e425
Filed by Inco Limited
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Falconbridge Limited
Commission File No. 1-11284
Inco Limited Commission File No. 1-1143
Important Legal Information
This
communication may be deemed to be solicitation material in respect of Incos proposed
combination with Falconbridge. Inco filed with the U.S. Securities and Exchange Commission (the
SEC), on October 24, 2005 and July 14, 2006, registration statements on Form F-8, which include
Incos offer and take-over bid circular, and has filed amendments thereto, which include notices of
extension and variation, and will file further amendments thereto as required, in connection with
the proposed combination with Falconbridge. The offer and take-over bid circular and the notices
of variation and extension have been sent to shareholders of Falconbridge Limited. Inco has also
filed, and will file (if required), other documents with the SEC in connection with the proposed
combination. Falconbridge has filed a Schedule 14D-9F in connection with Incos offer and has
filed, and will file (if required), amendments thereto and other documents regarding the proposed
combination, in each case with the SEC.
INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION STATEMENTS AND ANY OTHER RELEVANT
DOCUMENTS FILED OR THAT WILL BE FILED WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL
CONTAIN IMPORTANT INFORMATION.
INVESTORS AND SECURITYHOLDERS ARE URGED TO READ INCOS SOLICITATION/RECOMMENDATION STATEMENT ON
SCHEDULE 14D-9 THAT INCO FILED WITH THE SEC ON MAY 31, 2006, AND ANY AMENDMENTS INCO MAY FILE
THERETO, AS IT CONTAINS, AND SUCH AMENDMENTS, IF ANY, WILL CONTAIN, IMPORTANT INFORMATION REGARDING
TECK COMINCOS PROPOSED COMBINATION WITH INCO.
This
communication is not a solicitation of a proxy from any security holder of Inco or Phelps Dodge
in respect of Incos proposed combination with Phelps Dodge. Inco intends to file a Management
Information Circular regarding the proposed combination with the securities commissions or
equivalent regulatory authorities in Canada and to provide the Management Information Circular to
Inco shareholders and Phelps Dodge has filed a preliminary Proxy Statement on Schedule 14A
regarding the proposed combination with the SEC. WE URGE INVESTORS TO CAREFULLY READ THE
MANAGEMENT INFORMATION CIRCULAR, AND ANY AMENDMENTS INCO MAY FILE THERETO, WHEN IT BECOMES
AVAILABLE BECAUSE IT, AND ANY SUCH AMENDMENTS, IF ANY, WILL CONTAIN IMPORTANT INFORMATION ABOUT
INCO, PHELPS DODGE AND THE PROPOSED COMBINATION. WE URGE INVESTORS TO CAREFULLY READ THE PROXY
STATEMENT, AND ANY AMENDMENTS PHELPS DODGE MAY FILE THERETO, BECAUSE IT AND SUCH AMENDMENTS, IF
ANY, WILL CONTAIN IMPORTANT INFORMATION ABOUT INCO, PHELPS DODGE AND INCOS PROPOSED COMBINATION
WITH PHELPS DODGE.
Inco, Phelps Dodge and their executive officers and directors may be deemed to be participants in
the solicitation of proxies from Inco and Phelps Dodge security holders in favor of Incos proposed
combination with Phelps Dodge. Information regarding the security ownership and other interests of
Incos and Phelps Dodges executive officers and directors will be included in the Management
Information Circular and Proxy Statement, respectively.
Investors and security holders may obtain copies of the offer and take-over bid circular, the
notices of variation and extension, the registration statements, the Solicitation/Recommendation
Statement and Incos, Falconbridges and Phelps Dodges other public filings made from time to time
by Inco, Falconbridge and Phelps Dodge with the Canadian Securities Regulators, at www.sedar.com,
and with the SEC at the SECs web site, www.sec.gov, free of
charge. The proxy statement may also be obtained free of charge at
www.sec.gov and the Management Information
Circular (when it becomes available) may also be obtained free of charge at www.sedar.com. In
addition, the offer and take-over circular and the other disclosure documents may be obtained free
of charge by contacting Incos media or investor relations departments.
