HUGE IMPLICATIONS FOR SUDBURY
What are the implications of this deal for Sudbury? They are huge.
The first is how it feels. Inco and Sudbury have been synonymous
for a hundred years. The wealth from the Sudbury basin built this
company. Even the fights have been family fights. We all feel
proprietary about Inco whether we love it or dislike it.
Although the nickel is still here, the heart moves, and with the
heart, a thousand informal responses change. Over time the power is
gone.
Historically, many of the people who moved to the top of Inco either came from Sudbury or were here long enough to value it. It was a huge advantage, whether one was fundraising for a hospital, or trying to get a supply deal with Inco.
Sometimes, if you weren’t getting what you wanted, you might call
the premier and ask him to give the president of Inco a call or
vice versa. In short, the way things get done is through networks
of people with influence whether they are politicians, business
people, unions or charities. The networks are rendered all but
useless when the budgets are set in Switzerland or Phoenix which
has no great stake or loyalty to the network.
This change, from being in the centre of the universe, to just
being relatively important changes everything:
• It changes philanthropy for the worse.
• It changes the relative power of unions.
• It changes the number of professionals (from lawyers and
accountants and stockbrokers to insurance reps) who get interesting
and lucrative work.
• It changes the ability to work synergistically (such
as Sudbury Neutrino Observatory and Science North) in the
community.
• It changes the culture from a more laid back, internationally
focused, Canadian culture to a more hard-driving American
one.
• It changes the relative importance of Sudbury operations in the
internal competition for capital. Phelps Dodge Inco will be three
times as big with many more opportunities to deploy capital, most
of them in low wage countries.
• It will likely diminish the take on taxes with various kinds of
leakage that afflict branch plant companies most usually through
transfer pricing arrangements.
• Most importantly, it weakens the international presence of the
expanding Sudbury Mining Cluster that is Sudbury’s future. It
doesn’t necessarily destroy it,but it lessens the momentum
considerably.
PROTECT CANADIAN INTERESTS
It needs to be said, and said clearly. Canada has legislation on the books for just such an occasion. The Government of Canada, without so much as a committee meeting, can say, “This takeover is not in the interest of Canada and we deny it.”
So, does Sudbury have any hope of influencing the outcome of these
negotiations?
Of course. For more than 100 years, the men and women of this
community have lived and died helping Inco become a force in the
world. As Cutifani is fond of saying, “It’s all about people,” and
he is right. It is about people. It is about community. A conscious
community has an obligation to be concerned about its values, and
its sustainability. This is particularly true when it involves
mining riches that belong to the province and the country.
If you need some comfort to digest this jumpy thought, let’s go no
further than the leadership of that great socialist thinker Ralph
Klein in Alberta, who is not only collecting royalties on his
resources but worried daily that some other province might somehow
benefit from them.
Happily, the federal government has legislation in place that
allows them to disallow a foreign purchase of this magnitude if it
provides no net benefit to the nation.
It does not. In fact, some would argue the long term impact will be
harder on Toronto as a credible mining financial centre than
Sudbury as a supply centre.
The best outcome, although admittedly a remote one, is to turn the
clock back and entertain the Falconbridge and Inco proposal as
first tabled.
Failing that, we need a “Sudbury Accord” that makes the best
of a very bad situation. The “Sudbury Accord” would codify specific
outcomes that must take place if this transaction is to be
completed.
Where’s the money? Well, as expected, most of the money is being made by the shareholders of Falconbridge. They benefit from the auction between XStrata and Inco, and the benefit from the synergy with Inco’s assets. Next come the shareholders of Inco. After that it gets muddy. Phelps Dodge shareholders are losing value at the moment because a lot of people question the assumption of nickel prices going forward and don’t like the risk reward ratio of the deal to buy Inco. They are borrowing more than $20 billion. No doubt some of the senior executives are doing well on the way out, which is what happens when there is a winner and a loser. One gets the company, the other gets a parachute.
After that, there is no significant money for any other
stakeholders and certainly nothing for Sudbury unless you count non
-binding agreements to continue to spend money that has already
been allocated by Inco for the Sudbury Basin.
You’ll notice however that when senior executives want to ensure a
deal gets done they set aside money called a break up fee. If this
deal does not go through Phelps Dodge will get almost a billion
dollars for its time. The objective is to make it excessively
expensive for the next suitor. If I was Phelps I’d be looking for
that suitor. They could make a lot of money, get their stock price
back up and avoid the risk.
That said, I think Sudbury deserves a break up fee more than
Phelps. We are no longer the apple of our mining company’s eye. We
will now toil for some guy in Phoenix. Enough already.