The great Canadian mining non-disaster – foreign acquisition turns out OK
The great Canadian mining non-disaster
Sudbury’s experience of high wages and continued prosperity should quell fears about foreign acquisitions of Canadian mining assets
SUDBURY, ONT. The Globe and Mail Last updated: Friday, Nov. 04, 2016 6:22PM EDT
A couple of dozen men in hard hats and orange coveralls are gathered in a brightly lit, mud-splattered room, chatting about the type of topics we all chat about at work – the Leafs’ prospects, a daughter’s coming wedding, a deer someone saw on the drive in.
What makes these men different from pampered folks like you and me is that they are getting ready to drop more than half a mile into the earth. Once underground at Vale SA’s Totten Mine in Sudbury, Ont., they will operate giant scoops and haulers in dim, sweltering tunnels that have the capacity to kill the unwary or the unlucky.
“We’re lucky here because the depth and the ground conditions are pretty favourable for less seismic activity,” mine manager Gilbert Lamarche says nonchalantly as we prepare for the “cage,” or elevator, that will take us down to working depth. “But in other mines, the ground conditions are a much bigger factor.”
It’s a thought that tends to linger in the mind as men crowd into the narrow metal cage, the door rattles shut and we descend into the darkness at 1,700 feet a minute. Whatever else a mine may be, it’s fundamentally an operation rooted deep in a specific piece of the earth – which may be why the mines around Sudbury have become a powerful symbol for the territorial battle between local allegiances and global businesses.
Tempers flared ten years ago when two of Canada’s best-known companies, Inco Ltd. and Falconbridge Ltd., disappeared into the arms of foreign acquirers. The nickel miners had operated in the Sudbury Basin for generations. Many Canadians believed that allowing outside buyers to acquire the national icons was a colossal error on Ottawa’s part.
This newspaper billed the takeovers as “the great Canadian mining disaster.” Nickel prices were soaring at the time and it seemed clear that Canada’s resource industry was selling prized assets for a fraction of their true worth. “How did [the foreign acquirers] hijack one of Canada’s best hopes for a global corporate champion?” the story asked.
It put much of the blame on inept leadership at Inco and Falconbridge. The leaders of the two firms fumbled an opportunity to merge and simply weren’t up to the task of fending off “a new breed of 21st-century raiders,” according to the narrative. Sure, shareholders and executives at Inco and Falconbridge did well by the deal, but Canada “lost control of massive mineral deposits, including Canada’s crown mineral jewel, the Sudbury Basin.”
A decade later, much of the rhetoric from 2006 seems distinctly dated. Vale, the Brazilian giant that acquired Inco, got off to a rocky start, culminating in a year-long strike in 2009-2010. These days, however, it has rebuilt a decent relationship with the United Steelworkers union and earns praise from locals for its generous contributions to community causes. Glencore PLC, the Anglo-Swiss commodity empire that wound up as the eventual owner of the former Falconbridge, garners similar plaudits.
Nickel prices, contrary to expectations in 2006, did not keep on rising. Instead, the metal has toppled from more than $20,000 (U.S.) a tonne at the time of the takeovers to less than $10,000 now. Rather than revelling in a never-ending commodity supercycle, both of the foreign acquirers have seen their share prices shrivel as base-metals markets in general have taken it on the chin.
The Sudbury experience sheds light upon an important national debate: How much of Canada’s resource wealth should outsiders be allowed to own? It’s an argument that explodes into prominence every few years, whenever a foreign firm makes eyes at a prominent Canadian resource company. The business in question may be Sudbury nickel or Saskatchewan potash or Alberta oil, but the fundamental issue remains the same.
The progress of post-takeover Sudbury demonstrates that foreign ownership doesn’t translate into impoverished communities or blighted opportunities for Canadians. The city’s continued prosperity underlines a simple but often overlooked fact: Unlike factories or stores, resources in the ground can’t be moved. How much of that resource wealth winds up flowing into the pockets of Canadian households is ultimately more about government policy, union negotiations and local entrepreneurship than about where a head office is located.
“There is no valid economic reason for barring foreign companies from acquiring local companies, in the resource sector or anywhere elsewhere,” says Walid Hejazi, an associate professor of international business at the Rotman School of Management at the University of Toronto.
That is not to say that Canada should simply throw open its doors to any foreign acquirer on any terms. But 10 years after what was supposed to be the great Canadian mining disaster, Sudbury is doing just fine. The local mining-service industry has shifted gears and is prospering in new ways. In fact, it’s the foreign acquirers – that supposedly scary “new breed of 21st-century raiders” – that appear to be feeling the greatest pain.
It’s easy to find people who will rhapsodize about what might have been if Inco and Falconbridge had joined forces and repelled the foreigner invaders. But it’s just as interesting – and ultimately more illuminating – to take a close look at what has actually happened in the wake of the big foreign takeovers. Call it the great Canadian mining non-disaster.
In the mines
Working in a mine is still the hot, dirty, hazardous job it always was. But it’s also a much rarer job than it used to be. In the early 1970s, Inco employed more than 20,000 people in its Sudbury mines. By 2006, when the company was acquired by Vale, that number had shrunk to about 4,500. Today, under Vale’s ownership, the number of both underground and surface workers in Sudbury has fallen further, to about 4,000.