Page 1
PHELPS
DODGE/INCO/FALCONBRIDGE
TRANSACTION CONFERENCE CALL
Moderator: Steve Whisler
July 17, 2006
9:00 a.m. EDT
Operator: Good day, everyone, and welcome to this Phelps Dodge, Inco and Falconbridge
Transaction conference call.
At this time, all participants are in a listen-only mode. Later, we will conduct a
question and answer session. If you wish to ask a question during the
question and answer
session, please press star followed by the digit one on your touch-tone telephone. As a
reminder, todays call is being recorded.
Now I would like to turn the call over to your host, Mr. Stan Rideout, Vice President
and Treasurer of Phelps Dodge Corporation. Please go ahead, sir.
Stan Rideout: Good morning and welcome to everyone on todays call. Were here today to
discuss the enhanced offers for Inco and Falconbridge as our three companies combine to create
North Americas pre-eminent mining and metals company, Phelps Dodge Inco.
First, let me remind you that todays discussion includes a number of forward-looking
statements. In addition, its important to keep in mind the cautionary statements on the
use of supplemental data. And finally, all references are to U.S. dollars unless otherwise
noted as being in Canadian
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dollars. Additional information can be found on www.phelpsdodgeinco.com,
www.phelpsdodge.com, www.inco.com and www.falconbridge.com.
With that, let me turn the floor over to Steve Whisler, Chairman and CEO of Phelps
Dodge Corporation.
Steve Whisler: Thank you, Stan, and good morning, ladies and gentlemen, and I thank you for your
interest in this call this morning.
And the purpose of our call is to detail the terms of Phelps Dodges enhanced offer for
Inco, Incos enhanced offer for Falconbridge, and Falconbridges announced special dividend
to its shareholders.
With
me on the call this morning are Ramey Peru, our CFO and Art Miele, Senior Vice
President of Marketing here in Phoenix; and in Toronto, Scott Hand, Chairman and CEO of Inco
and his team; as well as Derek Pannell, CEO of Falconbridge and his team. Derek, Scott and
I each will make some brief introductory comments and then we will open the lines to
questions from analysts.
As we outlined in our June 23rd call, each of us has seized an opportunity to combine
three very good companies into one great company, a company that will
be a North American-based power house in the mining history. The new Phelps Dodge Inco will have exceptional
positions in copper and nickel, long-lived world class assets in low risk very stable parts
of the world, $900 million in expected annual synergies by 2008, a pipeline of exciting
growth projects coupled with improved capital allocation and
efficiency versus what each of
us could do independently pursuing growth opportunities. Well have a balance sheet that
will permit appropriate risk management as this industry evolves in the coming years and a
capital structure that should
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provide greater and more consistent returns to shareholders. In sum, we believe it will be
a must-have equity for North American investors wanting exposure to copper and nickel.
The three of us are absolutely committed to the success of this transaction. We
believe it is in the long-term best interest of all of our shareholders and offers the
greatest opportunity for long-term value creation. In keeping with that belief and our
determination to succeed, Phelps Dodge has agreed to increase the cash component of its
offer to Inco from Canadian $17.50 per share to Canadian $20.25 per share, an increase in
cash consideration of Canadian $2.75 per Inco share. The exchange ratio will remain
unchanged at 0.672 Phelps Dodge share for each Inco share.
At the same time, Inco has agreed to increase the cash component of its offer for
Falconbridge from Canadian $17.50 to $18.50 per share, an increase of Canadian $1 per
Falconbridge share. The exchange ratio will remain unchanged at 0.55676 Inco share for
each Falconbridge share.
Based on the Friday closing price of Phelps Dodge shares and the Federal Reserve U.S.
dollar to Canadian dollar exchange rate, our new offer for Inco is valued at $80.70 per
share Canadian. And Incos offer for Falconbridge has an implied value of Canadian $63.43
per share. Combined, these two moves represent an increase in the value of Incos offer for
Falconbridge of Canadian $2.53 per Falconbridge share. In addition, Falconbridge in
a move which enhances the immediate return to their shareholders, has announced a Canadian
75 cent special dividend to their shareholders.
