Xstrata takes Falco stake (August 15, 2005)

Swiss-based, diversified base metal miner Xstrata (XTA-L) has added nickel to its portfolio by picking up a 19.9% stake in Canada’s refurbished Falconbridge (FL-T).

Xstrata bought more than 73.1 million Falconbridge shares from asset-management company Brascan (BNN-T) for around $2 billion. The price tag translates to $28 per share; the shares closed at $28.38 in Toronto on Aug. 12, the last business day prior to the deal’s announcement.

Falconbridge ranks as the world’s third-largest nickel and zinc producer and the eighth-biggest producer of copper.

“We went for the 19.9% stake to secure the option on the whole company,” Xstrata chief executive Mick Davis explained to analysts during a recent conference call. “It puts us in the position that if we go after the whole we won’t likely face interloper interference.”

Such was the case earlier this year, when BHP Billiton (BHP-N) trumped Xstrata’s bid for Australian-based copper and nickel miner WMC Resources. Since that defeat, Xstrata has been rumoured to be eyeing Melbourne-based copper and gold producer Oxiana Resources and Canadian nickel giant Inco (N-T). The company acquired Australian-based zinc and copper producer M.I.M. Holdings via a cash-and-debt takeover deal valued at A$4.9-billion in mid-2003.

Davis also said that under Canadian law, the newly acquired equity level does not compel Xstrata to make an offer for the rest of the company’s shares. If Xstrata does go after those shares, at more than $28 per share, within nine months it would need to top up the consideration paid to Brascan.

Davis would not confirm whether his company would proceed to a full takeover, but said that the most important thing right now was to secure what he called “one of the most significant options available in the mining industry.”

He also stressed that it would be wrong to assume that the recent acquisition will necessarily lead to an offer for the remaining shares of Falconbridge. While he did admit that due diligence completed on Falconbridge last year, prior to its merger with rival Noranda, indicated that a combination would make a lot of sense, he said that his company was looking at a number of opportunities.

“We don’t intend to be a long-term shareholder with a minority interest in the company,” he concluded.

Xstrata will pay US$1.327 billion in cash plus US$375 million worth of 12-year convertible bonds. The bonds can be converted into 12.1 million new Xstrata shares at a rate of 17.1315 pounds per share, a 35% premium to their closing price on Aug. 11. The shares represent around 1.9% of Xstrata’s current ordinary share capital.

Xstrata says it will also use a new debt facility from Deutsche Bank and JPMorgan Chase & Co. to finance the acquisition.

Davis said that the convertible debenture was Brascan’s idea; he figures the company wants to retain some exposure to the sector, and that “they clearly have a positive view of Xstrata being that vehicle.”

Brascan has long considered its stake in Falco as non-core, and expects the sale to result in a pre-tax gain of around US$750 million that will be reported in the third quarter. In all, the company figures it has netted pre-tax gains of around US$1.3 billion by selling its Falco shares over the past six months. The company still retains US$570 million worth of Falconbridge junior preferred shares.

Bigger, simpler

The newly enlarged Falconbridge was begot in June, via the $3-billion merger between Noranda and Falconbridge. That deal saw Brascan more than halve its stake in Falconbridge to 20%. Davis said the simplified ownership structure was elemental in sealing the latest deal.

“Xstrata’s significant investment in the company is yet another positive confirmation of the asset mix and growth potential that we have accumulated within Falconbridge,” said Falco CEO Derek Pannell in a brief press release.

Xstrata now ranks as Falconbridge’s largest single shareholder. Xstrata expects the investment to immediately boost earnings.

Xstrata is held 24% by Credit Suisse First Boston Equities; privately owned Swiss commodity trader Glencore International owns 16%.

Shares in Falconbridge ended 87, or 3.1%, higher at $29.25 in Toronto following the news on Aug. 15. Xstrata shares jumped 6.2% to a new all-time high of 1,352 pence in London.