Noranda ponders its options in Amax bid for Falconbridge

The mining and forestry giant, which is Falconbridge’s largest shareholder with a 23.8% interest (27% voting interest) and which has made no secret of its intention to boost that interest, has been quiet on the takeover proposal.

Amax is offering to purchase for cash all of the outstanding shares of major nickel-producer Falconbridge for $36.125(C) for a total price of $2.8 billion. Expiration date is Sept 1. Falconbridge’s board of directors is recommending in favor of the offer.

A Noranda spokesman said the company’s board of directors met two days after the joint Amax- Falconbridge announcement and management discussions were continuing internally. Noranda’s options seem clear. The company could tender its shares to Amax and realize a profit estimated to be $221 mil lion; retain its shareholdings and become a minority shareholder in Falconbridge (assuming the Amax offer succeeds); or possibly strike a deal with Amax for ownership of Falconbridge’s Kidd Creek zinc-copper- silver operations at Timmins, Ont., which Noranda has been known to be eyeing.

Noranda may also decide it wants Falconbridge for itself and launch a counter-offer, topping the share price bid by Amax.

Another possibility is that Noranda, with a reported $3-billion line of bank credit, will allow Amax to swallow Falconbridge without much of a fight and then take a run at Amax itself.

Shares of Falconbridge rose $6.38 to close at $36.63 on the TSE the day of the takeover announcement, with more than three million shares changing hands. The trading volume fell but continued to be relatively strong during the next few sessions, with the share price hovering in the $36-$36.38 range.

Amax’s offer is contingent on at least 66.6% or 52.75 million common shares of Falconbridge being tendered.

Mike Brown, a base metals analyst with brokerage firm McLean McCarthy, said Noranda was caught flat-footed by the Amax offer and suggested Noranda would likely have a tough time financially trying to top the Amax bid. Nor does he think Amax would turn around and sell off any of Falconbridge’s assets.

Brown said the Amax offer focuses attention on what is happening in the mining industry in Canada: a successful bid would mark the first significant takeover of a major Canadian base metal company.

Because of the bid, higher market prices for Canadian mining companies will become the order of the day, he said, the higher prices reflecting the underlying values the market was not previously recognizing.

Brown is bullish on base metal prices and sees nickel producers such as Falconbridge being able to sustain profits experienced during the past two years at least until the middle of the next decade.

Asked why Amax wishes to acquire Falconbridge, senior mining analyst Ernie Nutter of securities firm Dean Witter Reynolds (Canada) said the move is designed to reduce the possibility of Amax itself being taken over.

Nutter said Amax, with a current debt of about $1 billion(US), would increase its debt (because of the necessary borrowing) to about $4 billion by swallowing Falconbridge, making the U.S. firm less attractive to a corporate suitor.

Acquisition of Falconbridge would allow Amax to expand its metals base, which currently includes aluminum, coal, gold and molybdenum, Nutter said. In particular, zinc from the Kidd Creek operations would provide the American firm with new market possibilities.

“It’s not a surprise somebody took a run at Falconbridge other than Noranda,” Nutter said. It’s possible a third party, U.S. copper producer Phelps Dodge for example, could also make a bid for Falconbridge, he said.

Nutter pointed out that should Amax be successful in taking over Falconbridge, its total payout could be reduced to $2.5 billion. McIntyre Mines, wholly-owned by Falconbridge, has a 13% interest in Falconbridge and in a full takeover, the value of McIntyre’s shares, about $300 million, would revert to Amax.

Part of the deal with Falconbridge allows Amax to acquire an option to purchase, for $356.7 million(C), a debenture convertible into about 9.9 million Falconbridge shares. The debenture may only be converted if Amax acquires 56% of the Falconbridge shares.

At the time of the takeover announcement, Falconbridge said its board has adopted a rights plan, which is designed to have a diluting effect on any person or company seeking to take over or control the company. Falconbr idge shareholders have yet to ratify the rights plan.

]]>