“The Great Canadian Mining Disaster” -by Jacquie McNish (November 25, 2006) – Globe and Mail’s Report on Business Inco Mining Story

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous impact and influence on Canada’s political and business elite as well as the rest of the country’s print, radio and television media.

This article was the cover story of the Saturday, November 25, 2006 edition of the Globe and Mail’s Report on Business Section. Jacquie McNish’s 16,000-word article on the failed Inco/Falconbridge merger has become the definitive account of this Canadian business tragedy.


Scott Hand had a dream, to keep Inco Ltd. in Canadian hands. But he didn’t count on corporate betrayal, political apathy, a new bread of shareholders, and a lack of boardroom bravado


The horizon clears

Inco sees its future

After days of murky weather, a wool fog lifted off central Labrador, revealing the bald rugged terrain explorer Jacques Cartier dismissed as “the land God gave to Cain.” The momentary clearing allowed a clutch of travellers to dash to two turbo props marooned at Happy Valley Goose Bay airport.

These were no ordinary tourists. Leading the parka-clad pack was Scott Hand, patrician chief executive officer of the world’s second-largest nickel producer, Inco Ltd. Behind him, eager to explore Cain, were an elite corps of international executives. Rick Waugh, CEO of Bank of Nova Scotia, a man who is gobbling up more Latin American banks than Butch Cassidy and the Sundance Kid, was here. So was David O’Brien, chairman of EnCana Corp. and Royal Bank of Canada. Joining them were Glen Barton, retired chief of Illinois’ Caterpillar Inc.; John Mayberry, onetime CEO of Hamilton steel maker Dofasco Inc.; and Francis Mer, retired boss of European steel maker Arcelor SA and a former finance minister of France. Inco directors one and all, they scrambled to the Dash 8s under an uncertain sky to see for themselves the 21st century’s first great mining startup: Voisey’s Bay.

Mr. Hand, however, wanted his directors to see more than a prosperous mine on the afternoon of Sept. 20, 2005. Although Inco was still digesting the $4-billion, 1996 purchase of Voisey’s Bay, he believed it was time to deal again. Rival Falconbridge Ltd. was in play, presenting Inco with an opportunity to forge a global powerhouse by bringing some of the world’s richest copper and nickel deposits under one corporate entity. Worried board members weren’t so sure. Inco had been burned by plunging nickel prices after the Voisey’s Bay deal, and the directors were nervous about risking an even bigger bet. Mr. Hand had two days to win them over. His message: “If we don’t do something on our own, somebody will do something to us.”

Once upon a time, his company monopolized world nickel sales by virtue of its claims to the Sudbury Basin, one of the planet’s biggest and richest mineral deposits. He was convinced it could be a titan again. Acquiring Falconbridge might even dispel Canada’s reputation as a place where companies are incapable of eating their way to the top of business food chains. If Inco’s blue-ribbon panel of powerful directors couldn’t control the destiny of one of the country’s few global heavyweights, then who could?

Just as the fog lifted temporarily that day in Labrador, the window for buying Falconbridge would not be open long. The battle for mineral assets was a lighting-fast Risk game involving ever fewer, more powerful takeover players. Reaching the Dash 8s, Inco’s top officials filed onto separate planes so the company would not be leaderless in case of a crash. Soon they were airborne, headed for a corporate turbulence that none of them could have imagined.

The Inco directors would travel into the heart of the most complicated takeover battle of our time. They would enter a world of colourfully named but mostly futile corporate projects, from Talon to Albatross to Sudbury Sangria. They would taste triumph, defeat, betrayal and, worst of all, a dismaying government indifference that reached up to the Prime Minister’s Office. Their burden was a fading national dream that saw Canada’s few remaining independent corporate giants as contenders on a global stage dominated by predatory raiders.

There would be no happy ending, however. Instead, a debilitating mix of corporate caution, personality clashes, political naiveté and shareholder revolts would weaken Canada’s mining contenders at the very moment they needed to be strong. In the first decade of the 21st century, Canadian greats — from the Hamilton steel maker Dofasco Ltd. to the Vancouver resort operator Intrawest Corp. — were being gobbled up by foreigners. And mining, so quintessentially Canadian, was to be no exception. A business fantasy, of creating a Canadian global giant, was about to disintegrate into a Canadian tragedy. This is the full story of how it unfolded.

Chapter One

Better together

Historic rivals secretly plot a marriage

The battle for Canada’s mining giants began with a small idea. Scott Hand wanted to do a deal. Inco’s chief had been eyeing a Canadian merger since the summer of 2003, when Derek Pannell, his counterpart at Falconbridge, approached him with a suggestion. The unflappable metallurgical engineer from the English port city of Southampton had been parachuted into Falconbridge in 2002 after he distinguished himself as a tenacious manager who could launch new mines ahead of deadline and under budget. In 2003, Mr. Pannell told Mr. Hand he wanted to launch something else. It was time, he argued, for the mining rivals to bury a century of grievances and explore a joint venture in Sudbury, Ont., home to the Sudbury Basin and its vast treasure trove of minerals. On the surface, the two men had little in common. Mr. Pannell is a no-nonsense engineer who worked his way to the top by honing his skills as a hard-nosed mining operator. Mr. Hand is a stiff U.S. lawyer who was raised in an affluent New York suburb and earned the trust of Inco’s powerful board by distinguishing himself as a cautious and loyal executive. In some business quarters, the reliable executive was known as “Steady Hand.”

