Falconbridge Limited

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Falconbridge Limited

95 Wellington Street, Suite 1200
Toronto, Ontario M5J 2V4
Canada
Telephone: (416) 956-5700
Fax: (416) 956-5757
Web site: http://www.falconbridge.com

Public Subsidiary of Noranda Inc.
Incorporated: 1989
Employees: 6,234
Sales: $1.74 billion (2000)
Stock Exchanges: Toronto
Ticker Symbol: FL
NAIC: 212234 Copper Ore and Nickel Ore Mining; 212299 All Other Metal Ore Mining; 327992 Ground or Treated Mineral and Earth Manufacturing

Falconbridge Limited is a leading base metals mining company operating out of Toronto, Canada. Its primary commodity is nickel, which is instrumental in the manufacture of stainless steel, followed by copper, cobalt, and platinum group metals. Falconbridge owns nickel mines in Canada and the Dominican Republic, and ever since 1930 has maintained a refinery in Norway. The company is majority owned by Noranda, a Canadian natural resources company that controls more than 50 percent of its stock. Falconbridge shares trade on the Toronto Stock Exchange.

Founding of Falconbridge: 1928

Falconbridge took its name from the township of Falconbridge, Ontario, an area possessing large deposits of nickel. In 1928, businessman Thayer Lindsley paid $2.5 million for mining claims in the area and created Falconbridge Nickel Mines Limited. The new company took immediate steps to work the claims, and despite the stock market crash of 1929 it was able to sink a shaft and begin to develop the mine, as well as build a smelter. Falconbridge still had to refine the ore, however, and the International Nickel Company of Canada (INCO) retained the North American rights to refining technologies. As a result the company turned to Kristiansand, Norway, where it purchased an operating refinery, renaming it Nikkelverk. The inconvenience of working on two continents was offset by the low cost of Norwegian electricity, a major expense in the electrolytic refining process for nickel. Moreover, Falconbridge was now positioned to take advantage of a growing European market for nickel that commanded higher prices than in the United States. The company engaged a London firm, Brandeis, Goldschmidt & Co., to market the product to the Continent.

Falconbridge completed its first full year of production in 1931, and business was adversely affected by the depressed world economy. Conditions improved somewhat the following year and the company was able to expand its operations, constructing a precious metals plant at Nikkelverk and sinking a second mine shaft in Canada. The company benefited from higher metal prices in the late 1930s, but it also became concerned about the political climate in Europe, as Germany became increasingly more militant. Even after the Continent became embroiled in war, Nikkelverk continued to operate. In addition to producing gold, silver, platinum, and palladium, the plant began to refine iridium, rhodium, and ruthenium. In 1940, Germany occupied Norway, and Falconbridge lost its refining capacity.

Because nickel was an important metal in Canada’s war effort, INCO now provided refining services to Falconbridge. Despite the loss of manpower to the Army, the company stepped up production, with all of its metal either sold directly to the government or allocated to industry for military use. It was not until 1945, with the end of war in Europe, that Falconbridge regained Nikkelverk. Despite shortages of coke, coal, and electricity, the plant renewed its operations, and the company was able to take advantage of improving nickel and copper prices. By 1947, in the midst of a postwar boom, Falconbridge recorded its highest profits since 1939. Nikkelverk was modernized and the company looked forward to a promising future, encouraged by the emerging new uses for nickel.

While demand for nickel began a steady rise in the 1950s, production in the free world was limited to the Canadians and the French with its operations in New Caledonia. The advent of the Korean War then created an even greater need for the metal.

The U.S. government began a program of stockpiling nickel and negotiated an incentive-laden contract with Falconbridge to buy nickel through 1961 at a price above market value. As a result, commercial customers were only able to acquire nickel on a quota basis and pent-up demand drove the price even higher. Falconbridge used its newfound prosperity to upgrade facilities and sink additional mines. By the middle of the decade the company had five mines in operation and four others in development. Throughout the 1950s, Falconbridge established production records each year. Commodity prices eroded somewhat as demand declined in 1957, yet profits continued to be healthy. Efforts were also initiated to explore a 300-square-mile concession in the Dominican Republic. By the end of the 1950s, despite a strike in the U.S. steel industry, the demand for nickel remained quite high.

In 1961, Falconbridge acquired some major assets from Ventures Limited, another company controlled by Thayer Lindsley. These acquisitions included controlling interests in gold mining firms Giant Yellowknife Mines Limited and Kiena Gold Mines Limited; copper producer Kilembe Mines Limited; the undeveloped copper and zinc deposits of Lake Default Mines Limited; and the silver, lead, and zinc mining operations of United Keno Hill Mines Limited. As part of this transaction, a large stake of Falconbridge stock would pass to Mclntyre Porcupine Mines Limited.

