Xstrata raises the stakes (July 17, 2006)

After taking a few days to root around in its pocketbook, Xstrata (XSRAF-O, XTA-L) has boosted its all-cash bid for the 80.2% of Falconbridge’s (FAL-T, FAL-N) shares it doesn’t already own by $6.50 per share to $59.00.

The sweetener came four days after the Swiss-based miner extended the deadline for its original offer to July 21. That extension was prompted by Industry Canada’s decision to take up to another 30 days (potentially stretching into early August) to fully consider Xstrata’s offer.

Xstrata’s revised bid values the target shares at around $18.1 billion, and Falco as a whole at about $22.5 billion. Xstrata has also lowered the minimum tender condition on its offer to a majority of the Falco shares it doesn’t already own.

Xstrata picked up its existing 73 million Falco shares from Brookfield Asset Management (BAM.A-T, BAM-N), formerly Brascan, for $28.00 per share, or around $2 billion. If its latest bid were successful, the company’s weighted average acquisition price would ring in at $53.01 per share, or $20.2 billion in all.

In response to Xstrata’s initial bid extension, Falconbridge CEO Derek Pannell reiterated his board’s endorsement of an earlier offer from Inco (N-T, N-N), which, unlike Xstrata’s bid, has received all necessary regulatory approvals. Falconbridge said it would evaluate the increased cash offer and provide a formal response to shareholders as soon as possible.

Xstrata’s improved bid also comes just two days before the July 13 expiration date of Inco’s competing bid for Falconbridge. Inco recently boosted its offer to $17.50 in cash plus 0.55676 of an Inco share for each share of Falconbridge. It places a value of $58.36 on each Falco share, based on Inco’s closing share price in Toronto on July 10 — the day before Xstrata’s new bid.

The offer is part of a US$40-billion three-way merger that would ultimately see Inco and Falco snapped up by Arizona-based copper producer Phelps Dodge (PD-N). Phelps intends to acquire Inco regardless of the outcome of the Falconbridge saga.

Phelps maintains that its friendly three-way deal provides the greatest long-term value for Falconbridge shareholders, and gives the Inco offer for Falconbridge an implied value of $61.04 per share, based on Phelps’ closing price in New York on June 10. Inco echoed Phelps’ sentiments in a statement of its own.

Xstrata shareholders recently approved their company’s bid for the Canadian miner but the plan still needs a nod from the European Commission (EC). That decision was to have been delivered by July 13.

Meanwhile, the EC has approved Teck Cominco’s (TCK.B-T, TCK-N) bid for Inco. The offer was approved as a “simplified” transaction, as neither customers nor competitors raised concerns about the transaction.

Teck’s offer is contingent on Inco scrapping its planned nuptials with Falconbridge. The EC approved that transaction after agreeing to the pair’s proposed remedy of selling Falco’s high-grade Nikkelverk nickel refinery in Norway to LionOre Mining International (LIM-T, LMGGF-O, LOR-L) for US$650 million.

Teck’s fully pro-rationed bid of $28.00 in cash and 0.6293 of one of its own shares expires on July 24. The offer values Inco’s shares at $71.97 apiece, based on Teck’s closing share price on July 10.

Environmental woes

In other news, the U.S. Court of Appeals for the Ninth Circuit has ruled that a lawsuit launched against Teck by two members of the Confederated Tribes of the Colville Reservation can proceed.

The Colville members contend that hazardous slag from Teck’s Trail lead-zinc smelter flowed down the Columbia River and into the United States. The court dismissed Teck’s argument that the lawsuit should be dismissed on the grounds that it is a Canadian company operating in Canada and is therefore not subject to U.S. environmental laws.

In early June, Teck reached an agreement with the U.S. Environmental Protection Agency (EPA) whereby Teck would spend US$20 million on a comprehensive assessment of the human and environmental health of the Upper Columbia River basin.

“From day one, Teck Cominco has voluntarily sought a co-operative arrangement with U.S. authorities to address the public’s concerns surrounding Lake Roosevelt,” said Teck senior vice-president of environment and corporate affairs Doug Horswill. “This agreement is a great step forward in allowing us to fulfill our commitment.”

The deal calls for the studies to be funded by Teck, and overseen by the EPA with the participation of the government of Canada, the U.S. Department of the Interior, the State of Washington, and the Spokane and Confederated Colville Tribes.

The studies would cover a 240-km stretch along the Columbia River, from the Grand Coulee dam to the Canadian border.

Meanwhile, the Supreme Court of Canada recently upheld a previous Ontario Court ruling that certified a $750-million class action lawsuit against Inco. The suit was filed by residents of Port Colborne, Ont., in 2001, and alleges that from 1918 to 1984, Inco’s electrocobalt refinery released thousands of tonnes of nickel oxide into the environment, thereby devaluing their neighbouring homes.

The matter now proceeds to the merits stage, where lawyers for the Port Colborne group must prove economic damages as a result of Inco’s actions.

Shares in Falconbridge were $1.16 better at $59.86 in mid-afternoon trading in Toronto following the news on July 11; Inco was up $1.53 at $74.91, and Teck was $1.60 richer at $71.47. For its part, LionOre was off 15 at $6.35. In London, Xstrata ended a penny better at 2,021 pence.