Inco-Falco deal to create a colossus

“Why don’t Inco (N-T, N-N) and Falconbridge (FAL.LV-T, FAL-N) merge?”

It’s a question that’s crossed the mind of even the most casual visitor to the adjoining but always separate mining and smelting complexes built over the decades by Inco and Falconbridge in the Sudbury basin, one of the largest and richest base metals deposits on the planet.

Exactly why it took this long is the stuff of legend, with the two companies’ genuinely acrimonious rivalry being one of the most enduring fixtures of the Canadian mining scene during the latter half of the 20th Century.

Inco and Falco veterans will earnestly tell you that there were profound differences in the corporate cultures and philosophies of both companies, with Inco epitomizing stuffy corporate Canada and Falconbridge being the more nimble upstart.

But to us, the past bad blood between the two companies always seemed to be more the result of the physical closeness of their operations than anything else.

Inco was founded in 1902 as the International Nickel Company, and virtually created much of the nickel market we know today. Noranda was founded in 1922 while Falconbridge came into being in 1928. Noranda and Falco only completed their own merger in June 2005.

The fact that it’s Inco bidding in a friendly way for the relatively larger Falconbridge speaks volumes about the importance of profitability: for the first half of 2005, Inco bagged profits of US$528 million on revenues of US$2.3 billion, while Falco netted the equivalent of only US$378 million on much larger revenues of US$4.1 billion.

Inco’s financial muscle today is the direct result of the painful but very necessary restructuring and modernization that it carried out during the late 1990s under the leadership of former chairman Michael Sopko.

Going forward in the world, the new Inco will be a force to be reckoned with. It’ll be the largest nickel producer (knocking Russia’s Norilsk Nickel to second place), the eighth-largest copper producer, the third-largest zinc producer, and a substantial producer of cobalt and platinum group metals. It will employ some 25,500 people in 28 countries.

While post-merger layoffs are inevitable throughout company, no major shutdowns of operations are planned, thanks to continued red-hot markets for virtually all the two companies’ products.

With a market capitalization around US$19 billion, the new Inco will be Canada’s first super heavyweight in mining’s base metals division, being in a position to record annual revenues around US$13 billion, with profits approaching the US$2-billion mark.

It will be able to stand shoulder to shoulder with the other giants of base metals production: Australia’s BHP Billiton, South Africa’s Anglo American, the U.K.’s Rio Tinto, Switzerland’s Xstrata and America’s Phelps Dodge.

Perhaps most importantly, the Inco-Falco deal will put to an end — or put off for a few years at least — the long-standing vulnerability of the two companies to a hostile takeover by foreigners, with the resulting heavy job losses at head office, and the negative ripple effect through corporate Canada.

Realistically, the only potential spoiler of the deal is Xstrata (Inco’s acquisition of Falconbridge is a truly historic moment in Canada’s mining industry and the aftershocks will surely reverberate for decades to come.