Editorial: Eramet still hankering after Koniambo (June 26, 2006)

If you thought that the tussle between France’s Eramet and Canada’s Falconbridge over the ownership of the latter’s Koniambo project was settled once and for all in French courts in December, think again: Eramet has not given up the fight, and a successful Inco-Falco merger may just be the catalyst to shake loose the asset and return it to its original owners.

Situated near Kone in the northern reaches of the island of New Caledonia in the South Pacific, Koniambo ranks as one of the world’s largest and highest-grading undeveloped nickel-laterite deposits, boasting reserves of 62 million tonnes grading 2.4 grams nickel per tonne, or 734,000 tonnes of contained nickel, all within a much larger resource.

New Caledonia has been a French possession since the mid-19th century and an Overseas Territory since 1956, meaning the land is legally an integral part of France and its 250,000 inhabitants are full citizens of the republic.

However, to placate an independence movement that first grew strong in the 1980s, the French government signed the Nouma Accord with the locals in 1998. The accord allows for the transfer over two decades of an increasing amount of governing responsibility to New Caledonia from France, and it guarantees that New Caledonians will vote sometime between 2013 and 2018 on whether to stay in the French republic or forge an independent state.

The characteristically symbiotic relationship between the French government and the country’s large private corporations meant that, when it came to the fate of Koniambo under the Nouma Accord, Paris wound up pressuring Eramet to give up its ownership in the deposit in 1998 to the Socit Minire du Sud Pacifique (SMSP), a company owned by the government of New Caledonia’s northern province.

The political aim of the French government was to foster locally owned industry and jobs in the north of the island, which continues to lag the more developed and richer south.

Eramet’s relinquishing of Koniambo was formalized in 1998’s Bercy Accord, which stipulated that, in return for Koniambo, SMSP would pass to Eramet its ownership in Poum (a smaller, less valuable nickel-laterite deposit on the island) and the French government would pay Eramet 1 billion French francs to make up the value difference.

A defining characteristic of the Bercy Accord has been its “use-it-or-lose-it” condition: SMSP and any partner had to make an “irrevocable decision” to develop a mine and processing plant at Koniambo before February 2005 (later extended to year-end 2005), or else Koniambo’s mining rights would revert to Eramet, and Eramet would return Poum and the cash.

Lacking the technical expertise and financial muscle to develop Koniambo on its own, SMSP quickly brought in Falconbridge as a minority operating partner in April 1998, with an eye to dividing the project’s ownership 51-49%, respectively.

Fast forward to December 2005, and Eramet was arguing in the High Court of Justice in Paris that ownership in Koniambo shouldn’t be formally transferred to Falconbridge and SMSP in fulfillment of the Bercy Accord because the partners had failed to live up to a key obligation under the accord of making a full commitment to proceed with the project.

While Falconbridge has never formally announced through a press release or public document that it is 100% committed to putting Koniambo into production, the company did manage to convince the French court that it was indeed quite serious about developing Koniambo, and Eramet’s application was rejected by the French courts on Dec. 28, 2005.

To its credit, Falconbridge has spent US$250 million completing a positive, bankable feasibility study of Koniambo and agreed to fully finance the US$3-billion price tag of the project, though no financing details have ever been released.

More detailed engineering work is being carried out at Koniambo this year, and Falconbridge says mine construction could begin next year, with nickel production starting up no earlier than 2009 at a rate of 60,000 tonnes nickel annually.

In January, consultants Technip of France and Hatch of Canada paired up to sign a US$250-million engineering, procurement and construction management contract with Falconbridge for the Koniambo smelter.

So far, so good for Falconbridge, but it could get weird if Inco and Falco succeed later this year in fending off the ongoing hostile takeover attempts from Teck Cominco and Xstrata, respectively, and complete their friendly merger. What happens to Koniambo then?

Inco chairman and CEO Scott Hand has already stated that he and Inco support Koniambo’s development, but with the very big proviso that the project not hurt the New Inco’s investment-grade credit rating (both Inco and Falconbridge are currently assigned a triple B minus rating by Standard & Poor’s.)

Inco is already part way through developing its US$1.9-billion Goro nickel-laterite mine in New Caledonia’s southern province, in what will be the largest-ever industrial project in the island’s history. And Goro has caused more than a few headaches for Inco, with many years used up by endless pilot-plant work and major cost overruns. Moreover, the project is provoking considerable resistance from a vocal minority who recently committed more than US$10 million worth of vandalism, and brought work at the site to a standstill.

What are the chances that the New Inco will put more of its eggs into one basket and develop Goro and Koniambo simultaneously, with no resulting downgrade in the company’s good credit rating?

We can already see that Inco has downplayed Koniambo’s significance in its sales job for its merger with Falconbridge, leaving the unmistakable impression that Goro will come first and Koniambo second, with no substantive “synergies” found between the two.

But if the new Inco effectively shelves Koniambo, that could put the company offside of the Bercy Accord, resulting in the deposit returning to Eramet’s eager hands.

Xstrata, should it succeed in acquiring Falconbridge, looks likely to proceed with Koniambo, but the project hasn’t been played up in its own sales pitch to Falco shareholders and there are no obvious synergies with other Xstrata assets.

Eramet, meanwhile, stands waiting in the wings, still agitated and ready to mine Koniambo. The company already has five nickel-laterite mines spread across New Caledonia, plus its Doniambo nickel smelter in the south, near Nouma (the world’s largest ferronickel plant) and its nickel-cobalt refinery in Sandouville, France, near Le Havre.

Eramet’s recent acquisition of Weda Bay Minerals and its large Halmahera nickel-laterite deposit in Indonesia gives the company a major growth platform to realize its aggressive plan of doubling its annual nickel output to roughly 120,000 tonnes contained nickel sometime next decade.

Inco and Falconbridge didn’t return our calls about Koniambo and its uncertain fate should their merger go through, but it’s one more factor Inco and Falconbridge shareholders should consider as they judge the competing takeover and merger offers now on the table.