The implied value of Incos new offer for Falconbridge represents a premium of 7.5
percent to the most recent Xstrata offer of Canadian $50, $59 rather, per share, which was
made prior to Falconbridges announced special dividend.
Inco has agreed to lower the minimum condition on its offer for Falconbridge in terms
of take up from two-thirds to 50.01 percent of the Falconbridge shares. Phelps Dodge has
agreed to a
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similar change in its combination agreement with Inco. We believe Incos enhanced offer to
Falconbridge is therefore clearly superior to Xstratas offer. Importantly, the Inco offer
is the only offer which allows Falconbridge shareholders the additional opportunity to own a
significant stake in the combined company and benefit from the $900 million of annual
synergies anticipated in the three-way combination with Phelps Dodge. Im sure Derek is
going to speak to this as well, but Falconbridges board has reaffirmed its support for and
recommendation of the Inco offer.
Before I ask Scott and Derek to make some comments, Id like to make just a couple of
more background comments. Weve had approximately three additional weeks of work since our
June 26th announcement. Within these three weeks, weve had the opportunity to spend
additional time at the operations of each of Inco and Falconbridge. The additional work has
allowed us to confirm our view on the financial attractiveness of this combination. We
frankly are even more confident about our views on synergies, about our understanding of the
operating plans for Inco and Falconbridge, and for our strategy to drive superior financial
performance than we were when we announced this transaction some three weeks ago.
One of the reasons that were able to make this enhancement is that each of us is
benefiting from continued market strength in the copper and nickel markets. Since our
announcement, the price of copper has increased approximately 22 percent and nickel, more
than 43 percent. Market fundamentals for both copper and nickel continue to be very strong,
especially during the next 12 to 18 months.
Given an updated financial analysis encompassing the work we have done in the past
three weeks, we continue to expect a three-way transaction to be immediately and
meaningfully accretive to Phelps Dodge cash flow and accretive to GAAP earnings per share in
2008.
While Phelps Dodge Incos total debt will increase by approximately $1.67 billion as a
result of the increased cash bids and the special dividend, again, just to remind everyone,
on the basis of
Page 5
our base case price assumptions, we expect to have a Phelps Dodge Inco debt to cap ratio of
around 30 to 35 percent and a net debt to cap ratio of between 20 and 25 percent by year-end
2007, just 15 months after our expected closing.
We are committed to maintaining an investment-grade credit rating. We will continue to
provide information to the rating agencies and believe they will reaffirm that rating after
analyzing our improved offer.
Lastly, all three management teams have had the opportunity to spend time with
shareholders in the past three weeks to discuss the merits of the proposed transaction.
Ill obviously let Scott and Derek speak for their shareholders. But with respect to ours,
to be frank, our move caught many of our shareholders off guard. It was unexpected, it was
big and bold, and it was complex.
As we explained to our shareholders, we cannot drive the timing of when world class
assets such as Inco and Falconbridge become available as potential combination partners. In
this case, our management and board felt the critical need to act opportunistically and
quickly to create tremendous potential long-term value for our shareholders.
Weve now had the opportunity to spend time with many of our major shareholders. Weve
also been able to publicly disclose more information about our financial analysis that
supports the transaction.
Given the additional time, and based upon these conversations and the feedback were
receiving, its clear many of our longer-term investors understand both the financial and
strategic rationales of the transaction, and recognize its significant possibilities.
With that, let me close and Ill now turn the podium over to Scott, to speak to the
transaction from Incos perspective. Scott.
Page 6
Scott Hand: Thanks, Steve. I want to add my full support to what Steve has just said. We are
putting forward a very competitive and superior offer to the Falconbridge shareholders. We
are ready, were able and were willing to complete the offer by July 27th, a pivotal date,
and we have reduced the minimum tender condition from 66-and-two-thirds percent to 50.01
percent. We intend to succeed, and this offer should do it.
