Inco and Falconbridge demonstrate synergy values

Inco and Falconbridge Limited provided members of the investment community with a first-hand look at how they plan to generate approximately $550 million in average annual pre-tax value by applying a ‘one mine’ approach to their combined Canadian operations if and when Inco’s friendly acquisition of Falconbridge is completed. They conducted a two-day Synergy Summit on Monday and Tuesday this week for about 60 investors and analysts, including an extensive tour of Inco and Falconbridge facilities in the Sudbury Basin.

“We wanted investors to see, hear and feel for themselves the outstanding and unique opportunities we have to create value at an operational level by combining our two companies,” said Inco Chairman and CEO Scott Hand. “This tour provided a great deal of tangible evidence showing why the New Inco is the most logical transaction on the table and possibly the best combination of any two companies in the mining industry today.”

To date, Inco and Falconbridge have identified the potential to realize, within 24 months following the completion of their transaction, some $550 million in average annual pre-tax run-rate operating and corporate synergies.  Using a 7% discount rate, these synergies would have an estimated net present value of some $3.5 billion after tax, representing about $9.20 per share of the combined company.

“I think we demonstrated conclusively that our current estimate of $550 million in annual benefits is real and achievable,” said Derek Pannell, CEO of Falconbridge. “We also showed that there is a great deal of upside potential.”

Of the estimated $550 million in synergy value that has been identified so far, about $205 million is expected to come from optimizing material feeds and processing facilities, $135 million from maximizing production by accelerating mine development, $100 million from cost and other improvements, and $110 million from savings in general and administrative costs (SG&A).

The two-day tour included Inco’s Coleman/McCreedy mining complex and Falconbridge’s Strathcona mill, Inco’s Copper Cliff smelter and Copper Cliff nickel refinery, and the Falconbridge Nickel Rim South development project, which is adjacent to Inco’s Victor property. At each, investors were shown in detail specific projects with the potential to generate value for the ‘New Inco’. For example, integrating Inco’s Coleman/McCreedy mine complex with Falconbridge’s Fraser Strathcona mill complex will increase production rates and lower operating and capital costs.

Investors also learned about the considerable potential to create even greater value once the two companies come together by looking beyond the Sudbury operations and considering the entire complex of combined operations in Canada as ‘one mine’.

“The ‘one mine’ approach is based on looking at all the Inco and Falconbridge Canadian assets as an integrated complex to fully utilise our combined mining and processing capabilities,” said Mark Cutifani, President of Inco’s North America/Europe Operations. “We have well-developed plans that back our synergies target and we can see some other very exciting possibilities.”

Current improvements planned at Inco’s Clarabelle Mill to separate 30% of the copper in bulk nickel-copper feed allows for production increases of 15% and the processing of more nickel through the smelter. Future possibilities include increasing copper separation to 70%, effectively providing additional nickel smelting capacity.

This added capacity would open the door to redirecting more Voisey’s Bay concentrate to Sudbury from Thompson – creating additional mining opportunities in Thompson.

Improving overall smelter throughput would also provide the opportunity to expand production at Inco’s Copper Cliff nickel refinery and Clydach nickel refinery by some 10% and 15%, respectively. 

Cutifani said that, along with increased production, these changes would mean improved productivity and lower costs across the operations. “We believe these initiatives along with our strategies to utilize our people most effectively have the potential to help reduce our costs beyond what we’ve already accounted for in the synergies identified to date.”

Based on current growth projects and expansion plans, and as a result of the synergies accounted for to date, Inco and Falconbridge expect by 2009 to increase both nickel and copper production by approximately 100 Mlb, and production of platinum group metals by approximately 111,000 oz in their combined Canadian operations. The increase in nickel production expected as a result of future plans to improve nickel-copper separation to 70%, described above, would add incremental production to this.

“The increases planned for the Canadian operations will be the most efficient and low-cost production increases in the nickel industry,” Hand said. He added that the world will need this additional nickel as the market is very tight and is expected to remain so, as China continues to build new stainless steel capacity and demand for nickel increases. "Given China’s tremendous industrial growth, we believe that a global nickel demand growth rate of 6% per year is a conservative estimate going forward, considering that Japan’s industrial expansion led to 14 straight years of 7% compound annual nickel demand growth from 1960 to 1974," he said.

Hand said that one clear lesson from the tour was that the scale of synergies available from a “one mine” concept could only happen by combining the assets of both companies under common ownership. “Others may speculate about joint ventures, but frankly you could never achieve process changes and improvements on the scale we are talking about without major commitment and investment, and that is what we are proposing,” he said.

He added that the combined teams at Inco and Falconbridge showed over the two days that they have a clear plan to achieve the synergies that have been estimated to date, and more. “There is a deep understanding by the people in these operations as to how we will implement these plans, and a tremendous amount of expertise available from people who have done this before,” said Hand. “Our people are excited about making it happen and they are ready to succeed.”