Teck extends as Falconbridge flies

With less than 1% of Inco‘s (N-T, N-N) shares tendered, Teck Cominco (TCK.B-T, TCK-N) has extended its bid for the nickel giant until Aug. 16.

Teck’s bid extension comes three days after Teck struck a deal under which Inco agreed to drop its poison pill plan on the same date. Teck had filed an appeal of the plan with the Ontario Securities Commission; the appeal was subsequently dismissed with the agreement of the two sides.

Teck has also amended its offer to allow for Inco shareholders to tender for up to 10 days after it first takes up and pays for Inco shares. At last count, some 1.35 million Inco shares had been tendered to Teck’s offer; Inco had 196.4 million shares outstanding at the end of June.

The extension without a sweetener falls in line with Teck’s recent modus operandi, which has been to sit on the sidelines and await an out come in the fight for Falconbridge (FAL-T, FAL-N). Teck’s bid for Inco requires that Inco scrap its planned nuptials with Falco.

Inco’s “best and final offer” for Falconbridge of $18.50 in cash plus 0.55676 of a share values each of Falco’s outstanding shares at shares at $64.57 apiece, based on Inco’s share price in mid-afternoon trading on Monday. Inco’s shares have been bolstered of late as investors anticipate an all-out bidding war for the company if it loses out on Falconbridge. Inco’s bid expires on July 28.

Falconbridge has reaffirmed its support for Inco’s bid touting the tremendous potential for value creation and enormous savings the union would generate.

“One of the primary reasons for the Falconbridge board reaffirming this recommendation is the forecast of extremely solid market fundamentals, especially for nickel and copper,’ said Falconbridge CEO Derek Pannell in a prepared statement.

Despite the spread between the two bids investors continue to pick Xstrata‘s (XSRAF-O, XTA-L) all-cash bid of $62.50 per shares as the winner, bidding Falco shares to the offer price in afternoon trading on Monday. Xstrata’s all-cash bid expires on Aug. 14.

Inco’s bid for Falconbridge is backed by Arizona-based copper producer Phelps Dodge (PD-N), which has agreed to scoop up Inco, with or without Falconbridge. Phelps has said it will not back a higher bid for Falconbridge.

“It is time for Falconbridge shareholders to decide what is truly in their best interests,” said Phelps CEO Steven Whisler.

Phelps’ bid faces some significant resistance from major shareholders Atticus Capital and Lehman Brothers, who have publicly criticized the deal as too dilutive. Both intend to vote against Phelps’ debt laden plan to swallow up Inco, with or without Falconbridge.

The recent increase to Phelps’ three-way plan is accompanied by an additional US$1.67 billion in debt, to bring the grand total to nearly US$24 billion.

Whisler said Atticus’ opposition did not surprise him, as the hedge fund “has consistently recommended short-term strategies based on their own objectives.”

Phelps is offering Inco shareholders $20.25 in cash plus 0.672 of one of its own shares for each of Inco share. The offer implies a value of around $78.32 per Inco share.

Teck’s bid for Inco stands at $28 in cash accompanied by 0.6293 of a class B subordinate voting share, or $68.67 per share. Many analysts expect Teck to boost its bid once Inco’s shareholders’ rights plan expires.

“We continue to monitor the progress of the bidding for Falconbridge,” said Teck CEO Don Lindsay in a prepared statement. “As market conditions evolve we will weigh any possible changes in our offer for Inco carefully against other potential transactions, and we remain committed to a disciplined approach to any transaction.”

Inco on the block?

If Inco fails to gain control of Falco, the termination of its rights plan is expected to trigger an all-out bidding war for the world’s second-largest nickel producer. The cast of usual suspects includes major players Companhia Vale do Rio Doce (CVRD), Anglo American (AAUK-Q, AAUKF-O, AAL-L) and Rio Tinto (RTP-N, RTOLF-O, RIO-L). Mining behemoth BHP Billiton (BHP-N, BHPBF-O, BLT-L) would probably not enter the fray as its sizeable nickel portfolio would be sure to raise competition concerns.

CVRD previously took a run at Noranda, which at the time controlled Falconbridge. Noranda merged with Falconbridge in 2005 after talks with Chinese parastatal enterprise China Minmetals failed to result in a deal.

Adding more fuel to the fire, Falconbridge recently released gaudy financial results for the second quarter. During the three months ended June 30, the company’s earnings more than triple from a year ago to US$728 million, or US$1.91 per fully diluted share. Revenue nearly doubled to US$3.95 billion thanks to higher metal prices. The company also enjoyed increased copper, zinc and molybdenum sales volumes, and higher treatment and refining charges at its smelters and refineries.

During the quarter, Falconbridge produced 154,726 tonnes of refined copper cathodes (up from 134,413 tonnes a year earlier), 19,579 tonnes nickel (21,181 tonnes), 7,488 tonnes ferronickel (7,675 tonnes), 63,364 tonnes aluminum (61,705 tonnes), 949 tonnes molybdenum (492 tonnes), and 1,221 tonnes cobalt (1,225 tonnes). It also churned out 241,000 oz. of gold (245,000 oz.) and 8 million oz. silver (9 million oz.).

The company trimmed its mined copper production for all of 2006 by 15,000 tonnes to 460,000 tonnes owing to lost production at the Collahuasi copper mine in Chile because of repairs to one of the mill motors and the primary conveyer. Refined copper production estimates wewre upped by 5,000 tonnes to 640,000 as throughput at the Horne smelter and CCR refinery are exceeding expectations. Likewise, lower head grades are expected to reduce mined and refined nickel production from the Sudbury operations.

Largely lost in the swirl of the ongoing battle was Inco’s recent release of record quarterly earnings. During the three months ended June 30, Inco saw its earnings more than double from a year earlier to US$472 million — the highest quarterly earnings in the company’s 104-year history.

The earnings translate to US$2.11 per fully diluted share, and came on revenue of US$1.81 billion, up from the year-earlier US$1.19 billion.

Inco produced 140 million lbs. nickel in the second quarter (including 6 million lbs. of tolled material), up 26% from last year. The increased is mostly owing to the commencement of concentrate production at Voisey’s Bay. Nickel unit cash cost of sales (net of by-product credits) was US$2.08 per lb., 26% better than a year ago.

The nickel miner benefited from record-high nickel prices and increased nickel and copper deliveries. It expects the good times to continue, with second-half nickel production pegged at 299 million lbs., up from 276 million lbs. in the first half. Nickel unit cash cost are forecast at US$1.50 to US$1.55 per lb. In all, the company expects full year nickel production of 575 million lbs. at a unit cash cost of US$2.00 to $2.05 per lb.

Meanwhile, ballooning costs at the Goro nickel-laterite project in New Caledonia tarnished the impressive earnings. The company now expects capital costs to shoot through its previous estimate of US$2.15 billion, with start up pushed into 2008 from late 2007. Early estimates pinned a US$1.4-billion price tag on Goro. A revised capital cost estimate and schedule is due out in the fall.

Construction at Goro was shut down for 3 weeks in April owing to protests, roadblocks and vandalism. The company recorded a US$16 million charge in the second quarter owing to the disruptions. Start up of certain construction work was also delayed for five months in 2005 while permitting issues were ironed out.

Inco plans to apply for an operating permit for the mine, processing plant, and infrastructure later this year. In June, a New Caledonian administrative tribunal revoked Goro’s operating permit, which was slated to expire in October. That permit applied to the original plant design for Goro, which was shelved in 2002.

Teck is due to release its second quarter financial results after markets close on July 24.