Plot thickens in battle for Inco

Brazilian iron ore giant Companhia Vale do Rio Doce (CVRD) (RIO-N) has turned up the heat in the battle for control of Inco (N-T, N-N) with an all-cash bid of $86.00 per share.

The bid values the nickel miner at around $19.4 billion in all, and is conditional on at least two-thirds of Inco’s fully diluted shares being tendered. It will remain open for 45 days, and requires regulatory approval, including that of Investment Canada. As its operations are complementary to Inco’s, and it currently does not produce any nickel, CVRD is confident it will get that approval.

While he says his company has not yet had any discussions with Inco’s management, CVRD chief executive Roger Agnelli says CVRD’s proposal is a friendly one, and doesn’t want it to jeopardize Inco’s development.

He adds that the deal should appeal to Inco shareholders, as it allows them to crystallize Inco’s profitable growth potential in cash without risk.

While Inco remains committed to its planned cash-and-share acquisition by Phelps Dodge (PD-N), it did say that it was open to talks regarding CVRD’s bid, which it said “could reasonably be expected to result in a superior proposal.”

Phelps would retain the right to match a superior offer should Inco and CVRD emerge from those talks with a superior offer. Otherwise, the Arizona-based copper miner would stand to receive a US$475-million break fee from Inco.

In the meantime, Inco said it was neutral on CVRD’s bid and advised “there is no necessity for Inco shareholders to take any action with respect to the CVRD offer at this time,” noting that the offer will remain open until Sept. 28.

Smells like a bidding war

Inco similarly invited Teck Cominco (TCK.B-T, TCK-N) to the negotiating table after it revised its cash-and-scrip bid at the end of July. Teck snubbed the offer, and Inco subsequently reaffirmed its rejection of the Vancouver-based diversified miner’s bid.

While it has consistently maintained that it would not be drawn into an expensive bidding war, Teck took a few days to examine CVRD’s offer and then, on Aug. 15, unveiled a last-minute sweetener that called for the overnight offering of around $5.7 billion worth of its class B shares.

For the offering to close, at least two-thirds of Inco’s fully diluted shares must be tendered to the revised offer by the new deadline of Aug. 30. Teck will use the proceeds to boost its bid to $89.00, with at least $71.20 coming in the form of cash and the remainder paid in class B shares. Teck currently has around 211 million class B shares outstanding.

Teck called the amended bid its “best and final offer for Inco.”

Teck’s previous bid of $40.00 in cash plus 0.5821 of a class B share bid was originally set to expire on Aug. 16; Inco’s shareholders’ rights plan carried the same deadline.

The two new bids put the pressure squarely on Phelps to ante up or pack its bags. The Arizona-based copper miner is currently offering just $20.25 in cash accompanied by 0.672 of one of its shares. That proposed bid will be put to a vote by its own shareholders on Sept. 25.

Phelps’ planned transaction, which has already been trimmed to a two-way from a three-way, faces some stiff opposition from some of its major shareholders who have called the plan too dilutive and debt-laden. Additionally, rumours abound that Mexican mining conglomerate Grupo Mexico (GMBXF-O, GMEXICOB-M) is considering a bid for the Arizona-based copper miner.

In late afternoon trading on Aug. 15, Phelps’ offer was leading at around $89.69 per share, with the company’s shares trading nearly 3% higher to US$91.93 on anticipation it would be the next takeover target if its bid failed.

By comparison, Teck’s existing bid rang in at $86.46, compared with its proposed new offer of $89.00 per share. Inco’s shares were running at $90.00 as investors anticipated even higher bids.

While the Brazilian’s bid currently trails, it does have the competitive edge of being pure cash — a lesson learned from the battle for Falconbridge (FAL-T, FAL-N) in which Xstrata’s all-cash bid prevailed. It is also the company’s initial and presumably starting offer. Teck’s new bid closes the cash gap, and comes with the added bonus that it is fully permitted.

“I think that we are paying a full price for the assets,” Agnelli told analysts and members of the media during a recent conference call. “We recognize that the assets are very good. They will provide a lot of value for our shareholders.”

If successful, the proposed transaction would beget one of the world’s three largest diversified mining companies, with substantial positions in iron ore, nickel, ferroalloys, bauxite, alumina and manganese. It would have a market capitalization around US$70 billion at current stock prices.

Status quo

Agnelli said he didn’t expect any big changes when asked about the future of Inco’s head office in Toronto.

“The Inco executives would just have to visit Brazil more frequently, which is not bad,” Agnelli added.

CVRD also said it plans to continue Inco’s investments in new mines and research.

In addition to Inco’s nickel reserves, Agnelli said CVRD was also interested in Inco’s nickel mining experience, hydrometallurgical technology, furnace operating expertise, and ore-handling technologies.

“We are looking for talent, we are looking for knowledge and Inco has everything in one single venture.”

Agnelli figures Inco’s expertise would help CVRD boost first-year nickel output at each of its Ona-Puma and Vermelho nickel-laterite projects in Para state, Brazil, by around 10,000 tonnes.

Combined, the projects are expected to annually churn out more than 100,000 tonnes of nickel by 2009.

Asked if the purchase price was perhaps too high, Agnelli said he expects the current metal price environment to last for at least another five years. CVRD expects annual growth in stainless steel (in which iron and nickel are components) consumption to range from 4.5% between 2000 and 2010 and 3.8% between 2010 and 2020.

CVRD intends to finance its proposed acquisition via a 2-year committed bridge loan provided by first-tier banks Credit Suisse, UBS, ABN AMRO and Santander. The debt-laden plan has not been applauded by all, with Moody’s Investors Service and Fitch Ratings both placing CVRD’s credit rating under review in anticipation of increased debt. If successful, the transaction would see CVRD’s debt more than quadrupled to US$24.9 billion, including some US$1.92 billion in debt inherited from Inco.

Despite the debt load it would bring with it, Agnelli said the proposed deal is an important opportunity, as it would help CVRD diversify its products, markets and geographic asset base. Importantly, it would also give his company a strong foothold in Canada.

“Canada is a mining country; it is a country that has legislation, experience, tradition, and very good people working in the sector,” he said. “It is very important for us to be in a country like Canada.”

CVRD is no stranger to the Great White North, having previously taken a run at Noranda, which at the time controlled Falconbridge. Noranda later merged with Falconbridge in 2005 after talks with Chinese parastatal enterprise China Minmetals failed to result in a deal. CVRD acquired Canadian nickel developer Canico Resources for nearly $1 billion in late 2005. Key to that deal was the Ona-Puma nickel project.

In other Inco news, the company’s president and CEO, Peter Jones will step down by the end of the year. Jones was originally to have resigned by June 30 or on completion of Inco’s planned acquisition of Falconbridge, whichever came first.

T.N.M. Nugget

COMPANHIA VALE DO RIO DOCE BID

ON OFFER:

$86 in cash per Inco share; $19.4 billion on a fully diluted basis.

MINIMUM ACCEPTANCE LEVEL:

66.67%

DEADLINE:

Sept. 28

THE BIDDER:

World’s biggest iron ore and pellet producer

Largest diversified miner in the Americas

SECOND QUARTER STATS:

Record net earnings of US$1.9B on revenue of US$5.9B; total debt of US$5.9B record production of 65.9 Mt iron ore, 1 Mt alumina, 114,000 t aluminum, and 189,000 t potash