Tempest in a nickel teapot: FNX takeover talk

I am not a big fan of hedge funds. In my opinion, one of the main reasons why the original Inco/Falconbridge merger was not successful was a result of these "predatory financial carnivores."

Respected Canadian investor-billionaire Stephen Jarislowsky also does not think highly of hedge funds.

In the May 23, 2007 edition of The National Post, Jarislowsky said, "The hedge funds are a bunch of scum who make deals fast and force companies into taking short-term decisions whether they are in the best interests of shareholders or not."

Last week, New York-based hedge fund York Capital Management was demanding that FNX Mining put itself on the auction block.

In a letter sent to FNX executive chair Terry MacGibbon, York Capital Management stated, "York Capital believes that there may be significant corporate interest in the Issuer [FNX] … Furthermore, York Capital believes that any transaction would be consummated at a significant premium to the current stock price."

Founded in 1991 by James G. Dinan, York Capital Management oversees about $7 billion worth of assets on behalf of institutions, endowments, foundations, and wealthy individuals and their families.

York Capital is FNX Mining's largest shareholder, owning 19.37 percent of that company's stock - stopping short of the 20 percent takeover bid threshold. Based on public disclosure, most of the stock was bought since Q2/07 and the dollar value of York Capital's FNX holdings is the largest in its portfolio.

So it is no surprise that this hedge fund may be getting a little nervous about its investment with all this talk about a likely recession in the United States, which could negatively impact the metals market and FNX's stock value.

A quick aside, with the advent of China's voracious metal demands, the impact of a possible or probable American recession on mineral prices is going to be very interesting. Regardless of what the pundits say - myself included - we are all in uncharted waters.

Much of China's metal usage goes into export products consumed by the United States, which theoretically, should put a damper on demand and prices during a downturn.

However, China is also undergoing the biggest urbanization and industrialization process in the history of mankind, which cannot be accomplished without mineral commodities.

How these two issues will affect the price of metals is the mining question of the decade!

There is no doubt that FNX Mining, which operates two mines on the north range of the Sudbury Basin, is bringing a third mine into production early next year and has two additional promising, advanced projects in the district, is a great takeover target.

However, one major problem is that FNX and CVRD Inco have a very close working partnership.

David Constable, FNX Mining's vice- president of Investor Relations said, "We have an off-take agreement with CVRD Inco for our output under which they process and market all of our ore production. This means that a potential suitor must be willing to buy us for a cash stream or make a deal with CVRD Inco before they bid for us to gain access to our ore."

By 2008, FNX will be supplying CVRD Inco with approximately 1.4 million tons of ore a year - roughly 15 to 20 percent of that company's Sudbury Basin production.

Why would CVRD Inco willingly give this up?

Constable continued, "FNX is in a major growth phase in the Sudbury operations with plans to double the tons of ore produced over the next three years and more than triple revenues. Combine this ambitious growth profile with the recent purchase of the Dynatec Mining Services Business - given its potential to provide the Company with interests in new near production projects outside of Sudbury - and you can then see the future value potential."

In addition, CVRD Inco and Xstrata Nickel are currently negotiating over possible mining synergies in their Sudbury Basin operations and a possible $300 million joint venture may be signed by the end of this year. In all likelihood, neither would benefit from a bidding war over FNX.

Sources also suggested that the due to the enormous size of York Capital Management's holdings of FNX, it would be very difficult to sell on the open market.

"Ultimately, the FNX management and board will decide the strategic options and all the FNX shareholders will need to vote on any sale price. The York Capital letter is just another input for the FNX Board to consider. We remain focused on our organic growth in Sudbury, our potential new projects and any exciting opportunities, which may arise from a possible CVRD Inco/Xstrata joint venture. We are certainly happy with the status quo," said Constable.

FNX's shares fell almost six percent on the Toronto Stock Exchange last Wednesday once the letter was made public indicating the market did not see much hope in the York Capital's demands being met.

The stock has since recovered trading in the $32 - $33 range.

It all seems like a metallic tempest in a nickel teapot!

Stan Sudol is a Toronto-based communications consultant who writes extensively on the mining sector. [email protected]