Superior Oil Gaining Control in the 1970s

Falconbridge experienced a small slump in the early 1960s when its contracts with the U.S. government expired, but the company quickly recovered as nickel consumption reached new heights and copper prices escalated because of political unrest in some copper-producing countries. Prices remained strong until a recession in 1971. By now the company saw a shift in ownership control. Superior Oil Co. of Houston, Texas, and its Canadian subsidiary acquired a 40 percent interest in McIntyre Porcupine, thereby gaining a 37 percent stake in Falconbridge, which it then increased to about 43 percent. Superior Oil would eventually gain control of the board and effectively run the company.

No longer operating with limited competition in the world, Falconbridge expanded internationally in the 1970s. To better market its products, the company established Falconbridge International Limited, as well as Falconbridge Europe S.A. to cater specifically to European customers. Later in the decade, Falconbridge U.S. Inc. was established to improve marketing to the United States. Moreover, South Africa properties began to produce platinum, and the Dominican concessions finally bore nickel. Overall, however, the 1970s featured unsteady business conditions and uneven financial results. Inflation hurt earnings in 1974, and weak demand in 1977 caused Falconbridge to post its first loss. But when conditions improved, the company achieved record earnings in 1979.

In 1980, D. Broward Craig was named president and chief executive officer of Falconbridge, reported to be handpicked by Superior Oil and lured away from St. Joe Minerals Corp., where Craig had served as president. After only five months at Falconbridge, however, he resigned. Although a company press release cited “disagreements over matters of policy” without providing elaboration, the press speculated that Craig was frustrated by the conflicting desires of privately held Superior Oil and the responsibilities of publicly traded Falconbridge. In particular, Craig was said to be upset when the Superior Oil-dominated board voted to suspend dividend payments for the third quarter, citing falling nickel prices. Although analysts derided the decision as being arbitrary, the board’s assessment of the situation was borne out by subsequent events. Commodity prices continued to decline, reaching their lowest level in decades and resulting in Falconbridge posting a loss in 1981, only the second in its history.

Craig’s successor, H.T. Perry, was replaced in 1982 by William James, who would have a major impact on Falconbridge. James earned a Ph.D. in geology from Montreal’s McGill University in 1957 and worked several years with his father’s well-respected mining consulting company before being hired by Noranda in 1973 to run a subsidiary. Although a scientist by training, he revealed a natural business acumen, and also gained a reputation for being brash. He was recruited by Superior Oil to rescue Falconbridge, and he quickly set about the task. He slashed the workforce, including the main Toronto office staff, by about 40 percent. He leased one of the two floors the company occupied in an office tower, gave up his corner office for a much smaller one, and even shared a secretary with the president of a subsidiary. Operations were briefly suspended at Canadian and Dominican mines, as well as in Norway. James turned to the equity markets to raise money for capital purposes, and in the process changed the company’s name to Falconbridge Limited. Nevertheless, Falconbridge still lost $81 million in 1982. It was not until the fourth quarter of 1983 that the company returned to profitability, and not until 1984 did the company post a profit for an entire year.

Company Perspectives

We are committed to improving shareholder returns through the responsible and profitable growth of our core nickel and copper businesses. We will accomplish this by: focusing on high-quality and long-life ore bodies; optimizing production from current assets; and preparing to take advantage of new market opportunities.

In 1985, Mobil purchased Superior Oil, then sold its Falconbridge interests to Dome Mines. More importantly that year, James outmaneuvered his ex-boss and mentor at Noranda, Alfred Powis, to acquire Kidd Creek Mines, a major silver, copper, zinc, and gold producer. The ore body, located near Timmons, Ontario, was discovered in 1964 by Texasgulf. It was so abundant in natural riches that it instantly made Texasgulf into a major diversified mining company. The Canada Development Corp. (CDC) forced a sale in 1981 in order to retain national control over the resources. Canada then experienced a movement towards privatization and CDC put Kidd Creek on the block. Noranda, cash-strapped because of a cost-reduction program, negotiated a joint venture with CDC, but James swept in with a $1.3 billion offer to acquire the property outright. His willingness to pay a premium of 66 percent over book value, some $245 million, won the day. Noranda and Falconbridge operated out of the same office building, and Powis visited his rival’s lobby to share in the champagne celebration, but his desire to gain Kidd Creek remained unabated.

