Not too little, not too late

At the turn of the millennium, at the nadir of the base metals price cycle, giants were being born into the community of base metals miners.

The parents were far-sighted men and women who understood that the weakness in the base metals markets was temporary and thus a perfect time to pick up assets on the cheap. They cobbled together these giants through a flurry of takeovers and mergers of companies located mostly in the English-speaking mining countries.

The resulting offspring were five of the biggest base metal miners in history: BHP Billiton in Australia, Rio Tinto in Britain, Anglo American in South Africa, Xstrata in Switzerland, and Phelps Dodge in the U.S.

A company from Canada, a leading mining nation, was noticeably absent from this list. Sure, Teck Cominco, Inco, Falconbridge and Noranda were large, but not big enough to stand shoulder-to-shoulder with the giants.

It left them vulnerable, but each of these four Canadian companies had its own reasons for not seeking to become a giant.

Teck’s famously small, wily and hands-on management team in Vancouver was not, and never will be, structured to be scaled-up to oversee a massive organization. It took them ages just to do the obvious and merge with Cominco.

Inco’s top brass spent the late 1990s and early 2000s deeply involved in restructuring the Sudbury operations and developing greenfields projects in Labrador and New Caledonia. Even today, with no controlling shareholder, Inco remains a tempting morsel for the sharks in the pool.

Falconbridge’s officers, of course, were increasingly restrained from the late 1990s onwards by the creeping takeover by Noranda, which, month after month, kept buying up about one per cent of Falco’s outstanding shares on the free market. Rank-and-file Falco employees bristled as Noranda tightened its grip on their company, and some lost their jobs after Noranda attained a majority position in the company.

Noranda is a more curious case. The reason Noranda didn’t make the big step to giant status at the same time as its foreign cousins can be traced back to the anti-mining attitude of its controlling shareholder, Brascan, which is more interested in power generation and real estate. Indeed, Brascan made public its indifference to our industry a few years back by branding its Noranda stake a “non-core asset.” Ouch!

Noranda briefly toyed with becoming a giant through its tepid, failed bid for Canadian copper major Rio Algom in 2000, which it lost to BHP, which in turn then merged with Billiton. Also, Noranda tried to diversify into magnesium in the late 1990s with its Magnola project, a disastrous, billion-dollar, mad-science experiment in Quebec’s Eastern Townships that re-processed asbestos tailings. (At the time, we dubbed the project the “Murrin Murrin of magnesium,” but now we realize that’s actually an insult to the Aussie nickel-laterite mine — after all, it is still in production.)

Noranda ushered in the new millennium by nearly halving its own exploration department and kicking some of its remaining employees in Toronto out of the financial district and into a mostly residential part of town, off the subway line, down by the lakeshore.

Meanwhile, at its smelting and refining facilities, there were strikes and layoffs. Anecdotally, at least, Noranda employees (that is, those lucky enough not to have been given a pink slip) became some of the most disgruntled in the Canadian mining industry.

“Somehow or other, Noranda will always find a way to screw things up,” one former Noranda employee told us. It’s the kind of sour comment we’ve heard over and over again.

Things took a turn for the ridiculous in September 2004, when Brascan and Noranda announced the latter had entered into exclusive talks to sell itself to China Minmetals, an arm of the authoritarian government of China.

In an industry where we are regularly treated to Oscar-worthy shows of indignation by CEOs declaring that thirty-per-cent takeover premiums are seriously undervaluing their companies, it was amusing to see Noranda executives, perhaps keen to keep their cushy jobs under the new regime, declare their full support for a deal that, at best, would deliver a “small premium” to shareholders.

Few others promoted the deal as a good one, and most were against it, arguing — sometimes quietly, sometimes vociferously — that it was smart to sell the Chinese our metals but not our souls.

The market, too, spoke loud and clear on the proposal: Noranda shares flat-lined during the autumn and winter even as the stocks of most other base metal miners surged forty per cent or more. Falco also traded at a discount to its peers.

The China Minmetals deal was quietly abandoned in the ensuing months, with all sides losing face. (Going forward, we suggest to China Minmetals that they pursue more-modest offtake agreements and joint ventures with Noranda and others, in the style of the successful relationships built up over the past half-century between Western mining companies and Japan’s trading houses, such as Sumitomo and Mitsubishi.)

This month, happily, we welcome news that Noranda and Falconbridge are merging. Like a middle-aged, North American family man coming to his senses after a reckless, public affair with a mysterious Asian temptress, Noranda has taken a second look at its frumpy but familiar mate Falconbridge and decided to re-commit to their relationship and take it to the next level.

This merger, expected to close by early May, is neither too late nor too little: it creates a small giant on the world’s base metals mining stage — one that can take advantage of the continuing boom in base metals and possibly withstand a hostile takeover.

In short, it’s a good move for employees, shareholders, the industry, and the country. More to the point, perhaps, Brascan will be able to make a far less conspicuous exit from the mining sector since its shareholding in the new entity will likely be reduced to below twenty per cent.

The name they’ve christened this giant — NorandaFalconbridge — is cumbersome (a plea to egomaniacs on Bay Street: when naming your companies, please stop after four syllables.) Let’s hope the executives show more imagination as they continue to build this company into an industry leader — right up to a time when their own employees will reflexively comment, “Somehow or another, NorandaFalconbridge will always find a way to get things right.”