We are very encouraged by the support that Phelps has shown with their increased offer
for Inco. This shows their real commitment to the vision of the new Phelps Dodge Inco,
which I completely share and their commitment, which I also share, to take this over the
finish line. We think the decision by the Falconbridge board to declare the special
dividend of 75 cents per share makes sense, given the great cash flows being generated by
Falconbridge. Our financial models which we have used did not include the approximate U.S.
$240 million, which will be paid out as a special dividend.
With the Canadian $1 increase in the cash portion of our offer, the acquisition of
Falconbridge remains accretive for book and cash earnings based on consensus estimates for
2006 and 2007. And NAV accretive based on our internal and very reasonable longer term
estimates of metals prices. So this offer for Falconbridge makes sense from a financial
point of view.
As Ive said before and I will say it again, we are creating a great nickel copper
company. I believe that I have been very consistent and I will continue to be so. Nickel
and copper are the best metals or materials around, which we can have as part of our
business. They are great today. And I believe that they have best prospects going forward.
Nickel was at $13.54 a pound this morning, and copper stands at $3.64 a pound. Supply will
chase demand for some time to come in both metals. Taking cancelled warrants to take nickel
off the London Metal Exchange, remaining LME inventories for nickel represent less than one
day of world consumption. You have heard our market guru, Peter
Goudie, forecast the nickel
market for a number of years.
Page 7
Some said we were too optimistic. But Peter and his crew have been right every time, and
Peter has been very clear where nickel is going over the next few years.
I always say be in the metals or materials that China needs and does not have enough
of. Among very few others, nickel and copper are and will continue to be in that category.
So the new Phelps Dodge Inco will be a great nickel copper company with a great presence in
North America, a stronger position, I believe, in North America than any other mining and
metals company in the world and with strong positions elsewhere around the world, and
particularly in the fast growing regions of Asia, a great list of growth projects and a
major position on the North American stock market. Thus shareholders can participate in the
short term with the very compelling offers that are on the table in the medium and longer term
by investing in one of the best mining and metals companies in the industry. And in all due
respect to Xstrata, their cash offer does not meet the mark in either case.
I also want to say that the new Phelps Dodge Inco makes sense for Canada and the
communities where we operate when compared to the alternatives. The new Phelps Dodge Inco
will get the great synergies by combining the Sudbury basin and the other synergies in
Canada, and this will benefit the people and all of the communities where we and
Falconbridge operate today. It will solidify Canadas position as the world leader in
nickel for years to come. The new PDI will have a strong position in Toronto where the
nickel division will be located with a critical mass of managerial, marketing and technical
people, supporting a major worldwide network in nickel, aluminum and zinc, which both Inco
and Falconbridge will bring to the table. The other alternatives will not deliver this.
So we have a winning deal here today for the shareholders of all three companies, and a
winning deal for our people, and for the communities where we operate in Canada. Thank you
very much and Ill turn it over Derek.
Page 8
Derek Pannell: Thank you, Scott and good morning, ladies and gentlemen. I will not repeat the
justification for the transactions that have all ready been put forward by Steve and Scott but
suffice it to say we are united in our enthusiasm for the advantages that these transactions
bring to the shareholders of all three companies.
With the improvements now on the table, Falconbridge shareholders have a proposal
before them, incorporating Canadian $18.50 in cash, with a 75 cent Canadian dividend and
Canadian $41.70 in shares at Fridays closing prices, giving a total value of $60.95
Canadian. The improvements offered by Phelps Dodge to Inco and looking through both
transactions on a similar basis, represent a value of Canadian $64.20 to Falconbridge
shareholders. The simple arithmetic of the transactions clearly adds up to a compelling
and superior offer for Falconbridge shareholders.
I believe, however, that beyond this, the true value of the Inco and Phelps Dodge offer
lies in the opportunity afforded Falconbridge shareholders to participate in the leading
North American metals mining company, and the synergies associated with this combination.
