BUSINESS

Returning home

Investors devour Trelleborg’s stake in Falconbridge

ANDREW WILLIS August 7 1995
BUSINESS

Returning home

Investors devour Trelleborg’s stake in Falconbridge

ANDREW WILLIS August 7 1995

Returning home

BUSINESS

Investors devour Trelleborg’s stake in Falconbridge

It is difficult to imagine any foreign visitor enjoying a more profitable six-year stay in Canada than Sweden’s Trelleborg AB. In September, 1989, the industrial conglomerate, founded in 1890 as a bicycle-tire maker in the tiny southern town of Trelleborg where it is still based, spent $1.1 billion for a 50-percent stake in Falconbridge Ltd. of Toronto, the world’s second-largest nickel producer. Noranda Inc. of Toronto bought the other half of the company. After a slump in world demand, nickel prices hit a six-year low of about $2.50 a pound in September, 1993. But now, Falconbridge’s fortunes have rebounded: last week, nickel prices soared to $5.40 a pound, a jump that came from rising demand in industries like car manufacturing. And Trelleborg’s patience was richly rewarded on July 26, when a group of 15 Canadian investment dealers bought out the Swedish firm’s share in Falconbridge for $1.4 billion—one of the biggest deals ever seen on Bay Street Trelleborg executives estimate that, all told, they have made nearly $600 million on their Falconbridge investment. Meanwhile in Canada, the brokerage houses quickly sold Trelleborg’s 50 million Falconbridge shares to domestic investors, who are betting the Swedes have walked away happy—and have still left some money on the table.

For Canadian investors, part of the appeal of Falconbridge’s so-called secondary offering comes from the fact that the stock was sold in bite-sized chunks. Each Falconbridge share costs $28.75, but investors only have to pay $9.75 up front, with another $9.50 due in July, 1996, and $9.50 due in January, 1997. These “instalment receipts”—which were also recently used to sell massive stock blocks in Toronto-based Abitibi-Price and Suncor Inc. to the public— made Falconbridge an attractive investment: the shares sold out completely in less than three hours. According to mining analyst Manford Mallory at Research Capital Corp. in Toronto: “Instalment receipts offer greater leverage to investors, because if Falconbridge goes up $2, that’s a more impressive gain on a $9.75 instalment receipt than it is on a $28 stock.” Mallory notes that large investors were selling Falconbridge shares, as well as stock in other mining companies late last week, to make room in their portfolios for the instalment receipts. As a result, common shares in Falconbridge actually fell in price from $28.62, when the deal was announced, to $27.25 at the end of the week.

According to mining industry experts, Trelleborg sold Falconbridge to pay off its debts and to focus its attention on subsidiaries that it controls including a rubber manufacturing unit and a pulp-and-paper division. Trelleborg and Noranda originally shared control of Falconbridge, but a 1994 offering of 44.6 million shares to the public at $18.50 each diluted the Swedish company’s stake to

28.3 per cent Noranda, which invested another $560.5 million, retained 46.6 per cent But Trelleborg’s departure from the Canadian mining scene and the new muscle on its balance sheet, have left analysts speculating on its future strategy. Says London-based mining analyst Peter Dupont of UBS Ltd., ‘Trelleborg has been through a number of incarnations. The big question is where are they headed now, because if they wanted to stay in mining, they would hang on to Falconbridge.”

For their part, analysts and executives are bullish on Falconbridge’s long-term prospects despite the recent spike in nickel prices. Falconbridge president Frank Pickard has amassed a war chest of $388 million in cash and his company turned a $131-million profit in 1994 on revenues of $1.96 billion. In an interview with Maclean’s, Pickard said his strategy is to continue building Falconbridge with a $486-million investment in the Raglan nickel and copper mine in northern Quebec and a 50-per-cent stake in a $1.9-billion Chilean copper project. Both sites are expected to start shipping ore in 1998.

Falconbridge also has mines in the Dominican Republic and is prospecting in Africa’s Ivory Coast. Closer to home, Pickard says the company is also exploring around producing sites in Sudbury and Timmins, hoping to find additional reserves that will add to the life of its existing mines. Noranda chairman and chief executive, David Kerr, who is also on the Falconbridge board of directors, says he supports the expansion plans, and adds: “There is no change in our strategy at Falconbridge.”

Nevertheless, strategic plans at all metal mining companies are being redrafted this year following the discovery of a huge nickel deposit at Voisey Bay, Nfld. Toronto-based Inco Ltd., the world’s largest nickel producer, paid $700 million in May to grab a 25-per-

cent stake in the company that owns the property, Diamond Fields Resources Inc. Nickel from Voisey Bay could potentially increase the world’s annual output by eight per cent—and drive down the commodity’s price—although the property is not expected to begin commercial production until the turn of the century. Some analysts suggest that the uncertainty in international nickel markets created by the Voisey Bay find may have prompted Trelleborg’s decision to sell. But Falconbridge’s Pickard downplays that scenario. “Voisey Bay is a good discovery, no question,” he said. “But the growth we are seeing in the world market means that its production will be easily soaked up by the time it’s in production.” In fact, Pickard predicts that nickel prices are still at least a year away from peaking. And investors are clearly optimistic that commodity prices will sustain Falconbridge’s stock price, long after the Swedes have cashed their cheques from Canada.

ANDREW WILLIS