Inco takes spotlight, Falco waits in wings

In recent weeks, shareholders of Diamond Fields Resources (TSE) have been busy weighing various offers put on the table by two of the Western World’s largest nickel producers, Inco (TSE) and Falconbridge (TSE).

The nickel giants are bidding for control of Diamond Fields’ key asset, the rich Voisey’s Bay nickel-copper-cobalt project in Labrador. And although the story may be far from over, Inco clearly has the upper hand now that directors of Diamond Fields Resources (DFR) have unanimously resolved to accept its March 26 offer, albeit with a few changes hammered out during several days of negotiations.

Diamond Fields’ announcement came only hours after Falconbridge had amended its Feb. 19 offer to propose a new deal that would result in Inco and Falconbridge each owning 50% of Voisey’s Bay Nickel Company.

A similar proposal, initiated by Inco and presented to Falconbridge, had previously been rejected by Diamond Fields. Even so, Falconbridge President Frank Pickard views his amended deal as “a win-win-win” for all parties, because project economics could be enhanced by combining the technical expertise of Inco and Falconbridge. “We have excellent cobalt recovery technology and Inco has expertise in flash smelting,” he said. “It would be a case of two minds being better than one.”

In a conference call, Diamond Fields Co-chairman Robert Friedland told investors and analysts, once again, that he does not like the concept of two companies being equal forces in the nickel business, as proposed in Falconbridge’s amended offer. “It is contrary to our best interests,” he said.

Instead, Friedland said he prefers to own shares in one company that would clearly be the dominant player in the world’s nickel industry. To make his point, he says he does not intend to accept any cash in return for his shares of Diamond Fields, only Inco shares.

“I would rather be exposed to the shares than have the cash,” he explained. “I believe the shares of the victor will appreciate considerably once the cash stream from Voisey’s Bay is appreciated. It will be a cornucopia of cash…and I think we are nowhere near the peak of the nickel cycle.” Diamond Fields directors believe that once Voisey’s Bay achieves full production, no later than the year 2000, it could have an annual cash flow in the range of $1 billion. A mine feasibility study, to be completed later this year, is expected to target annual production of 270 million lb. nickel and 200 million lb. copper.

DFR directors also point out that the Inco offer allows shareholders to participate in future discoveries through the VBN shares, which are designed to reflect a 25% interest in the financial performance of Voisey’s Bay.

The terms of this new class of shares were amended such that shareholders will have rights to participate in all future discoveries in Labrador, as well as in Diamond Fields’ existing exploration properties in Norway and Greenland. Inco also committed to spend at least $80 million to explore these holdings within five years following the merger.

Inco’s total consideration package per DFR share will include 0.557 of an Inco common share (or the equivalent in cash of up to a maximum of $350 million), 0.091 of an Inco Series E Convertible Redeemable Preferred Share, 0.25 of an Inco Class VBN share and one Diamondco note which will be paid in one share of Diamondco (a company formed to own DFR’s diamond assets).

Inco and DFR expect to hold shareholders’ meetings to obtain the necessary approvals by mid-to-late May, with closing expected to follow.

Diamond Fields directors expressed confidence that Inco shareholders will approve the deal, even though the company’s shares have been under downward pressure because of concerns that the high-priced takeover will cause considerable dilution. DFR director Edward Mercaldo noted that Inco intends to carry out an aggressive stock re-purchase program in the years ahead.

Diamond Fields directors also stated they would have no objection if Inco were to sell a minority stake in Voisey’s Bay — in the order of 10% to 25% — once the Inco-DFR deal is closed, “as long as it is a disciplined process and not a shot-gun marriage.”