Editorial: A “super major” is born?

The blockbuster, friendly takeover offer by Phelps Dodge (PD-N) for Inco (N-T, N-N) and Falconbridge (FAL-T, FAL-N) looks like it has a good chance of succeeding, and if it does, it’ll profoundly shake up mining in Canada, producing a long list of winners and losers.

Inco and Falco shareholders are the biggest winners for the moment, of course, but Phelps Dodge shareholders will be the biggest long-term beneficiary, with the deal’s undoubted ability to deliver both commodity diversification and synergies between Phelps Dodge’s and Falco’s copper assets, particularly in South America.

It’s quite a turnaround story for a company that was battered and on the ropes as little as five years ago: the new Phelps Dodge will be the world’s second-largest copper producer (after Chile’s state-owned Codelco), the world’s largest nickel producer (jumping ahead of Russia’s Norilsk), the world’s largest or second-largest producer of molybdenum, its third-largest cobalt producer, and its seventh or eighth-largest zinc producer.

But Phelps Dodge will likely remain a very conservative company run primarily for the benefit of its biggest shareholders: the major U.S. funds. During a conference call with analysts, Phelps Dodge chairman and CEO Steven Whisler repeatedly stressed that, going forward, one of his company’s primary goals is to retain its investment-grade credit rating through the full base metals price cycle, and that it will use cash flow to pay down the massive debt resulting from the bid.

It’s not exactly a vision that fires up the imagination of people who are deeply passionate about the mining industry.

The welcoming of Phelps Dodge as a white knight also shows just how desperate Inco management had become in June as their vision of a merged Inco-Falconbridge colossus began to fade with the emergence of superior hostile bids for Falconbridge from Xstrata (XTL-L), and for Inco, from Teck Cominco (TEK.B-T).

If Phelps Dodge does succeed in its bid, Canadians will be the biggest losers. It’s pretty galling, really: two foreign born CEOs — Inco’s Scott Hand and Falconbridge’s Derek Pannell — rise to the top of the two crown jewels of Canadian mining and, at the first opportunity, promptly sell them off to a large but second-tier American corporation that has had, until now, barely a passing interest in this country.

So much for Hand’s months-long, vocal championing of the creation of a “made in Canada” mining giant out of Inco and Falconbridge: if that had been a serious goal and not a convenient pose, he and his team would have managed to come to terms with Teck Cominco for a three-way merger of the Canadian majors.

This sale of Inco and Falco will further hollow out a corporate Canada already substantially diminished by the sale of such Canadian icons as Dofasco, Hudson’s Bay Company, Eatons, Fairmont Hotels and Resorts, Tim Hortons, Labatts, Molson and Newbridge, plus most of the Alberta oilpatch.

Gone will be many of the Inco and Falco head office jobs in Toronto and work will dry up for much of the high-paying, ancillary work carried out by the city’s lawyers and accountants.

And while Phelps Dodge has promised not to institute layoffs at Inco’s and Falconbridge’s Canadian operations for three years, when that period is up, the cuts will likely be deep, particularly on the copper side.

After endorsing the Inco-Falco merger, the unions active in Sudbury and Manitoba will also find themselves on the losing end as they watch their influence with head office shrivel.

The Toronto Stock Exchange will be dealt a blow with the disappearance of Inco and Falconbridge as primary listings. The two companies represent about 19% of the TSX’s diversified metals and mining subindex.

The exchange has been trying for years to position itself as the pre-eminent exchange for trading both major and junior mining shares, but that will be increasingly difficult to accomplish with only three solid, Canadian-domiciled major mining companies listed on the exchange: Alcan (AL-T, AL-N), Teck Cominco and Barrick Gold (ABX-T, ABX-N). At this rate, the TSX may find itself relegated to dealing primarily with mining’s lower-stakes junior sector, and leaving the big boys of mining to New York and London.

But Xstrata and Teck have yet to respond to this new bid, and you’d have to think they didn’t put all they had into their first offers. We have that funny feeling that the game isn’t over yet and we’re heading into overtime.