Noranda nearing 20% stake in Falconbridge

Not content with simply being Falconbridge Ltd.’s largest single shareholder, Noranda Inc. has increased its ownership of the nickel producer to 16.5% and will probably buy more.

After failing once to get a significant stake in Falconbridge (N.M., July 11 /88) and losing an earlier opportunity to buy the Kidd Creek orebody, smelting and refining complex (N.M., March 17/86), Noranda chairman Alf Powis has gone to the open market to buy a stake in Falconbridge.

Both of Noranda’s earlier attempts were foiled by the manoeuverings of Falconbridge Chairman William James, a former Noranda employee and old friend of Powis. Noranda’s buying spree is the latest in a battle of one-up-manship between the two executives.

Noranda paid $275 million to become Falconbridge’s largest shareholder and Powis says buying won’t stop until he has reached 20%.

As one of the world’s largest diversified natural resource company, Noranda has set its sights firmly on Falconbridge’s base metal assets in order to maintain that position. And even though the 20% ownership level was expected to be achieved at press time, analysts are convinced that Noranda will eventually bid for control.

Since it has no apparent competitors to contend with, Noranda can afford to wait until the price is right before adding to the 12.2 million Falconbridge shares it already holds, analysts say. There are another 74.35 million shares outstanding.

With almost $400 million in his company’s treasury at year-end Powis is well placed to turn the tables on his friend and former colleague, Falconbridge Chairman Bill James.

After outbidding Noranda for a 24.9% control block of its own shares from Placer Dome Inc. (TSE), James recently regained full control of a series assets which Powis badly wants.

They include the copper-zinc- silver operation at Timmins, Ont., which was snapped up from under Noranda’s nose in 1986 when Falconbridge paid the Canada Development Corp. $650 million for the operation.

Last year, the Kidd Creek refinery produced 83,500 tonnes copper metal, 114,400 tonnes of zinc and 7.1 million oz silver.

In 1987, Noranda refined almost 149,200 tons of copper concentrates from Kidd Creek at its Horne smelter in northwestern Quebec. Noranda also took about 30,000 tons of copper concentrates from Falconbridge’s Strathcona mine in Sudbury, Ont.

“If an offshore buyer was to come in and buy control of Falconbridge, it could decide to ship its concentrates elsewhere,” said Alan Thomas, Noranda’s senior vice- president, finance. He was referring to rumors that a Japanese metal producer is planning to build a huge smelter in the northeastern United States.

But analysts say Noranda is more interested in the huge orebody at Kidd Creek than protecting its custom smelting interests in Quebec. At year-end Kidd Creek’s proven reserves down to 5,000 ft stood at 50.6 million tonnes of grade 3.55% copper, 5.11% zinc, 0.15% lead and 1.6 oz silver per tonne.

“Noranda’s mining operations have been going down the drain in proportion to is forest products wing,” said Dean Witter Canada mining analyst Thomas Komlos. Earnings from the company’s metals and minerals division were $141.3 million in 1987 compared to $223 million in forest products.

According to Komlos, Falconbridge’s largest shareholder won’t stop once it has bought enough shares to give it 20%. “The next step would be to go for over 50%,” he said.

“At that point, it could operate the nickel producer as a separate entity and switch the Kidd Creek operation into its own metals and minerals division,”

With $1.4 billion in long-term debt, there is little that Falconbridge can do to stop Noranda’s diversification plans. “Falconbridge could make itself less attractive to possible suitors by acquiring something big,” said Komlos.

But as the buying spree continues, Noranda executives were saying only that they will go for the 20% level which would allow it to credit Falconbridge’s earnings in its own financial statements.

“The Falconbridge shares are a very good investment given current strong nickel prices,” said Thomas. His company has paid an average $22.5 per share for its stake in the nickel producer compared to the $25.75 per share which Falconbridge paid Placer Dome for the 24.9% control block.

Benefitting from the strongest copper and nickel prices in years, Falconbridge reported its highest earnings ever for a single quarter — $95 million or $1.19 per share, compared to a $17 million (17 cents per share) loss last year. If nickel prices remain close to current levels ($6.60(US) per lb), the company’s long term debt should be pared down to below $900 million by year-end.

According to Thomas his company will acquire the additional 2.5 million shares needed to give Noranda 20% when the price is right.

“We are just watching the market at this point,” he said.