Falconbridge becomes quarry for takeover after Xstrata deal Swiss miner scoops up Brascan holding, r

Falconbridge becomes quarry for takeover after Xstrata deal Swiss miner scoops up Brascan holding, raising the spectre of a total buyout

By Wendy Stueck, Mining Reporter, Canada Globe and Mail

Tuesday, August 16, 2005

Vancouver -- Swiss mining powerhouse Xstrata PLC has agreed to pay $2-billion for a 19.9-per-cent stake in Falconbridge Ltd., raising the possibility that the Swiss company will swallow Canada's biggest mining company.

Xstrata, a major copper and coal producer that has a stock market value of more than $15-billion (U.S.), announced yesterday that it had purchased Brascan Corp.'s stake in Falconbridge, triggering speculation that the Swiss company's next move would be to acquire the rest of Falconbridge.

Toronto-based Brascan has long wanted to cut its resource holdings to focus on property, power and funds management.

Xstrata chief executive officer Mick Davis played down the possibility of a takeover, saying that "it is wrong to assume that today's acquisition will lead necessarily to an offer for the remaining common shares of Falconbridge."

But in a conference call to discuss the deal, Mr. Davis hinted at future developments.

"I think that the value in this investment is the option which it gives us," he said. "We don't intend to be a long-term shareholder with minority interest in the company."

Analysts said Xstrata isn't in the habit of hanging on to minority positions.

The company, whose predecessor operations go back to the 1920s, is the world's biggest exporter of thermal coal and a major producer of copper and zinc. Its biggest shareholders include trading company Glencore International AG, which controls a 40-per-cent stake. Xstrata reported sales of $6.5-billion last year, compared with 2004 sales of $7-billion from the combined operations of Noranda and Falconbridge.

"They are not in there just to hold a stake in Falconbridge," said analyst Greg Barnes of Canaccord Capital. "That is not their business; they are a mining company."

Xstrata's purchase will be seen as a pre-emptive strike by other potential bidders for Falconbridge, said Victor Lazarovici, a mining analyst with BMO Nesbitt Burns.

Mr. Lazarovici also expects Xstrata to increase its stake.

Mr. Davis is a deal maker who has probably overseen more big acquisitions than any executive in the mining industry, Mr. Lazarovici said.

As the former chief financial officer of London-based resource player Billiton, Mr. Davis helped push through several important deals, including the blockbuster 2001 deal that created BHP Billiton.

Since taking the helm of Xstrata in 2001, Mr. Davis has closed a controversial $3-billion takeover of Australian miner MIM Holdings Ltd. and made a failed bid for WMC Resources Ltd.

Xstrata is known for being a strategic player whose actions sometimes prompt rivals to make competitive moves, Mr. Barnes said.

Xstrata targeted Australia's WMC with a hostile takeover bid last October.

That bid was trumped by one from rival BHP Billiton, which announced a friendly, $7.3-billion offer for WMC in March and completed the takeover this year.

With BHP sewing up the WMC transaction, which included the massive Olympic Dam ore body in Australia -- a mine with big stores of copper, uranium, gold and silver -- speculation soon shifted to what Mr. Davis would pursue as an alternative.

Prices for commodities such as copper, nickel and uranium are at multiyear highs and resource companies are trading at correspondingly high levels, making potential acquisitions expensive.

But with players such as Brazilian iron ore giant Companhia Vale do Rio Doce plowing billions into new projects and acquisitions, few expected Xstrata to stand still for long.

Last month, there were rumours that Xstrata was eyeing Toronto-based nickel producer Inco Ltd., which has two major new nickel projects under construction at a time when prices for nickel are soaring.

But Xstrata instead went for a stake in Falconbridge, also a significant nickel producer. The miner currently does not have any nickel in its global portfolio, which includes copper, coal and zinc assets as well as exposure to other metals.

Xstrata's foray into the Canadian mining sector comes as the dust is still settling from the merger of the former Noranda Inc. and Falconbridge. That combination came about after talks between Noranda and China Minmetals about the possible sale of Noranda to the Chinese company wound up without a deal.

Under the terms of the deal between Brascan and Xstrata, $375-million of the purchase price will be settled through a convertible debenture issued by Xstrata.

Falconbridge shares gained 87 cents (Canadian) to close at $29.25 on the Toronto Stock Exchange yesterday.

Xstrata rose 79 pence ($1.71) to £13.52 on the London Stock Exchange yesterday.

A mining giant

The $2-billion purchase of a 20-per-cent stake in Falconbridge is the latest 'bolt-on' acquisition by the Swiss mining giant Xstrata PLC, which is aiming to build its four main commodity divisions.

* Alloys

Headquartered in Rustenburg, South Africa, Xstrata's alloys division is the world's largest integrated ferrochrome producer. Xstrata also produces vanadium pentoxide and ferrovanadium from mines in Australia and South Africa.

About 80% of global alloys production is used to make stainless steel.

'04 sales: $953-million (U.S.)

* Coal

Headquartered in Sydney, Australia, Xstrata's coal division is the world's largest producer of export thermal coal and a significant producer of coking coal. Its operation employ about 10,--- people in 30 mines in Australia and South Africa.

Coal generates about 33% of world's electricity.

'04 sales: $2.7-billion (U.S.)

* Copper

Headquartered in Brisbane, Australia, Xstrata's copper division produces copper concentrates and copper cathode in Queensland, and copper-gold concentrates and gold ore in Argentina. The division is evaluating a copper project in Peru.

About 75% of global copper production is used by telecoms and for power transmission.

'04 sales: $1.6-billion (U.S.)

* Zinc

Headquartered in Madrid, Xstrata Zinc became the world's largest producer of zinc concentrates and refined zinc when it acquired the Spanish zinc operation of Asturiana de Zinc SA in 2001. It also has zinc and lead operations in Germany, Australia and Britain.

About 80% of global zinc production is used for galvanizing steel and die-casting alloys and brass.

'04 sales: $1.2-billion (U.S.)