We were all perhaps wrong!
Early Friday, Brazilian iron ore king, Companhia Vale do Rio Doce (CVRD) made an all-cash offer to buy Inco Limited at the price of CDN$ 86.00 per share. The offers of both Teck-Cominco and Phelps Dodge are a mix of cash and share. The hedge fund boys and girls dance with delight with all cash offers as these always trump any cash/share combination and give maximum short term gain.
In addition, Atticus Capital, a large American hedge fund that owns about eight percent of Phelps Dodge does not support the merger with Inco and will recommend shareholders to vote against this deal. If there are no regulatory hurdles, this does appear - notice my hedging - to be a knock-out punch.
Roger Agnelli, chief operating officer of CVRD said in a statement, "This is an exciting opportunity for CVRD. The operations of the two companies are complementary and the combination will enhance our capabilities to benefit from the fast changing global landscape in the metals and mining industry."
CVRD is the world's fourth largest mining company and the largest producer of iron ore, the key ingredient of steel. With the industrialization and urbanization of China, which could not happen without steel, the historic high prices for iron ore have created a new mining titan. CVRD is also the second largest producer of manganese and ferroalloys, one of the world's lowest cost producers of aluminum products as well as copper, potash and kaolin. Regardless of the other metals, roughly 80 percent of profits are tied to iron ore, the main reason for the company's desire to diversify from that mineral.
One of the key issues emphasized in the CVRD press release is
Inco's "specific knowledge, long-term experience in nickel mining
and technological leadership in nickel metallurgy." Nickel mining
and refining of sulphide and laterite deposits is very difficult
due to the complexities of the ore. There is no other company
with as an extensive knowledge of this strategic metal.
Brazil has enormous laterite and sulphide nickel deposits which
would make a perfect fit with Inco.
Last December, CVRD spent almost one billion dollars taking over
Canadian junior miner Canico Resources. Canico's Onca Puma nickel
laterite project is located in Brazil's Para State in the
northeast close to CVRD's vast iron ore deposits. CVRD is also
building another nickel laterite project in the same region. The
Vermelho project, combined with Onca Puma will together produce
up to 100,000 metric tons of nickel when they reach full capacity
in 2009.
Created in 1942, CVRD was put together from a combination of
American and British owned mining and railroad properties. At
that time the Brazillian government owned 80 percent of the
company. In the late 1990s, CVRD was privatized but due to the
company's enormous impact on the national economy with the
building of essential infrastructure like railroads, ports and
employment, the government probably still has significant
influence.
As with all these press releases, CVRD is confident that this
takeover will deliver significant benefits to Canada. They intend
to establish a global nickel business in Toronto, continue to
invest in R&D as well as capital projects in Canada and
support the communities where Inco operates. CVRD also stated
that it intends to "work with key stakeholders to optimize the
Sudbury operations in order to support its long-term
competitiveness." This sounds like the company is open to joint
ventures with Xstrata/Falconbridge.
Furthermore, CVRD is committed to the highest standards of
corporate social responsibility, environmental protection and
"the creation of channels of social and economic mobility in
low-income communities." The third remark is someone odd and
makes me think that there could be some significant cultural
problems or misinterpretations.
By and large CVRD has had a lot of experience dealing with -
forgive me if I am politically incorrect - third world or
developing countries. Many of the regions they operate in do not
even have basic infrastructure, education or health care
facilities. Sudbury does not fall in that category. Our
expectations are very different.
Sudbury, the richest mining district in North America and among
the top ten most important globally, is the source of most of
Inco's enormous wealth and expertise. There must be major
concrete benefits for this community if they want to buy control
of a near-trillion dollar ore deposit. That was completely
missing from the press release!
Do not think I am against
this deal
because the company is from the third world. Canada's direct
investment in Brazil has increased 280 percent in a decade; from
$2 billion in 1993 to $7.6 billion in 2003 (roughly 10 times
Brazil's investment in Canada). With a population of almost 190
million, the country is Canada's largest trading partner in South
America. It is estimated that almost 800 Canadian companies are
involved in Brazil including major players like Alcan, Encan,
Nortel, Bank of Montreal, Scotiabank and CAE just to name a few.
Brazil is one of four emerging economies that will change the
economic balance of the world. The other three are Russia, India
and China - collectively known as the BRIC countries.
However, "Mother Inco" and "Aunti Falconbridge" were like part of
the family. As a community, we grew up with them and accepted
their quirks. If they were late with the rent, no problem because
we knew they were always good for the money. We also knew if we
had serious concerns, they would give us a good hearing, but all
that has changed. Head office for Xstrata is in Switzerland and
if CVRD is successful, Rio De Janeiro. These companies do not
have the historically deep roots in the well being of this
community.
These are strangers, the gloves have come off and our
expectations will be much more demanding. I look forward to
hearing CVRD's proposed benefits for the community of Sudbury -
an essential part of getting Canadian government approval for
this deal.
Stan Sudol is a Toronto-based communications consultant/policy
analyst who writes extensively on mining issues. He can be
reached at
[email protected].