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Mining mergers; What is in it for the North.

The massive multi-billion dollar takeovers of nickel, copper and zinc deposits of Falconbridge and Inco is staking new territory for community leaders in Northern Ontario to sort out what the socio-economic landscape will look like.

In mid-August, Swiss-based Xstrata PLC added Falconbridge to its stable of mining assets while Brazilian miner Companhia Vale do Rio Doce (CVRD) appeared to be the front runner to take over Inco with a $19.87 billion all-cash offer. Phelps Dodge, Inco's preferred suitor, remained in the running with Inco shareholders prepared to vote Sept. 7 on the Arizona miner's $19.6 billion stock and cash offer.

But is what's good for shareholders of these companies, necessarily good for a Kidd Creek refinery worker in Timmins or a Sudbury mining supplier?

"This is new ground for everyone," says Greater Sudbury mayor Dave Courtemanche, who was preparing a community position paper for release this month prior to his upcoming meetings with Xstrata and CVRD officials. "It could be a good thing for Sudbury," he says.

"There's an international bidding war going on and the frontlines are right here."

But lost in the blizzard of national media stories on the financial details is the impact on local stakeholders. Courtemanche says his "community agenda" will outline what Sudbury's expectations are for the incoming new owners of these homegrown companies with a local relationship of more than a century.

He plans to send a strong message to Ottawa and Investment Canada in reviewing these mega-mergers.

What's important to Sudbury, says Courtemanche, is the new owners' commitment to invest in "one of the most sophisticated mining camps in the world."

He views investment in operations, training and skilled labour development, as a priority as well as financial support for the city's advanced mining-related research including the Centre of Excellence in Mining Innovation.

"The time will come when the price of nickel is not $13 a pound and companies have to make tough decisions on where to invest in corporate assets. We want Sudbury to be seen as a jewel in the corporate crown."

He's also counting on the support of local economic development initiatives as well as a commitment to Sudbury's ongoing environmental clean-up.

Dick DeStefano, executive director of the Sudbury Area Mining Supply and Service Association (SAMSSA), says the prevailing mood among mining suppliers is that new ownership will have to deal with the existing service base.

His understanding of Xstrata's management philosophy is that they will source material and services locally, instead of coming in with their own preferred suppliers.

"We have to believe that because they really don't have any (mining) infrastructure," says DeStefano, since Xstrata is known as "asset builders, not necessarily operational managers."

DeStefano says if individual mining units are allowed to operate with autonomy, suppliers' relationship with- Falconbridge should be maintained.

Some critics have sounded alarms about foreign ownership of Crown resources, but DeStefano isn't that concerned since Canadian firms have invested heavily in South America, "and that has to be reciprocal."

For Timmins mayor Vic Power, the Xstrata acquisition means his community won't appear to play second fiddle to Sudbury.

Power says all the merger talk surrounding the earlier three-way deal involving Inco, Falconbridge and Arizona suitor Phelps Dodge left Timmins as barely a blip on the radar screen.

A June meeting with Marc Gonsalves, Xstrata's general manager of corporate affairs, left Power satisfied the Swiss miner was the best fit for the Timmins copper and zinc camp.

"It's better that Xstrata was to take it, if anyone was to take it."

He's hopeful new ownership will arrive with a "more reasonable attitude" towards industrial assessment instead of steadily fighting the issue with the municipality.

"How can a company that's worth six times more than it was three years ago, should consider that it's assessment should be less?"

According to published reports in August, Xstrata plans to realign its international nickel assets with Falconbridge's Ontario, Quebec and New Caledonia operations under the umbrella of a slimmed-down Toronto head office called Xstrata Nickel.

Within days of their acquisition, Falconbridge CEO Derek Pannell and chief financial officer Steve Douglas had vacated their posts with more senior management shakeups expected.

But Falconbridge's unionized workers in Sudbury were breathing easier with a guarantee of no job cuts for three years.

Dwight Harper, vice-president of Mine Mill and Smelter Workers Local 598/CAW in Sudbury, says they received those assaurances from Xstrata several months ago and while sweeping boardroom changes were being made, he expects "lesser changes" in management locally.

Harper agrees with Power that an Inco-Falconbridge merger would have had a detrimental affect on the service industry since redundancies would have been declared under one unified operation.

"Without a doubt. It would have the secondary industry that would take the brunt of it."

But Harper isn't entirely convinced the takeover wars are over. He suspects Xstrata might eventually realize the operational synergies of merging Sudbury's mining operations under one umbrella.

"Whoever gets Inco in the future may somehow end up with Falconbridge anyway through a different route. But who knows?"

Laurentian University economic professor David Robinson agrees the consolidation battles are not yet over.

With Xstrata establishing a separate North American nickel operation in Toronto, a future transaction to merge the Sudbury camp is a distinct possibility.

"Either Xstrata or CVRD could sell the Sudbury operations to the other and it would make sense if it happened fairly quickly," says Robinson. "I would bet (CVRD) would be willing to sell this operation to Xstrata, since Xstrata has set it up so it can sell the operation to anybody really easily."

He views CVRD with some suspicion. Although newly privatized, he calls the Brazilian firm "an instrument of a very nationalist government" that's playing to strengthen the Brazilian stock market and that country's supply and service industry. He says the debate should be centred around what that means and how senior levels of the Canadian government ought to be responding.

"It's one thing if everybody is playing neutral but Brazil isn't and I think Sudbury is threatened by this."

Robinson says these acquisitions are a "test" of how savvy Canada's political leaders are in supporting and strengthening the supply industry.

In federal review of these mega-mergers, Robinson says, unlike small international company takeovers, these involve huge amounts of strategic resources.

"It's not just someone buying a chunk of Muskoka, it's buying one of the lakes."

Robinson says politicians like Courtemanche must apply pressure on senior government to sell them a vision of establishing Sudbury as Canada's mining hub.

"We are important to Canada's industry strategy and we've got the drive to build on that. If you sell us out, we won't have a supply and research centre in Canada worth counting."

By IAN ROSS

Northern Ontario Business
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Author:Ross, Ian
Publication:Northern Ontario Business
Geographic Code:1CANA
Date:Sep 1, 2006
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