/ 3 July 2006

$40bn creates a nickel and copper giant

United States mining company Phelps Dodge sealed a $40-billion deal last week that will create the world’s largest nickel producer and the leading publicly quoted supplier of copper.

The agreement is part of a frantic scramble for mining companies as the price of commodities is driven higher by the red-hot Chinese economy and its demand for raw materials. The price of nickel alone has doubled in the past three years — the most sustained bull run in decades — although it has fallen back from its peak over the past month.

Phelps Dodge, which is based in Phoenix, Arizona, said it had agreed to buy two Canadian companies: Inco and another business that Inco was already in the process of buying, Falconbridge. The three will have a combined market capitalisation of $56-billion.

If the deal wins approval, the combined company, called Phelps Dodge Inco, will operate in 40 countries and employ about 40 000 people. Phelps Dodge CE Steven Whisler said: ”We’re extremely excited about the powerhouse we’re creating. We have the chance to step up to the big leagues.”

The companies forecast annual cost savings of $900million a year from the combination. It will also have positions in other metals, including cobalt and molybdenum. Although it is the largest listed copper producer, the company would still be smaller than China’s state-owned Codelco.

The agreement still needs to be approved by competition authorities in Europe, the US and Canada. Xstrata, which is based in Switzerland, could also still attempt to spoil the party. Xstrata bought a near-20% stake in Falconbridge in August, and last month made a bid for the other 80% at C$52,50 a share. Phelps Dodge’s bid allows Inco to lift its offer for Falconbridge to C$62,11 a share.

Phelps Dodge said the Inco deal was not contingent on it completing the Falconbridge acquisition.

Robin Bhar, a UBS analyst, said consolidation would help to control prices. — Â