Despite their differences, the two men were unified in their desire to forge a Canadian mining legacy. To Mr. Pannell, it was lunacy that Falconbridge and Inco lived alongside each other with so many redundant operations. “We kept looking over the fence at Inco and saying, ‘This is so strange,'” he said. For a century, the foes had mined ore side by side from the Sudbury Basin, jealously protecting adjacent mining claims like squares on a checkerboard. Inco and Falconbridge had tentatively explored joint operations in the Northern Ontario city in the past, but were hampered by Inco’s historic disdain for its competitor’s smaller mines and reserves in Sudbury. To make matters worse, Falconbridge infuriated Inco in the mid-1990s when it lobbed a surprise competing bid for the Voisey’s Bay deposit, forcing Inco to dig deeper into its pocket to buy the Labrador prize. A subsequent billion-dollar hit, triggered by a humiliating overpayment for the project, fostered dark suspicions within Inco’s ranks that Falconbridge wanted to wound its competitor.

The timing for Mr. Pannell’s proposed truce, in the dog days of 2003, was perfect. Inco, which once supplied as much as 90 per cent of the world’s nickel supplies, had seen its market share slip to 17 per cent in 2003, putting it in second place behind Russian behemoth Norilsk Nickel Group. Compounding Inco’s problems, its fledgling nickel mining project in New Caledonia had been sandbagged by a billion-dollar cost overrun and local resistance to the megaproject. A big cost-cutting push in Sudbury would be welcome news for Mr. Hand to take to a board grappling with mounting losses and a swooning stock price.

Mr. Pannell knew it would take more than a friendly reception to overcome the long history of distrust between the companies. So in the late summer of 2003, the two men went to unusual lengths to launch the elusive quest for a joint venture in Sudbury. Operating under the code name Project Pentlandite, a reference to the brassy, yellow mineral that houses most of the world’s nickel, the two companies quietly recruited two dozen managers from Inco and Falconbridge to secretly gather and share their mining secrets. To enforce co-operation between the corporate antagonists, the companies hired one of the world’s most respected mining engineers. Graham Farquharson, 65, is the man mining companies around the world turn to when they want a trusted assessment of exploration results or mine operations. The president of Toronto’s Strathcona Mineral Services Ltd. leapt to global prominence in 1997 when he exposed the Indonesian gold-salting scam at Bre-X Minerals Ltd., triggering the biggest mining failure in history. Mr. Farquharson’s challenge in Sudbury would prove to be no less daunting.

The lean and weathered engineer met Project Pentlandite’s recruits for the first time in October, 2003, under cover of Sudbury’s Howard Johnson Plaza Motel, a one-storey motor inn in the city’s west end. Mr. Farquharson explained that the team’s mission was to study both companies’ operations along the northern ridge of the Sudbury Basin, near the small leafy mining town of Levack. The economics of two companies mining the same ore body had become so dysfunctional that every day Inco trucks drove thousands of tonnes of ore from its Coleman/McCreedy East Mine along a paved road that winds around Falconbridge’s underused Strathcona processing mill. The trucks dumped the ore onto nearby rail cars that then crawled to Inco’s Clarabelle Mill, 50 kilometres to the south. A fortune could be saved if the men in the room could figure out how to eliminate the ridiculous overlap.

From the beginning, Project Pentlandite was infected with a paranoia that slowed the progress of information-sharing to a glacial pace. Falconbridge and Inco executives were so afraid that leaks about a Sudbury cost-cutting venture might spark a union revolt that they went to extraordinary lengths to camouflage the team’s work. Project members were told to invent excuses when asking superiors for time off work or requesting company data. If they wanted to exchange or review data, they were confined to an office rented near the outskirts of Sudbury. Further frustrating the venture were old complaints between hostile neighbours. Some executives at Inco’s Toronto head office were so worried that Falconbridge was duplicitously gathering information for a hostile takeover bid that they wasted many weeks arguing to no avail that Falconbridge sign an agreement restricting it from launching a bid. It wasn’t easy for Inco officials to abandon old suspicions, Mr. Hand said, because “it was never clear whether you could open your kimono and be sure that someone wouldn’t take advantage of you.”

The result? A simple review of one mine and mill site dragged on for nine months, “bogged down by the baggage of the past,” Mr. Pannell said. Slowly, the two sides opened up and, by July, 2004, Mr. Farquharson had enough material to make a powerful case for co-operation on the northern ridge of the Sudbury Basin. He estimated that if the companies worked together to improve mine ventilation, and shared equipment and mine access, they could boost output and save close to $50-million annually in capital expenses. Even greater savings could be had, he believed, if Inco shipped ore from the Coleman/McCreedy mine to Falconbridge’s adjacent mill.

On July 9, 2004, Mr. Farquharson sent a report on his findings to Inco and Falconbridge executives and waited for their reply. But nothing would come. Falconbridge’s controlling shareholder had lost patience with Sudbury-style intransigence. Incredibly, Inco and Falconbridge officials did not jump on the opportunity to save perhaps $100-million. Instead, one year later, in June, 2005, the two companies announced a smaller co-operation agreement to save $15-million annually by shipping Inco copper to a modern Montreal refinery owned by Falconbridge. As for Project Pentlandite’s promise of a much grander joint venture, Mr. Farquharson said, “It just sort of died.”

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