The fundamentals supporting metal prices remain stronger than ever, as evidenced by
decreasing inventories and increasing metal prices for our primary metals, copper and
nickel. The ability of the new company to generate cash into earnings has already been
demonstrated by the results of the first quarter, and by Falconbridges release of its April
results. Based on these results, and the continuing strong copper and nickel prices it
seems to me that the equity components of the offer I mentioned before are significantly
understated. Thus, taking into account the combination of superior value, the reduction in
the minimum tender from two-thirds to 50.01 percent and the removal of all regulatory
hurdles, we have, together, created the conditions to complete a very successful
transaction.
Ill now hand the call back to Steve Whisler, Phelps Dodge. Steve.
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Steve Whisler: Thank you, Derek. That concludes our prepared remarks. Operator, well open up
the lines for questions.
Operator: Thank you. Ladies and gentlemen, at this time, we will begin our question and answer
session. If you wish to ask a question, please press star one on your touch-tone telephone.
Please keep in mind, that if you have been using a speakerphone, make sure your mute function
has been released to allow the signal to reach our equipment. Once again if you have a
question, star one. You can give us a moment to assemble our roster.
And well take our first question from Kerry Smith, Haywood Securities.
Kerry Smith: Good morning, thanks, Operator. Steve, I have a question, you have an interesting
slide in the presentation thats pro forma financial base case, where youve given some metal
price assumptions through 08. And can I assume that the bid is based on this base case price
estimate?
Steve Whisler: Yes, sir, it is. We have not changed any of our assumptions underlying the
financial analysis.
Kerry Smith: OK. Thats, great. Thank you.
Operator:
Thank you. And well now take our next question.
Steve Whisler: Operator, next question?
Operator: One moment, please. And our next question will come from David Gagliano, Credit Suisse.
Page 10
David Gagliano: Thanks. I just wanted to ask a quick question on the synergies here. I believe
under the revised terms, PD shareholders could potentially be voting on the Inco merger before
the outcome of PD, before the outcome of Incos bid for Falconbridge is known. Hence, Im
wondering what your targeted synergies are if Falconbridge is not part of the proposed Phelps
Dodge Inco merger?
Steve Whisler: Well David, we have focused all of our the bulk of our efforts, anyway, on
identifying synergies in the three-way. Were committed to that. We think thats where the
greatest power is, in terms of creating the kind of company that Derek, Scott and I have
outlined. I think that obviously theres opportunities in terms of a two-way situation if,
that in fact, is what evolves from the facts. But right now, the facts are that we have an
agreed to three-way that all three of us are determined to pursue with absolute determination.
If those facts change, then well obviously go back and look at some things and were quite
comfortable with where well end up.
David Gagliano: OK. Fair enough. Thanks.
Operator: And we will now take our next question from John Tumazos, from Prudential.
John Tumazos: Thank you very much. A couple of questions. On page 42 of the proxy, it indicates
that PDs due diligence was of Inco visiting facilities in Canada, Indonesia, New Caledonia
and elsewhere. Could you please describe the locations of Falconbridge, which you visited?
Second question: In your remarks, Steve, you indicated your long-term shareholders
understand the rationale of the transaction. I guess Im thinking of the Weyerhaeuser
annual report for this past year, where they invoked the name of Frederick Weyerhaeuser in
1900 planting trees for his grandchildren. What do you think is the right time horizon for
your shareholders to look at the Company? You distinguish between long-term. Some peoples
long-term is longer than others.
Page 11
Steve Whisler: Right. Let me try and take both questions. And Ill take them in the order that
you asked them, John. First, with respect to the Falconbridge assets and due diligence, given
the location of the Collahuasi and Antamina properties, we visited those properties frankly on
a regular basis, as they do our properties. Everybody is always looking for good ideas and
the opportunity to improve their mines so frankly we know those properties very, very well.
We visited a number of other Falconbridge properties in Canada. I was not part of the due
diligence team so I cant recite them off the top of my head, but we also spent a lot of time
in the Falconbridge data room, which frankly they did a very good job of pulling all the
information together.
Its fair to say I think that we focused on copper and nickel and we particularly
focused on the Sudbury region, wherein Falconbridge also has substantial assets. So we are
quite comfortable with what we did in terms of due diligence and our knowledge level and
base of the Falconbridge assets.
