updated 6/26/2006 4:04:52 PM ET 2006-06-26T20:04:52

Phelps Dodge Corp. is buying Canadian mining companies Inco Ltd. and Falconbridge Ltd. for about $40 billion in the hope that global demand will continue to support surging metals prices.

The deal could resolve what had been a four-way bidding war and would create a dominant copper and nickel producer in the North American market. The company would be the world’s largest nickel producer and the largest publicly traded copper producer, just as copper prices have quadrupled in the past five years.

If the offer is approved, Phoenix-based Phelps Dodge would have thwarted two other bids. Inco originally announced its deal to buy Falconbridge last October. As the companies sought regulatory approval, both received alternate bids: Vancouver-based Teck Cominco Ltd.’s bid for Inco and the Swiss mining company Xstrata PLC’s for Falconbridge. The offer from Phelps, which has received board approval from all three companies, puts a premium on the prices of both companies.

Demand for commodities, particularly from rapidly industrializing China, have steeply pushed up prices for metals such as nickel, aluminum, zinc, copper and others in the first half of the year, generating a growing stream of cash for mining and metal companies.

The combined company, to be called Phelps Dodge Inco Corp., would have operations in 40 countries and employ about 40,000 people.

Inco shares jumped $5.93, or 10.2 percent, to $64.19, Falconbridge shares were up $2.45, or 5 percent, to $51.75 and Phelps Dodge shares dropped $6.35, or 7.7 percent, to $76.60, in afternoon trading on the New York Stock Exchange.

“We’re extremely excited about the powerhouse we’re creating,” Phelps Dodge Chief Executive J. Steven Whisler said. Whisler will be CEO of the combined company once the deal is complete. “The transaction we announced this morning is clearly transformational. Our key driver in this transaction is the potential for significant synergies.”

Under terms of the deal, Inco shareholders will receive 0.672 shares of Phelps Dodge stock plus 17.50 Canadian dollars ($15.59) per share in cash for each share of Inco stock, representing a premium of 23 percent over Inco’s price on Friday.

Inco in turn will increase its offer for Falconbridge to 17.50 Canadian dollars ($15.59) from 12.50 Canadian dollars ($11.14) and the exchange ratio to 0.55676 shares of Inco, from 0.524 shares, for each share of Falconbridge.

Based on Phelps Dodge’s offer for Inco of 80.13 Canadian dollars ($71.40) per share, the value of Inco’s increased offer for Falconbridge is 62.11 Canadian dollars ($55.34), or a 12 percent premium to Falconbridge’s price Friday.

“I know our cultures are compatible and our people will be treated with respect,” Falconbridge CEO Derek Pannell said Monday.

The most vulnerable part of the deal is the portion involving Falconbridge, Linda Varoli of Wall Street Access said. Phelps Dodge has said the Inco deal is not contingent on the closing of the one with Falconbridge. The Phelps offer for Falconbridge represents an 18 percent premium over the bid from Xstrata.

“We don’t know what Xstrata is going to do yet,” Charles Bradford of Soleil-Bradford Research said, noting that Xstrata has accumulated a 19.8 percent stake in Falconbridge. “They have very deep pockets. This is not a done deal by any means.”

The chief financial officer of Phelps Dodge, Ramiro Peru, said the company had arranged $22 billion in financing, which he said will be sufficient to close the transaction. Phelps Dodge also plans a $5 billion share buyback to be completed within 12 months after the deal closes.

Phelps said Monday that it did not anticipate any major regulatory hurdles for the deal. It is expected to close in September with Phelps Dodge shareholders owning about 40 percent of the combined company, Inco shareholders with 31 percent, and Falconbridge holders with 29 percent.

Phelps, founded 172 years ago, said deal would result in synergies of $900 million a year to be realized by 2008.

The company will have headquarters in Phoenix with Inco Nickel offices in Toronto. Inco CEO Scott Hand would be vice chairman, while Pannell will become president of Inco Nickel. The new company would be listed on the NYSE and also plans to apply for a listing on the Toronto exchange.

Whisler said there was the possibility of selling off noncore assets.

Phelps has guaranteed no layoffs in mining and processing operations for at least three years.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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