Keevil's Great Idea

Diane Francis column for Saturday Post May 20:

Peter Brown thinks he knows who's going to win the takeover battle underway in Canada's mining sector.
"If I was a betting man I'd bet Teck [Cominco Inc.] wins Inco [Ltd.] because its Chairman Norman Keevil won't lose," said Peter Brown, founder, Chairman and CEO of Canaccord Capital Inc. in Vancouver, Canada's biggest independent investment bank.
"In 40 years, Teck's gone from a $20-million market cap, and two mines with two years' reserves left, to this huge base metals conglomerate," he said in a recent telephone interview. "The company was built with the right combination of science, geology, innovation and guts and I don't think it stops here. Norman is a builder. He would like Teck to be an RTZ."

Norman Keevil Jr. is a geologist with a PhD whose late father invented mining technologies that are still in use today. Mr. Keevil and his family control the company with 50% of its restricted, high-vote stock. His well-heeled partners in this stock include Japan's Sumitomo Metals Mining America Inc. and the Caisse de Depot et Placements du Quebec. There is also Middle Eastern money.

Thus far, Teck's strategy has been cunning.

Teck bid for Inco even though Inco had negotiated a friendly takeover of Falconbridge Inc. which Teck said it has no desire to own. In fact, Teck's bid was based on Inco dropping the Falconbridge merger.

This opened the door for Swiss-based Xstrata PLC, which owns 19.9% of Falconbridge, but had blessed the Inco-Falconbridge merger, to bid for the rest of the company it did not already own. That's what happened this week which is not only predictable but might be exactly what Teck wanted.
Now it looks as though Inco and Xstrata may become embroiled in an expensive bidding war for Falconbridge and Teck appears to be in the best position.

-- If Xstrata outbids Inco for Falconbridge, then Teck will capture Inco then make a joint venture deal of some description with Xstrata regarding Falconbridge's Sudbury nickel operations in order to realize sizeable synergies by eliminating duplication.

-- On the other hand, if Inco outbids Xstrata for Falconbridge, its own stock value will be reduced, making Teck's takeover offer more tempting to Inco shareholders. Teck may also join forces with partners to buy Inco/Falconbridge.

-- Alternatively, if Xstrata appears to be willing to overpay for Falconbridge, then Inco may be agreeable to joining forces with Teck to help snatch it away from Xstrata.

This, to many, is the most likely outcome and would result in a three-way mining powerhouse.

(It's interesting to note that Teck made a quick $500 million windfall on a bet of C$100 million from Inco when it bought the Voisey's Bay nickel discovery from Robert Friedland.)

While Teck has become the cat amongst the pigeons, the aggressive mining company isn't the only game around in Canada. One intriguing possibility is gigantic Alcan Inc. of Montreal, says Terry Ortslan, mining consultant in a recent interview.
"I think Alcan is a very real possibility," he said.

That's not as odd as some may think. Alcan is big enough to buy Inco and Falconbridge. Also, buying base-metal mining outfits has been a successful strategy for its rival Alcoa, the world's biggest aluminium company. Likewise, Australian mining giant BHP Billiton of Australia is involved in aluminium along with nickel, copper and other commodities.

"This is going to be a big battle because Inco is the ultimate prize in the mining industry. The others won't let this go away without a fight. Perhaps Teck's owners will form partnerships to get it," said Mr. Ortslan.

There are two other possible foreign bidders such as Brazil's Companhia Vale do Rio Doce or CVRD.

"It has a commitment to diversify and has been making large takeovers," said Mr. Ortslan. "It also looked at Noranda."

The other takeover possibility is America's largest mining company, Phelps Dodge Corp., flush with cash and more worried than most miners are about operating mines in hostile, increasingly anti-American, jurisdictions around the world. Assets in safe, democratic, friendly Canada might even net a premium to such a company.

The consensus is that the Chinese government, embarrassed by Ottawa's rebuff of its planned takeover of Noranda Inc. months ago, will take a pass.

Politics will continue be important in this one. The election of a minority Tory government may make a foreign takeover easier but cannot be considered a green light.

In fact, a foreign predator would create problems for the fledgling government because there would be a big political pushback on the part of the New Democrats and Liberals. There may also be a backlash by the public against any foreigners buying a national treasure such as Sudbury'a and Voisey Bay's rich nickel deposits.

Clearly, the best outcome for Canada in the current mining bidding wars would be if Teck Cominco Ltd. or another Canadian succeeds in buying Inco Ltd. as well as Falconbridge Ltd.

But Teck's restricted share ownership structure may become a problem unless Teck's board agrees to tender their high-votes for regular shares at a reasonable ratio. There have been indications the board will do this.

Whatever the outcome, Canada deserves an aggressive base-metal player that's a world-beater. A three-way merger would create a C$50-billion mega-miner and rank as the fourth largest mining corporation in the world.