Inco throws in the towel, Voisey’s struck by strike

Having failed to acquire a controlling stake by midnight (Vancouver time) on July 28, Inco (N-T, N-N) has decided to drop its bid for Falconbridge (FAL-T, FAL-N). The surrender ends the company’s nine-month pursuit of its rival.

“Though a large number of Falconbridge shareholders supported our offer, unfortunately it wasn’t enough,” said Inco chief executive Scott Hand in a prepared statement. Inco will promptly return all shares tendered to its offer.

Trying to put a smile on the situation, Hand said that while Inco failed to complete is quest, its shareholders have benefited from a 73% increase in the company’s share price since the bid was launched in October.

Hand says that while the result is disappointing, his company plans to shift its focus to its proposed two-way deal with Phelps Dodge (PD-N). That deal is a remnant of an earlier proposal that would have seen the Arizona-based copper miner buy Inco and Falconbridge for US$40 billion.

Phelps is offering Inco shareholders $20.25 plus 0.672 of one of its own shares for each Inco share. The deal valued Inco shares at $79.81, based on Phelps’ closing share price in New York on July 27.

That plan already faces a foe in Teck Cominco (TCK.B-T, TCK-N), which has a standing offer of $28.00 in cash plus 0.6293 of one of its shares for each Inco share. The offer hinged on Inco failing to acquire Falconbridge. Teck recently extended its bid to Aug. 16 — the same day Inco’s shareholders’ rights plan expires.

The latter event is expected to trigger an all-out bidding war for Inco, with Companhia Vale do Rio Doce (CVRD), Anglo American (AAUK-Q, AAUKF-O, AAL-L) and Rio Tinto (RTP-N, RTOLF-O, RIO-L) touted as potential predators.

Inco’s retreat clears the way for Swiss-based miner Xstrata (XSRAF-O, XTA-L) to complete its competing all-cash bid of $62.50. Xstrata’s offer was recently approved by Investment Canada but still requires shareholder approval. It expires on Aug. 14.

“We welcome the fact that Falconbridge shareholders have acted decisively in rejecting the Inco offer and we urge them now to tender to Xstrata’s all cash offer,” said Xstrata CEO Mick Davis.

Davis said his company’s original 19.8% stake in Falconbridge, acquired Brookfield Asset Management (BAM.A-T, BAM-N) (formerly Brascan) for $28.00 per share, played a major role in the victory as it allowed the company the unique opportunity to make a “definitive, compelling and generous offer.”

The failure of the Inco-Falconbridge transaction also means that Falconbridge must fork over a US$150-million expense fee to Inco; it is also on the hook for another US$300 million break fee should Xstrata complete its proposed acquisition.

Falconbridge’s board plans to review the developments, including Xstrata’s intention to acquire up to 5% of Falco’s shares on the TSX, and will thereafter advise shareholders.

Caught in the crossfire is LionOre Mining International (LIM-T, LMGGF-O, LOR-L). The company loses out on its deal to buy Falco’s high-grade Nikkelverk nickel refinery in Norway for US$650 million, as it was contingent on Inco acquiring Falco. The deal was designed to ally competition concerns. Inco will now pay LionOre a US$32.5-million break fee.

The Falco defeat wasn’t Inco’s only loss last night, at midnight, some 120 unionized workers at the company’s Voisey’s Bay nickel mine in northern Labrador walked off the job after contract negotiations broke down. The two sides were trying to hammer out the operation’s first labour pact.

Voisey’s Bay began producing in September, and churned out some 23 million lbs. nickel-in-concentrate and 10 million lbs. copper-in-concentrate during the balance of the year. The mine was expected to produce around 120 million pounds of low-cost, high-grade nickel concentrates in 2006.

Inco said that the strike, by about a quarter of the mine’s 420-strong workforce, would not affect finished nickel production, as Voisey’s, which ships concentrate seasonally, had large quantities of concentrate on hand for shipping to the Sudbury and Thompson smelters.

Shares in Inco were $2.56, or 3%, higher at $86.57 at the close of trading in Toronto following the news on July 28; Falco was a nickel better at $62.23; LionOre was 25 higher at $6.18; while Teck was alone in the red at $73.01, 24 off its previous close. For its part, Phelps was up US$3.42 at US$81.50 in New York. In London, Xstrata jumped 1.60 to 23.01.