With respect to your second question, you know, the reality of this industry is that
managements and boards have to make decisions that frankly impact not only the next quarter,
the next year, but several years down the road, as well as several decades, and the kind of
high quality long-lived assets that we are talking about here are just exactly those kinds
of asset, that have productive lives of several decades.
One of the challenges in this industry has always been how do you appropriately value,
both from a company standpoint, in the sense of how we look at projects internally, but its
also been true for investors. And frankly, everybody struggles with that. When we step
back and apply judgment, we certainly understand that high-quality, meaning high-grade
reserves, that are going to produce in year 10, 15, 20, 25, 30 on out, have significant
value.
Again, when I step back and look at this transaction, and look at the economics as
weve modeled them and as we see the copper and nickel markets out over the next 18 months,
you
Page 12
know, this company generates a tremendous amount of cash. It gets very, very healthy very
quickly and then has all of that opportunity in front of it, including probably the most
exciting pipeline of growth projects in this industry, certainly in copper and nickel. So
how do we value it? You know, we have to look out, in terms of you know, in the five to 15
year range and make appropriate decisions and judgments.
OK, next question operator?
Operator: Yes sir, in the next question will come from Gary Lampard, with Canaccord.
Gary Lampard: Yes, thank you. Under the metals price assumptions youve already outlined, the
deal is immediately cash flow accretive and earnings accretive from 2008. Would the same be
true if Phelps Dodge ended up just buying Inco and not Falconbridge?
Steve Whisler: Yes, it would, although as we have indicated in our proxy materials it is not as
powerful from an accretion standpoint as the three-way, but again, to my earlier response, in
terms of we have not noticed as much effort on identifying potential synergies between Phelps
Dodge and Inco as we have in terms of identifying potential opportunities in a three-way.
Gary Lampard: OK, thats great, thank you.
Operator: And as a reminder if you would like to ask a question, you may do so by pressing the
star key followed by the digit one. And we will now take a question from David Binns with
Seminole Capital.
David Binns: Yes, I was just wondering if shareholders for Phelps Dodge decide not to vote for
the deal, whether Phelps Dodge still has to pay the penalty to Inco?
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Steve Whisler: Well, we are absolutely convinced that shareholders are going to support this
transaction, and thats certainly the indications that I have received from the shareholders
that Ive spoken to. They are frankly longer-term and longer-term folks. In the event that
Phelps Dodge shareholders did not approve this transaction, there would be a breakup fee
thats up to approximately $125 million, as I understand it.
Operator: Anything further?
David Binns: No.
Steve Whisler: Operator, next question please.
Operator: Yes sir. And we will take the next question from Anthony Rizzuto, from Bear Stearns.
Anthony
Rizzuto: Gentlemen. I just want to ask a question regarding a number of things. First of
all, we see that Chinese copper imports are down by 40 percent in the first six months. Weve got a
lot of concerns out there when we talk to people, users of copper about demand elasticity and
we are hearing of some substitution going on in plumbing and HVAC markets. There is probably
less uncertainty about the macroeconomic environment today than there was maybe three or four
months ago in the outlook. Im sure you guys have looked at this combination running a stress
scenario, or worst-case scenario, but I was wondering if you could indicate what kind of
pricing for copper and nickel that you may have used in this scenario and how did the
combination, the combined entity, look on that basis?
Steve Whisler: Tony, you know Phelps Dodge well and you can be assured that we have obviously
looked at what we think are very realistic downside cases and stress tests, everything that we
are doing. For obvious competitive reasons Im not going to get into that, but I think
suffice it to say that we are comfortable with what we could be looking at in the way of a
downside. I think more
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importantly though is its important to focus on what we really see as the picture for
copper and for nickel over the next 12, 15, 18 months, because thats really what is key to
this transaction. And, Art, maybe you would like to just make some comments in terms of the
copper market and then Ill defer to my colleagues, Scott and Derek, on nickel.
Art Miele: Good morning Tony.
Anthony Rizzuto: Hi Art, how are you?
