(UPDATE) Xstrata ups its bid, Phelps-Inco stand pat

The marathon bidding war for Falconbridge (FAL-T, FAL-N) appears to be nearing the tape, with Inco (N-T, N-N) and Phelps Dodge (PD-N) balking at their turn for a further improvement to their offer.

The scales now appear tipped in Xstrata‘s (XSRAF-O, XTA-L) favour after it bumped its hostile bid for the 80.2% of Falco’s shares it doesn’t already own by nearly 6%.

Xstrata’s sweetened bid of $62.50 per share, up from $59.00, came just three days after Inco boosted its bid for Falco with the backing of Phelps. Xstrata’s increase is in line with what many analysts were expecting; still some say the company could go as high as $65 a share. Xstrata originally launched its bid to consolidate Falco with a bid of $52.50 per share on May 17.

Inco CEO Scott Hand responded to Xstrata’s new offer by describing his company’s latest revision as its “best and final offer.” Additionally, Phelps said it remained fully behind Inco’s bid but would not support a further increase.

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

Xstrata’s casue has received a boost from some of Phelps’ major shareholders, who have publicly criticized their company’s deal as too dilutive. Both Atticus Capital and Lehman Brothers intend to vote against Phelps’ plan to swallow up Inco, with or without Falconbridge.

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

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.

Under the plan, Inco is offering Falco shareholders $18.50 in cash and 0.55676 of one of its shares for each of their shares. Inco is aiming for a simple majority of those shares. The bid expires on July 27. Additionally, Phelps has added $2.75 to its offer for Inco, to bring its bid to $20.25 in cash accompanied by 0.672 of one of its own shares.

Xstrata’s new bid values Falconbridge as a whole at around $24.1 billion. That includes a special dividend of 75 per share recently unveiled by Falconbridge. Claiming the dividend as its own, Xstrata says its offer comes to $63.25 per share. A successful bid would see Xstrata cover the US$240 million dividend payout, less around US47.5 million that it would have received via its 73 million Falco shares.

Said Xstrata CEO Mick Davis: “Xstrata’s 20% stake in Falconbridge, purchased at $28 per share, puts us in the unique position of being able to offer $63.25 per share, a price that is simply more than any other company can justify under any realistic commodity price scenario.”

Xstrata’s average acquisition cost under the new proposal comes to around $56.44 per share, leaving room for a higher bid if needed. The bid will be financed via committed debt facilities of US$19 billion.

Xstrata has also dropped the minimum tender condition on its offer, which will allow it to take up and pay for any shares tendered immediately following approval of its bid by shareholders and Industry Canada. The company expects a decision from the Investment Review Division soon.

Davis also reiterated his company’s aim to acquire all of Falconbridge’s shares amid continuing inferences that Xstrata would commence a creeping takeover once Falco shareholders’ rights plan expires on July 28.

Xstrata’s bid now runs through Aug. 14, thereby allowing Falconbridge shareholders to receive the special dividend. The scheme will also be put to a shareholders vote on that day. Unlike Phelps, Xstrata already has the support of major shareholders Credit Suisse Securities and Glencore International, who together hold around 35.9% of the company’s outstanding shares.

Davis says the unrest among Phelps’ major shareholders adds to the built in uncertainty of the company’s share-backed bid. He also says that the share portion of Inco’s bid for Falco has enjoyed an artificial boost from Phelps’ highly conditional offer and competing bid from Teck Cominco (TCK.B-T, TCK-N).

Davis expects that if Inco manages to acquire more than half of Falconbridge’s shares its own share price will fall back to previous levels, as the offer form Teck would be pulled.

“It is now clear that on any valuation basis Xstrata’s all-cash, fully-funded offer is superior to Inco’s final offer,” said Davis.

In a parting shot, he concludes that Inco should turn its attention to its own future and the reality of the competing bids by Phelps and Teck.

Teck has stood by its offer of $28 in cash accompanied by 0.6293 of a class B subordinate voting share for each Inco share since launching it in early May. The bid rings in at $72.48, based on Teck’s closing share price on July 19. The offer is contingent on Inco scrapping its planned nuptials with Falconbridge.

Teck’s appeal of Inco shareholders’ rights plan is set to heard by the Ontario Securities Commission on July 21. Teck says the plan is redundant as an auction for Inco is already under way.

Inco on the block?

With Xstrata now widely pegged to win the Falco battle, market watchers are anticipating an all-out bidding war for Inco. The cast of usual suspects include 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.

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.

Shares in Falconbridge were off a nickel at $63.33 in late-afternoon trading in Toronto on July 20; Inco was $1.56 better at $80.85; and Teck Cominco was $2.88, or 4.1%, lower at $67.80. In London, Xstrata was up 10 pence at 2,015 pence, while Phelps was $3.06 cheaper at $77.97 in the Big Apple.