Hunting for lion's share of nickel jungle ANDY HOFFMAN Friday, March 30, 2007
Ian Pearce is a man who likes to keep things on schedule. The chief executive officer of Xstrata Nickel rises each morning at 4:45 a.m. He always catches the first GO train leaving from Oakville, Ont., at 5:34. Coffee in hand, he's in the company's downtown Toronto headquarters at precisely 6:13.
It should be no surprise then that Mr. Pearce followed through this week on his pledge to aggressively expand his company's business in short-order fashion.
Just seven months after taking on his first CEO job, he pulled off a $4.6-billion friendly deal to purchase LionOre Mining International Ltd., the largest pure play nickel miner left on the Toronto Stock Exchange.
“It fits. We saw the value [LionOre] had for our strategy going forward,” said the trim and tall 50-year-old during an interview.
“Our strategy was to grow. We saw it as a nice asset to come into our business right now. It's cash accretive and generates good cash flow in these good times.”
Good times indeed. The negotiations, which began in earnest last November, were conducted against a backdrop of surging nickel prices. With each passing day, it seemed LionOre's share price was rising in tandem with the metal, which has rallied 62 per cent since the start of this year and peaked at $48,500 (U.S.) a tonne on March 16, just 10 days before the deal was announced.
By that time, Mr. Pearce's offer price of $18.50 (Canadian) per LionOre share represented a slim 5.8-per-cent premium to the Toronto company's closing share price the day before.
Not surprisingly, some institutional shareholders were quick to bemoan the bid price. One said Xstrata was “stealing” LionOre, which operates mines in Botswana, South Africa and Australia that are expected to produce 44,000 tonnes of nickel this year. Several analysts have maintained their price targets above the bid price, suggesting the offer fundamentally undervalues LionOre.
Mr. Pearce, of course, fundamentally disagrees.
“We've evaluated the business. As the prices go up and down, so the deal moves as well. We've had to factor in what we can do with this business. The Xstrata story has always been that when we deploy ourselves around any asset, the management approach and the accountability approach that we always use allows us to run that business and get more out of that business than the previous owners. So no matter where the metal price hits, we're going to leverage that business,” he said.
Despite being a novice CEO, Mr. Pearce has clearly picked up a thing or two during the dramatic takeover battles waged for Inco Ltd. and Falconbridge Ltd. last summer. At the time, he was Falconbridge's chief operating officer. When Xstrata PLC — the up-and-coming Anglo-Swiss miner led by fellow South African native Mick Davis — emerged victorious in the fight for Falconbridge, Mr. Pearce agreed to stay on to head the company's new nickel division.
As with Xstrata's Falconbridge deal, the nickel unit's bid for LionOre is all cash.
The deals also share a common strategy in seeing Xstrata move early to give itself an edge. A 20-per-cent ownership stake in Falconbridge, acquired early before other bidders arrived, gave Mr. Davis a clear competitive advantage over other Falconbridge suitors.
With LionOre, Xstrata Nickel first “locked up” 19 per cent of the company's long-time shareholders, who agreed to tender their shares at the bid price, then launched a formal bid for the whole company.
“That was a good strategy. It shows a good level of confidence in what we're doing. We feel that is a positive indicator to other shareholders,” Mr. Pearce said.
“These are experienced people in the business and we think it sends a good message to the rest of the community that we've made a good offer. If it hadn't been a good offer I don't think they would have tendered,” he said from behind the desk of his modest office which, although located on the city's waterfront, fails to offer the executive a lake view.
Whether or not the tactic will be enough to convince other shareholders to accept the bid remains to be seen. But in his quest to cement the company's position as the world's fourth largest nickel producer, Mr. Pearce believes that Xstrata Nickel needs exposure to the regions where LionOre's operations are.
“One of the elements is the geographical opportunities in Africa and Australasia. We don't have operations there and those areas are part of the global nickel play. We see that as important,” he said.
For example, LionOre management in Australia can help with the company's Koniambo development project in New Caledonia, while African executives will assist bringing along Xstrata's Kabanga nickel deposit in Tanzania, a 50/50 joint venture with Barrick Gold Corp. LionOre's “Activox” technology, a process which uses water to leach nickel from the mined ore, could possibly be deployed at the isolated Kabanga deposit, Mr. Pearce said.
As for how the proposed LionOre purchase will be funded, Mr. Pearce struck a second deal this week that will net the company a one-time payment of $500-million (U.S.) for its pipeline of inventory to metals trader Glencore International AG (which just happens to own 35 per cent of Xstrata PLC). Under the agreement, Glencore will become the sole marketing and sales agent for the company's nickel, cobalt and ferronickel.
“We're a producer and a mining company and we wanted to focus our management time on that,” Mr. Pearce said, adding that while the two transactions were not meant to occur so close together, “they've come together nicely.”
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