Art Miele: Good, good. Lets start with the first comment you made regarding China. It is true
that imports of cathode are down, but I think its important to understand that there has been
some significant well, let me first start. Growth in China is very strong. The IP numbers
are around 17 percent. Tomorrow, China will release their second quarter. The estimates around are
a minimum of 9.7 percent growth in GDP, and theres talk of
being well above 10.5 percent, maybe even 11 percent.
There is no doubt that the Chinese economy continues to be very strong and copper
consumption through the system is strong, but imports are down and there are number of
factors related to that. There has been a significant amount of copper released by the SRB.
Part of it has gone to the LME exchanges in Korea, but part of it has gone directly into
the market, and this would be cathode or cathode of a sort. And I say cathode of a sort
because they are also releasing material that they bought in the 1970s and 80s that are in
their state-owned companies.
And I visited China for the first time in 1983 and I suspect some of that material I
saw in 1983 is being released to the market now. The other thing thats going on is similar
to what happened with stainless steel and steel in second half of last year. Theres a
general de-stocking in the market in China in this first half. And as you saw with steel
and nickel, once that de-stocking is over there is once again a very strong requirement
for the underlying materials, and we think that will happen with China, as well. So we see
China continuing very, very strong.
Page 15
With regard to overall macro elsewhere, in just about every market, whether its the
U.S., Europe, Japan, and other developing countries, the market is out-performing our
expectations for the first half and we expect that the market will be, at a minimum, in line
with our expectations for the year more likely above that. And we had forecast about
four percent. I suspect it will be closer to five percent by the time the year is over.
With regard to substitution, weve talked about that. There is clearly some
substitution taking place. The easier substitution related to some
applications in copper-aluminum have taken place and have been taking place over the past year and there is some
substitution in plumbing. But a great deal of this takes a long time to change and we have
not seen significant changes, and I think overall the consumption that weve seen in the
first half substantiates that.
Scott, you want to make a couple of comments about the nickel market as you see it?
Scott Hand: Sure. Unfortunately, Peter Goudie couldnt be here this morning, but I did speak to
him and what hes saying is as hes said before, as we said a couple of weeks ago, nickel
demand remains very strong around the world. Therell be a deficit this year. The price over
$13 reflects that. Peter and I have never seen a tighter nickel market than were seeing
today in all parts of the world. Weve talked a lot about substitution. It is harder to
substitute nickel than it is other metals because of the need for
corrosion- and heat-resistance. The only area that were seeing a little bit of weakness, and its probably more
adjustment than anything else, is in the plating area in China. But you see it every time
when the when the when the nickel price reaches a new plateau as people get used to the
higher prices. Our view is very strong remains strong is that the nickel market is
tight is as tight as weve ever seen it and will continue to be so for a number of years.
Page 16
Derek Pannell: Id like to add something. I think the main facts that are relevant to this
transaction are that by combining these three companies, you reduce the cash costs the C1
cash costs as a result of all the synergies. For example, Falconbridges cash costs have
recently the C1 cash costs have been recently in the 30 cent range. And by bringing
together the copper assets of Phelps Dodge in regions two and three of Chile, for example, El
Abra and Candelaria with the assets that we have in region two and three, El Moro, for
example and the Altonorte smelter and Lomas Bayas, you reduce the cash costs. So that while I
agree with what everybody else has said, that the costs or the prices are unlikely to be
reduced in the short term, they probably will be in the long term, and the best the best
defense is to have extremely low cash costs. By combining these companies and getting the
synergies, you achieve that.
On the nickel side, exactly the same thing is the case. By combining Inco and
Falconbridges assets in Sudbury, were actually able to produce an additional 30,000 tons
of nickel with virtually no or very little capital costs. This, again, will reduce the cash
costs of nickel and make us one of the lowest, if not the lowest, cash-cost producer of
nickel in the world. Those are the things that will put us in a good position when
eventually prices do are reduced.
Steve Whisler: All right, gentlemen. Thank you.
Steve Whisler: Operator, next question, please?
