Inco bides its time, could still make counter offer

Ultimate control of Diamond Fields Resources (TSE), 75%- owner of the highly prized Voisey’s Bay nickel-copper-cobalt discovery in Labrador, is not likely to be decided until mid-April.

Inco (TSE), along with other potential suitors, had until 6 p.m. EST on Feb. 14 to respond to the recent merger deal proposed by Falconbridge (TSE). Just before the deadline was to expire, Inco issued a release stating it would not make an offer for Diamond Fields at this time but would nevertheless reserve the right to do so in the future.

Many, however, downplayed the significance of the deadline because of comments made by Diamond Fields’ Co-chairman, Robert Friedland, earlier in the week. Friedland indicated that any interested company could launch a counter-bid at any time — up until the Falconbridge proposal is voted on and approved by shareholders of both companies in mid-April.

“I don’t think this was a significant deadline,” says John Lydall, a mining analyst with First Marathon Securities. “It was there because it was part of the agreement between Diamond Fields and Inco, but I don’t think anyone really paid any attention to it.”

Market analysts predict that, eventually, Inco will have to make a counter-offer in order to maintain its ranking as the world’s largest producer of nickel. By making a higher bid, or at least one with a higher cash component, and winning control of Diamond Fields, Inco would also secure its position as one the lowest-cost nickel producers in the world.

The quandry for Inco is complicated by the fact that it is obliged to act in accordance with its original agreement with Diamond Fields.

Inco and Diamond Fields entered a partnership last June to advance the Voisey’s Bay discovery. Under the terms of the agreement, Inco purchased a 25% interest in the discovery and related claims for $525 million worth of 15-year, 6.5% convertible prefered shares. The shares are convertible into 13.3 million common shares at US$29 per share after June 29, 2000. Inco also agreed to provide $25 million to fund a feasibility study and additional exploration. Inco will also provide technical and operating expertise and arrange financing for the project.

Finally, Inco will buy a minimum of 133 million lb. of nickel per year for the first 20 years that the mine is in operation, plus all nickel produced above the 133-million-lb. level for the first five years of operations.

This agreement will remain in effect even if Falconbridge is successful in controlling 75% of Voisey’s Bay. Analysts are already speculating that the idea of marketing Falconbridge nickel, possibly at the expense of its own operations, may be too bitter a pill for Inco to swallow.