Most of the shrinkage is the result of improved mining technology, bigger equipment and more efficient processes. Despite the vastly reduced work force, Vale’s Sudbury mines produce more nickel today than they did in the 1970s. If you’re looking for the most implacable enemy of the traditional hard-rock miner, the culprit isn’t a foreign acquirer – it’s the automation that has boosted productivity and reduced the need for underground workers.
The Totten mine, which opened in 2014 at a cost of $760-million, features much of the technology that has revolutionized the business in recent decades. Every miner is identified with a radio-frequency identification tag (RFID) that allows the person to be tracked from the surface. A ventilation-on-demand system cuts energy costs by pumping air to exactly where it is needed in the mine, rather than throughout the entire warren of tunnels. A central control room uses more than 40 screens to monitor various aspects of the operation.
The technology boosts safety as well as output. Mr. Lamarche, a young, well spoken engineer, is proud of the fact that Totten has gone more than a thousand days without an injury that has resulted in lost time for a worker. Every shift begins with a talk about the major tasks of the day, an analysis of the accompanying dangers and a discussion about how to mitigate them. “Safety always comes first,” he says.
Even so, hard-rock mining remains a job with lethal potential. Kevin Dutrisac, a shaft-services leader at the Totten mine, is a friendly thirtyish man with a booming voice and forthright opinions. Four years ago, one of his best friends died in an underground accident at another Vale mine in Sudbury.
After the accident, he pondered the possibility of finding a new line of work. His wife is a doctor and she didn’t want him working underground any more. “But I’m not the kind of guy who is just going to sit around the house, twiddling my thumbs,” he says. So instead, he landed his current job, a position that keeps him at the mine, but largely above ground.
What motivates other workers to step into the cage every day? In large part, it’s money. A typical income for a unionized Sudbury miner tops $100,000 a year. The number can soar considerably higher if the miner chooses to work lots of overtime and earns productivity bonuses.
Those six-figure incomes represent the outcome of decades of hard bargaining between the company and the United Steelworkers. Leo Gerard, the Sudbury boy who rose to become president of the international union, says labour relations initially soured when Vale took over in 2006.
“Things went from a constructive, mature relationship to a confrontational relationship,” he growls from his Pittsburgh office. Mr. Gerard blames Roger Agnelli, the former chief executive of Vale, for attempting to push authoritarian, Brazilian-style labour relations on a Sudbury work force full of second- and third-generation miners who were used to being consulted. (The company disagrees with that depiction and says the main issue was the shift from a defined-benefit pension plan to a defined-contribution one.)
The tensions culminated in a nearly year-long strike, the longest in Sudbury history, that ended in the summer of 2010. But labour relations have warmed considerably since then. One reason for the thaw, Mr. Gerard suggests, is that Canadian managers are now running the Sudbury operation and are much better attuned to the local scene.
A sign of the improved relationship came last year when the company and the union agreed on a contract well in advance of the old deal’s expiration. The new contract extends into 2020. By the time it expires, Sudbury will have enjoyed an unprecedented decade of labour peace.
“Vale’s senior managers have come to the conclusion that they cannot just impose their will,” Mr. Gerard asserts. Perhaps so, or perhaps a miserable market for base metals has made both sides more willing to compromise. Whatever the motivation, the union and the foreign acquirers now appear to be living together in rough harmony – and Canadian miners are still drawing big paycheques.
In the markets
One of the striking aspects of the 2006 takeovers were all the developments that no one saw coming.
There was no inkling of the financial crisis that would erupt late the following year, no premonition of the long swoon in base-metal prices that would start in 2011. None of the commentary on the Sudbury takeovers recognized the imminent threat posed by nickel pig iron, a low-cost alternative to the refined nickel traditionally used for making stainless steel.
Nickel prices have ratcheted lower and lower in recent years, in part because of the rise of nickel pig iron in China and in part because of a general deterioration in demand and prices for metals. As a result, it’s hard to argue that Inco and Falconbridge shareholders were taken advantage of by smooth-talking, opportunistic foreigners.
Those who mourn the passing of the Canadian giants may want to consider MMC Norilsk Nickel, the big Russian nickel producer. Its shares are trading today for much the same price in U.S. dollars that they fetched a decade ago – a not-very-impressive performance.
Shares for an independent Inco and Falconbridge would likely have followed a similar course, given the generally miserable market for their primary product. For that matter, they might have followed the path of Vale or Glencore shares, both of which have lost more than a third of their value since 2011 because of the brutal market for raw materials.
Of course, looking at shareholders’ returns may be missing the point. Much of the controversy at the time of the takeovers centred on the notion that a combined Inco-Falconbridge could have formed a national champion.
But would Inco or Falconbridge have taken a substantially different path than Vale or Glencore? It seems unlikely. Ultimately, the development of a mine is based on geology, international metals prices and capital markets, not the location of head office, observers say.