Depressed metal prices, which persisted despite a recovering economy in 1986, prevented Falconbridge from enjoying immediate benefits of the Kidd Creek acquisition. James cut costs, in the process selling off a number of assets, but the purchase had been predicated on rising metal prices, and it was simply impossible to make money on Kidd Creek at current levels. While a short-term mistake, the property continued to hold long-term promise, and by 1988 it was a major contributor to Falconbridge’s record earnings for the year. Powis, in the meantime, was hatching a plan to acquire Kidd Creek. Noranda began to buy up shares of Falconbridge stock, and by 1988 it became apparent that it intended to acquire a controlling interest and in effect purchase the company without paying a premium. James responded by agreeing to sell the company to Amax Inc., a Greenwich, Connecticut, aluminum, coal, and gold mining company, for $2.42 billion. He also instituted a “poison pill,” a shareholder rights plan that prevented Noranda from adding to its Falconbridge holdings. James put Powis into a bind: Noranda would benefit from the Amax deal as a major shareholder, yet he still coveted Kidd Creek. Clearly, James was not going to let him take over Falconbridge without paying a premium, and not just for a controlling interest but in a purchase for the entire company. The struggle would last more than a year, but in the end Noranda would pay $31.50 each for the shares it did not control, instead of the $23 it had paid earlier. In order to finance the $1.8 billion deal, however, Powis had to take on an equal partner, Sweden’s Trelleborg AB. In the process, Falconbridge was taken private. James knew that he would not stay on as CEO, quipping to reporters, “I just cost them too g—damned much money.” He was replaced in the near-term by Alex Balogh, and in 1990 by Franklin Pickard, who had worked part-time at Falconbridge since the age of 16 and during his summers in college trained to become a metallurgical engineer.

Returning to Public Status: 1994

Nickel prices entered the downside of a cycle in the early 1990s, caused in large part by exports to the West from the Soviet Union. Falconbridge, which was forced to temporarily shut down some mines and production facilities, recorded a loss for 1993 when the price of nickel bottomed out. To raise capital, Falconbridge went public again, taking advantage of rising nickel prices to raise close to $600 million. Over the course of the next year, Trelleborg also took the opportunity to sell off its shares as part of a plan to cut debt and focus on its wholly owned businesses. Falconbridge proved to be a wise investment for the Swedish company, which realized a $600 million return on its money in only a few years.

The conservative Trelleborg influence on the Falconbridge board was replaced by more aggressive directors. Pickard took advantage of that situation in 1996 to make an aggressive bid for Diamond Fields Resources and its nickel deposits in Voisey’s Bay, discovered in 1994 and believed to be the highest-grade nickel find in the world. Longtime rival Inco already owned a 25 percent stake in Voisey’s Bay. It was unlikely from the start that Inco would allow Falconbridge to buy the assets, and in the end it outbid its smaller rival. Nevertheless, Falconbridge was able to take away more than $50 million in a non-completion fee.

Under Pickard, Falconbridge initiated a growth plan in 1996 that would double nickel production over the next 15 years, with an emphasis on expansion into the South Pacific nickel-rich island of New Caledonia. With the use of nickel in high-alloy steel steadily increasing, he chose to position Falconbridge to take advantage of the trend, rather than be overly concerned about near-term price fluctuations. In addition, he oversaw the company’s development of a Raglan, Quebec, nickel and copper property, as well as the Collahuasi copper mine in Chile. Pickard was visiting the mine in September 1996 when he suffered a heart attack and died. Although shaken by the sudden turn of events, interim CEO Alex Balough vowed that the company would carry on with Pickard’s agenda. Several weeks later a permanent replacement was named: Oyvind Hushovd, who had been born in Norway, started out at Nikkelverk, and worked for Falconbridge for more than 20 years. He had served as an executive in the company in both Norway and Toronto.

Financial results in the late 1990s were mixed at Falconbridge. Profitable years in 1996 ($250 million) and 1997 ($137 million) were followed by a $36.4 million loss in 1998, caused by depressed metal prices that were due in large part to an Asian economic slump and Russian overproduction. When prices recovered, Falconbridge recouped its losses, posting a $153.1 million profit in 1999. The company followed with record results in 2000, earning $245.7 million on revenues of $1.75 billion. Weak metal prices in 2001, as well as a lingering strike at one of its facilities, dampened profits and caused the company to cut back on production. Despite the cyclical nature of commodity prices, however, Falconbridge remained a strong company with a healthy long-term outlook.

Key Dates

1928:: Thayer Lindsley acquires mining claims in Falconbridge, Ontario.
1929:: Norwegian refining facility, Nikkelverk, is acquired.
1931:: Company completes its first year of full production.
1940:: Nikkelverk is lost to occupying German forces.
1945:: Company regains Nikkelverk.
1961:: Company diversifies operations with acquisition of major mining interests.
1982:: Company name is changed to Falconbridge Limited.
1985:: Kidd Creek Mines Limited is acquired.
1989:: Falconbridge is acquired by Noranda Inc. and Trelleborg AB and taken private.
1994:: Stock offering returns Falconbridge to public company status.

Principal Subsidiaries

Falconbridge Europe S.A.; Falconbridge U.S. Inc.; Falconbridge International S.A.; Falconbridge Nikkelverk A/S; Falconbridge Dominicana, C. por A.; Société Minière Raglan du Québec Itée; Compania Minera Dona Ines de Collahuasi S.C.M.; Falconbridge Nouvelle Caledonie SAS.