Falconbridge makes bid for Diamond Fields Resources

Late to enter the race for control of the Voisey’s Bay nickel-copper-cobalt deposit in Labrador, Falconbridge (TSE) has nevertheless vaulted to the head of the pack.

Falconbridge has offered to merge with Diamond Fields Resources (TSE), owner of 75% of the property, offering shareholders of that company $4 billion in shares and cash. Diamond Fields’ board of directors has accepted the offer, but the transaction will not be completed until shareholders of both companies approve it, which Falconbridge officials expect will take place by mid-April.

The acquisition will bring Falconbridge’s nickel production close to that of Inco (TSE), the world’s leader. In 1994, Inco’s share of the world’s nickel market was 26%, whereas Falconbridge held 11%.

Under the terms of the proposal, Diamond Fields shareholders will exchange each common share for the following: one Falconbridge subordinate voting share or $31.12 per share, or a combination of both; one participating equity share of Falconbridge; and a Falconbridge note good for one common share of a new company which will be set up to hold Diamond Fields’ diamond properties.

The maximum amount of cash payable to Diamond Fields’ shareholders on the share exchange will be limited to 15% of the total consideration.

Each Falconbridge subordinate voting share will have one-tenth the voting power of a Falconbridge common share, except in certain circumstances where it will be fully voting. The subordinate shares will be converted automatically into common shares after five years.

Each Falconbridge participating equity share will be converted automatically, after five years, into a fraction of a Falconbridge common share at an exchange rate of 0.05 of a Falconbridge common share for every additional 10 million tonnes of massive sulphide ore grading 3% nickel or better found on the Voisey’s Bay property (outside the area of most of the known resource at the time of the merger). The maximum share exchange ratio will be 0.3 of a Falconbridge common share and the minimum will be 0.15.

The deal will see the number of directors on Falconbridge’s board increase to 15. The holders of Falconbridge subordinate voting shares will be entitled, as a class, to elect four directors, and the holders of participating equity shares will be entitled to elect one.

Falconbridge’s majority shareholder, Noranda (TSE), fully supports the proposed merger.

“This merger will strengthen Falconbridge immensely, and therefore, the proposed transaction is also good for Noranda,” says Noranda Chairman David Kerr.

As a result of the transaction, Noranda’s position in Falconbridge will fall to about 30%. For the purposes of electing directors, however, Noranda’s voting interest will be above 44%.

The cost of production at Voisey’s Bay is expected to be negative in the early years of production, rising to 40 cents per lb. of nickel in the later years, as open-pit mining of the Ovoid zone gives way to underground mining of the Eastern Deeps deposit.

“The combination of Falconbridge’s technical and operating expertise with Diamond Fields’ Voisey’s Bay discovery will ensure that Falconbridge will be the lowest-cost player in the global nickel and cobalt markets, well into the 21st century,” says Falconbridge President Frank Pickard.

He explains that his company had been in the running for a ownership position in the Voisey’s Bay project since last spring, when Teck (TSE) and, later, Inco dealt for their respective 10% and 25% interests.

Eastern Deeps

“We were in the group that signed confidentiality agreements and looked at the site, but then we elected not to bid,” Pickard adds. “We were a lot more informed in the past three weeks than we were before. Once we displayed an interest, we had access to a lot of data.”

He says the discovery of the Eastern Deeps zone last fall, which has doubled reserves at Voisey’s Bay, made the company a “much more attractive takeover target for Falconbridge.”

While Falconbridge’s offer stood at presstime, there is nothing preventing Inco or another company from striking a better deal with Diamond Fields. In turn, Falconbridge could respond with a new offer.

Conceded Pickard, “I don’t know if this is our final offer or not.” Diamond Fields has paid a fee of $28 million to Falconbridge in consideration of the merger proposal, and it has agreed to pay an additional fee of about $73 million if Diamond Fields accepts a better offer from a third party within six months.

Pickard says Inco’s shares in Diamond Fields (7% of the total) will have to be sold if the Falconbridge bid succeeds, as will Teck’s shares. Inco’s 25% ownership of the deposit, however, is not affected, and the company remains bound by its June 1995 agreement with Diamond Fields to market all of the nickel from Voisey’s Bay for the first five years, and the first 130 million lb. per year thereafter.

“We have great respect for Inco’s marketing abilities, so we welcome the fact that they’re going to be involved,” Pickard says.

Ore processing law

Paul Dean, Newfoundland’s assistant deputy minister of Natural Resources, says his government’s new law (passed in December 1995) requires companies that mine in the province to process their ore there (unless they prove that it would not be economically feasible). He says this law would apply to the Voisey’s Bay project because of its large size and the fact that world nickel smelting capacity would be insufficient once production begins.

Pickard has already told Newfoundland Premier Brian Tobin of his company’s plans to build a smelter and refinery in the province, Dean says, adding, “We think of it as a firm commitment.”

Speaking to The Northern Miner, Pickard adds, “We’d like a location on the south coast of Newfoundland where they’ve got ice-free harbors. If we have to build it, we might as well built it there.”

Pickard says the opening of the Raglan nickel mine on Quebec’s Ungava Peninsula will proceed as planned during the first quarter of 1997, unaffected by activity at Voisey’s Bay. He says, however, that if they are needed in later years, the modular buildings used at the Raglan site can be transferred to Voisey’s Bay.

Raglan’s nickel is to be shipped to Quebec City and transported by train to Falconbridge’s smelter in Sudbury, Ont. Refining of the nickel will take place at Falconbridge Nikkelverk in Norway.

Pickard says some nickel from Voisey’s Bay will initially travel the same route, until Falconbridge has completed construction of its Newfoundland smelter-refinery complex. Sudbury does not, however, have the capacity to handle the addition of a steady stream of Voisey’s Bay nickel production at anticipated levels.