlier, CVRD's Roger Agnelli opted to lay low while other buyers spent their powder. CVRD would enter late with an all-cash offer that it hoped would shut down the auction. On the evening of Aug. 10, Mr. Agnelli phoned Mr. Hand at his home it Toronto. "Scott, we are going to move," he said. The next morning, CVRD unveiled a proposal to buy all of Inco's stock for $86 a share, or $19.4-billion. It was over.

Or so Inco officials thought. Like the character in a thriller who just won't die, Teck had one more shock in store for Inco. The plot twist started when Mr. Lindsay got an unexpected call from Bob Dorrance, CEO of TD Securities Inc., shortly after CVRD unveiled its bid. TD Securities had advised Xstrata during its takeover of Falconbridge, and Mr. Dorrance wanted to pass on an idea that had emanated from its trading desk. Xstrata would be paying Falconbridge shareholders $18-billion cash for their shares in the second week of August. Potentially, there were going to be a lot of big funds looking to shift billions of dollars into other mining stocks. TD's traders, Mr. Dorrance said, believed there was a unique opportunity to sell close to $6-billion of Teck's class B shares. It would be enough money for Teck to ante up its bid for Inco. A dramatic proposal, to be sure. "They thought they could sell it," Mr. Lindsay said. "Once CVRD bid, I knew the odds were very low that we could secure Inco. I also knew that we had to try. There was a shot. In a sense, we were putting it to the shareholders to decide."

On Aug. 15, Mr. Lindsay sat down in a conference room on the fourth floor of Toronto's First Canadian Place to witness the progress of his long shot. Although TD Securities had authored Teck's share sale, the largest in Canadian history, he had chosen to watch the end game with his trusted investment bankers at BMO Nesbitt Burns. Around 5 p.m., when most traders and investors are done for the day, Mr. Lindsay and dozens of BMO Nesbitt investment bankers and sales people began placing calls to more than 600 of the world's largest pension and mutual funds, insurers and hedge funds to pitch the shares. Teck's team had until the next morning to convince enough investors to buy $5.7-billion worth of its stock, at $78 a share, in order to back a new, $20-billion bid for Inco it was prepared to announce that day.

By the time Mr. Lindsay left, just after 11 p.m., it seemed doubtful the audacious plan would work. Many investors, especially those reached at their summer cottages, said the share issue was too complex to assess in such a short time. The bankers agreed to return to work before dawn the next morning to pitch Asian and European buyers. By the time Mr. Lindsay rejoined the sales army at dawn, his bankers advised him they believed they could get enough buyers, but only if they lowered the price of the shares by $2 apiece. At that point, Mr. Lindsay said, "I thought it ends here now." At 9:15 a.m. Toronto time, he spoke to Teck's directors who had assembled in Vancouver for a predawn conference call. Several minutes later, the board voted to shut down the Inco bid. This time, it was truly over.

Conclusion

The long haul

How short-term gains won the day, and lost the basin

How did Xstrata and CVRD hijack one of Canada's best hopes for a global corporate champion? The easy answer is that Swiss and Brazilian miners have more benevolent owners and deeper pockets to outbid their Canadian competitors. A more awkward truth is that Canada's mining and political leaders couldn't have played their hands more ineptly. Imprisoned by the bonds of old rivalries, personality clashes and conservative directors averse to risky takeovers, Canada's mining leaders waited too long to unify against advancing foreign raiders. When the Canadians finally moved, they were tentative and cautious. They badly miscalculated the regulatory landscape and the emerging power of hedge funds on the takeover battlefield. When they turned in desperation to Ottawa for political support, they encountered two shaky minority governments unwilling to tangle with the politics of protectionism.

Canada's 20th-century mining companies were no match for a new breed of 21st-century raiders. An industry that once prized geologists and engineers now hails financial and banking experts as the new kings of mining. The world's fastest-growing mining companies are BHP Billiton, CVRD and Xstrata, and it is no coincidence that their chief executive officers are former bankers and financial men. They view their mining conglomerates as global trading houses that can quickly assemble billion-dollar pools of capital to acquire competitors and launch new mines. They seek to preserve their profits in a relentlessly cyclical business by controlling production to temper sharp swings in metals prices.

Don Lindsay, another banker, was right when he predicted 1½ years ago that Canada's mining industry was poised for consolidation. What he got wrong was that no Canadian company, not even Teck, could match the gutsy deal-making finesse of such titans as BHP Billiton, which a few years ago leveraged its perch in Australia to become the world's largest mining company. As a result, two of Canada's most powerful companies proved to be much better sellers than acquirers. Shareholders and executives at Inco and Falconbridge reaped huge stock and options windfalls. But Canada lost control of massive mineral deposits, including Canada's crown mineral jewel, the Sudbury Basin. Executives in London and Rio de Janeiro are now preparing to take advantage of hundreds of millions of dollars of Sudbury cost savings that were first envisioned by Project Pentlandite.

As for the men who once led the Canadian companies through the takeover wars, their careers have been shuffled like the mining assets they traded this summer. Scott Hand was hired last month to oversee CVRD's acquisition of Inco, and he will report to bosses in Rio de Janeiro until he retires next year. Derek Pannell quietly crossed sides two weeks ago to join the board of his summertime takeover opponent Teck. Don Lindsay, the man who saw five takeover strategies vaporize in less than two years, is already charting a new acquisition strategy at Teck. Unable to buy nickel or copper companies, his company is now betting its future on acquiring Canadian diamond operations, which he believes could be Canada's next Inco or Falconbridge. Steve Whisler, the Phelps chief who couldn't tie up takeovers of Australian or Canadian mining rivals, this week agreed to be swallowed by its U.S. competitor Freeport McMoRan Copper & Gold Inc. in a friendly $26-billion merger proposal.

And what of the 12 Inco directors who started their turbulent takeover journey in Labrador in September, 2005? After 13 months and 50 board meetings, the hard-working guardians of shareholder value earned well-deserved praise for negotiating such a lucrative takeover premium for their investors. That is the short-term story. A longer-term perspective is not so generous. While it is true that Inco had been in decline for decades, its directors could have acted boldly to change the destiny of a onetime mining great. Instead, Inco's directors and executives moved too late to forge a transformational alliance with its neighbour Falconbridge. When they did act, their naiveté and lack of prowess in the political and takeover arena weakened their hand. Yes, Inco officials will say powerful hedge fund investors are making it harder for public companies to make big bets on acquisitions. And yes, foreign regulators interfered with a homegrown deal. But these forces have not thwarted the ravenous deal makers at BHP Billiton and Xstrata, who now tower over Canadian mining companies. These risk takers, not Inco or Falconbridge, are the builders of a new mining century.

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