Operator: Yes, and well take the next question from Orest (inaudible) excuse me Wowkodaw
with Canaccord Capital. Sorry about that, sir.
Orest Wowkodaw: No problem. Thanks and good morning. Based on the timeline of Falconbridges
poison pill expiring on the 28th of July, are we to assume that todays offer represents your
best and final offer for Falconbridge?
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Steve Whisler: Scott, do you want to respond to that?
Scott Hand: Id say this is a hell of a good offer. People should be tendering on the 27th.
Dont wait for the 28th, since there are risks involved in waiting beyond that. This is one
hell of an offer. Youve heard all the reasons why, both short-term and long-term. I would
urge the Falconbridge shareholders to get on the bandwagon and move on.
Steve Whisler: I would fully support that. Operator, next question?
Operator: And well take our final question from Brian MacArthur, UBS.
Brian MacArthur: Good morning, gentlemen. Two quick questions first of all, can you just
discuss the moly prices you used for the next few years and your accretion dilution and just a
general outlook there? And secondly, I know, Steve, were focusing more on the three-way and
obviously that would be a powerful entity, but youve also in the prospectus laid out the
two-way combination between Phelps and Inco, and there you talk about synergies of $215
million, I believe. If you could just and youve sort of talked, but you havent focused a
lot on that. So if youd just elaborate a little bit on how the $215 million was arrived at.
Steve Whisler: Yes, I will, Brian. First, we have not disclosed the moly price assumptions that
weve used. The moly market is much different than copper and nickel in terms of the way its
priced and theres some very, very key competitive reasons for why we have not. I think I
will leave it with you with this, that you can expect that weve taken a similar haircut to
moly price assumptions in from a trend standpoint and you can you can draw your own
conclusions from that.
With respect to the second question, clearly the bulk of our of our focus in terms
of identifying synergies and the like has centered around confirming and verifying the
Sudbury situation. As I
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indicated to you, we are extremely confident that if we put additional effort and focus into
a Phelps Dodge/Inco-only combination, that the $215 million thats identified in the proxy
would increase and increase substantially. We have focused on the three-way. As weve
indicated to you, we think thats where the real combination or the real power of this
combination is, and frankly, thats what were all three determined to get to.
So, thats about the best I can answer that and, you know, if facts change for whatever
reason, then well make appropriate adjustments. But right now, were focused on getting
the three-way accomplished. We think, as Scott has indicated, that we have an extremely
attractive and compelling offer on the table and we have every confidence that were going
to get there.
OK, operator, that I understand was the last question. Let me just close by making a
couple of comments with respect to this new company and, frankly, the transaction that were
talking about. And Im not going to repeat again all of the reasons why we think this is an
extremely powerful combination. We talked a little bit about the long-term aspects, but I
think its important that everybody understand and keep focused on using fairly conservative
price assumptions for the next 15 months to 18 months, which is really the best window that
we have on the marketplace, and I know that Scott, Derek, and their teams feel that same way
in that we have a pretty good window into where we see the markets in that period of time.
Using that price deck, this transaction, from a Phelps Dodge shareholder perspective,
is immediately accretive from a cash-flow-per-share standpoint and fairly large numbers
you know, well into the 30 plus percent or north of there. Its earnings per share
accretive in the second year. So, its very hard to find these kinds of transactions that
have this power from an economic standpoint, and thats frankly one of the reasons why we
are so attracted to this and so committed to getting it done.
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The company that we create from all of this is going to be a literally a powerhouse
in an industry that, frankly, is rapidly changing. And so were committed to it. As I
said, its the economics are powerful on the short-term basis. From a long-term
perspective unbelievable asset base, and were excited about it. So, I appreciate very
much all of your interest. On behalf of Derek and Scott, I want to thank you for attending,
and we look forward to seeing more of you in the coming weeks. Thank you very much.
Operator: Ladies and gentlemen, that does conclude todays conference for today. A replay of this
call will be available on www.phelpsdodgeinco.com that was www.phelpsdodgeinco.com at
approximately twelve noon Eastern today. Thank you for your participation and you may now
disconnect.
END