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Teck withdraws from Inco fight as equity sale fails
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17th August 2006
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Teck Cominco Ltd., the world's largest zinc producer, withdrew from the three-way contest for Canadian nickel miner Inco Ltd., increasing the likelihood Brazil's Cia. Vale do Rio Doce's $17,4-billion cash offer will win.

Teck Cominco failed to sell as much as C$5,73-billion ($5,1-billion) in stock, funding it needed to top offers from Vale and from Phoenix-based copper producer Phelps Dodge Corp. Donald Lindsay, CEO of Vancouver-based Teck Cominco, said in a statement on Thursday he'll seek other targets.

Nickel, used to make steel rust-resistant, has doubled in price this year and quadrupled since the 1990s. Vale joined the bidding for Inco, the world's second-biggest nickel producer, with an unsolicited bid on Aug. 11, after Teck Cominco began its pursuit in May as Inco tried to buy a Canadian rival.

“Vale is in the priority spot with regard to winning Inco,” said Cristiane Viana, metals and mining analyst with AgoraSenior Corretora, Brazil's largest stock brokerage. “The concern that many investors had, that Vale might end up paying too much for Inco in a battle, has eased.”

Shares of Toronto-based Inco fell C$3,20, or 3,5%, to C$86,55 on the Toronto Stock Exchange. They still have gained 70% in the past year. Teck Cominco jumped C$2,21, or 2,8%, to C$82,02.

Vale, the world's biggest iron-ore producer, rose 64 centavos, or 1,6%, to 41,5 reais in Sao Paulo. Phelps Dodge rose 24 cents to $91,94 in New York Stock Exchange composite trading.

The Phelps Dodge bid for Inco was valued at C$20,1-billion, or C$89,30 a share. The US company is offering C$20,25 a share in cash and 0,672 of a Phelps Dodge share. Vale is bidding C$86 a share in cash.

Nickel prices soared today, forcing the London Metal Exchange to impose trading restrictions for the first time in a year. The metal rose $1 645, or 6%, to $29 100 a metric ton, gaining for the sixth straight session.

Record prices for base metals from copper to nickel triggered a surge in takeovers among mining companies worldwide. There have been $89-billion of acquisitions this year, compared with $27-billion a year earlier, according to data compiled by Bloomberg.

Rising energy, metal and raw-materials prices has been a boon to Canada's economy, spurring investment, driving exports and bolstering the Canadian dollar, which has gained more than 7% against the US currency the past 12 months. Gross domestic product in Canada has averaged about 3% over the past two years, compared with 3,8% in the US.

Teck Cominco's previous offer of cash and shares expires tonight.

“While we received strong support from a large number of institutional investors, in the end we could not complete the proposed equity offering on terms that made sense for Teck Cominco,” CEO Lindsay said in the statement.

Lindsay, 47, spent two decades at CIBC World Markets advising mining executives on takeovers. He worked on the 2001 merger that created Teck Cominco from the combination of Teck Corp. and Cominco Ltd. He become Teck Cominco CEO in April 2005.

Teck Cominco failed to sell the shares because there wasn't enough demand for such a big stake, investors and analysts said. The sale would have been the largest ever in Canada, representing about a third of Teck Cominco's market value. The proposed sale was twice as big as the second-biggest offering, the 2004 sale by the federal government of a stake in Petro-Canada.

Teck Cominco tried to complete the sale overnight, forcing fund managers to act quickly. The sale was conditional on Teck Cominco winning the battle for Inco by the end of August. Some investors balked at buying stock in a company with dual-class shares, which allows Chairman Norman Keevil and his family to control the metal producer with a minority of shares.

“The biggest problem with the Teck bid is the dual-share structure and family control,” said Sergio Di Vito, head of trading at Mavrix Fund Management Inc., which oversees $712-million in Toronto. “People must have said: 'It doesn't make sense to buy the shares if we can't get control'.”

Keevil, 68, was appointed vice president of exploration at family controlled Teck Corp. in 1962, joined the board of directors in 1963 and became chairman in 1981. He retained that role after Teck combined with Cominco.

The equity sale was led by BMO Nesbitt Burns, which also advised Teck Cominco on its takeover bid. Other banks in the group were Merrill Lynch & Co., TD Securities and CIBC, a unit of Canada's fifth-largest bank.

Bankers were only able to find buyers for about half of the shares the company wanted to sell, the Globe and Mail newspaper reported on its Web site without identifying its source. Bankers initially sought to sell the shares at C$78 and later lowered the price to C$76, the newspaper said.

Inco said yesterday it may hold talks with Vale. Inco still recommended the offer by Phelps Dodge, the world's third-biggest copper producer.

Inco, led by CEO Scott M. Hand, 64, agreed to buy Toronto-based Falconbridge in October. Each company runs mines, smelters, refineries and mills in Canada's Sudbury basin in Ontario. That deal was rejected by Falconbridge shareholders, and the company earlier this month advised investors to accept the rival offer by Xstrata Plc.

Vale's offer is 8,8 times Inco's earnings before interest, taxes, depreciation and amortization, or Ebitda, based on the past four quarters. That compares with the 8 times Ebitda that Xstrata is paying for Falconbridge, according to data compiled by Bloomberg.

Xstrata's hostile takeover for Falconbridge derailed a bid by Phelps Dodge to acquire both Inco and Falconbridge in what would have been the industry's biggest merger at more than $37-billion.

Phelps Dodge CEO J. Steven Whisler, 51, has said his company needs to make acquisitions to compete with major mining companies.

He has worked at Phelps Dodge for almost 30 years.

“It will not surprise me to see other bidders for Inco,” said Benoit Brillon, who manages C$6-billion at Natcan Investment Management Inc., the 11th largest shareholder of Inco. “The best investment strategy to date has been to wait.”

Vale CEO Roger Agnelli, 46, is bidding to gain supplies of nickel to deliver alongside iron ore to steelmaking customers such as ThyssenKrupp AG. The takeover would be the biggest foreign acquisition ever by a Brazilian company.

“Since it's all cash, it's going to be valued more favourably in this marketplace if Vale increased its bid by about C$1,50,” said David Kratochvil, an analyst at Rochdale Securities LLC in New York. He rates Phelps Dodge and Inco 'hold' and doesn't own the shares.

When Vale's two Brazilian nickel mines start in 2008 or 2009, the company will be able to produce more than 280 000 metric tons of metallic nickel a year, 15 percent more than Russia's OAO GMK Norilsk Nickel, the largest producer.

Vale is developing two nickel projects, Vermelho and Onca Puma, both in the Carajas region of Brazil's Amazon, near the company's existing iron-ore and copper projects and a company-owned rail network that serves them.

Vale had no comment on the Teck Cominco announcement today, company spokesman Fernando Thompson said.

Acquisitions of Canadian companies are reviewed by the Competition Bureau and, in cases involving a takeover by a foreign company exceeding C$265-million, by Industry Minister Maxime Bernier under the Investment Canada Act. Bernier can block the transaction if it doesn't provide “net benefits”, such as increased productivity and research and development, to the country's economy.

Edited by: Bloomberg

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