“In spite of all the myths and sentimentality about what might have been, Vale has probably been no better, no worse than Inco would have been,” says Vic Pakalnis, president of Mirarco, a not-for-profit outfit in Sudbury that does applied research into areas such as environmental monitoring and geomechanics.
Nationalists who worry that Canada has lost control of its resources are missing the point, says Prof. Hejazi, the U of T economist. Foreign acquirers still have to abide by Canadian laws, pay Canadian taxes and royalties, and satisfy Canadian priorities.
“Because the assets are in Canada, and in the ground, an acquirer can’t just move them anywhere,” he says. “We can force any owner, domestic or foreign, to behave in a way consistent with Canadian interests.”
One recurring worry is that foreign acquisitions will hollow out Canadian head offices, removing highly paid jobs from this country. But whether that actually happens depends on the commitments that governments extract from foreign buyers.
For instance, Vale agreed at the time of the 2006 acquisition to put the global headquarters for its base-metals operation in Canada. Today, that operation, which reported $6.2-billion (U.S.) in revenue in 2015, is based in Toronto and run by Jennifer Maki, a Canadian born and raised in the Kitchener-Waterloo area.
As executive director, she manages the former Inco assets – not just Sudbury, but also Voisey’s Bay in Labrador and operations in Indonesia, as well as in many other locales around the world. In addition, she oversees Brazilian copper operations that Vale brought to the table, including the giant Salobo mine. In total, her base-metals division accounts for a quarter of Vale’s global revenue.
Ms. Maki says just more than 300 people are employed in the Toronto head office and a research facility in Mississauga. “People can be upset about [the sale of Inco], but from our perspective, we’re proud of what we’ve built,” she says. “We’re a global base-metals business based in Toronto.”
An accountant by training, she joined Inco in 2003, three years before the Vale takeover. She says many of the initiatives associated with the shift to foreign ownership would have happened anyway. One example is the contentious move from a defined-benefit pension plan to a defined-contribution plan, which most observers agree was at the heart of the long 2010 strike.
“I can assure you [the pension change] was on the agenda of Inco … it wasn’t something the Brazilians brought, it was something the business recognized had to be done to ensure long-term success.”
Ms. Maki is a buoyant and forthright personality, but there’s one question she sidesteps – whether Vale would still decide to acquire Inco if it could go back a decade, knowing what it does now about the troubled outlook for nickel prices. “I can’t answer that,” she says.
Vale’s experience has spanned an initial period of soaring nickel prices, followed by several years of declining prices, but it remains committed to Canada for the long term, she says. As proof of that, the company has poured more than $4.3-billion into Sudbury projects since it acquired them.
One of the most intriguing scenarios for those operations will come when nickel prices finally do recover. Murilo Ferreira, Vale’s chief executive, told investors in late 2014 the company was mulling a spinoff of its base-metals division. The resulting company would be listed in Canada, he said, and Vale would retain a majority stake.
As it turned out, the spinoff never happened. “It’s not an option today in this market,” Ms. Maki says. “It’s a challenging market for nickel. The idea is there if prices recover, but it’s not something we’re looking at right now.”
If, at some point, the idea comes back to the forefront, the debate over the great mining takeovers could come full circle. Once again, Canadians would be able to invest in a company focused on this country’s pre-eminent mineral resource. But would that nationalistic appeal resonate? Sudbury’s experience should quell fears about foreign acquirers.
A different environment
A decade ago, as China’s roaring economy created seemingly unending demand for raw materials such as copper, nickel and other metals, the global mining industry got caught up in a whirlwind of takeovers that pushed prices sky high. The frenzy put Canada’s big miners in the heart of the action.
March, 2005: Canadian miners Noranda Inc. and Falconbridge Ltd. agree to combine, after Noranda earlier called off talks about a takeover by China Minmetals Corp.
August, 2005: Swiss mining giant Xstrata PLC pays $2-billion for a 19.9-per-cent stake in Falconbridge.
October, 2005: Nickel giant Inco Ltd. reaches an agreement to acquire its rival Falconbridge Ltd. for $12-billion in an attempt to thwart Xstrata PLC from buying Falconbridge.
May, 2006: Teck Cominco Ltd. bids $17.8-billion for Inco Ltd., setting the stage for a global bidding war for the nickel producer.
May, 2006: Xstrata makes a $16.1-billion hostile cash bid for Falconbridge, topping Inco’s offer.
June, 2006: U.S. copper miner Phelps Dodge Corp. bids $48-billion (U.S.) for Inco and Falconbridge, aiming to create a global “super-major” mining conglomerate.
July, 2006: Xstrata boosts its bid for Falconbridge, valuing the company at $24.1-billion (Canadian) and eventually winning the contest.
Aug. 11, 2006: Brazilian mining giant Companhia Vale do Rio Doce bids $19.4-billion in cash for Inco. Inco agrees to the deal in September.
February, 2012: Commodities powerhouse Glencore International PLC agrees to $88-billion (U.S.) deal to acquire Xstrata, creating a global mining and metals behemoth.
In the community
Sudbury is used to patronizing jokes from southerners. Its strongest retort may be a number: $87,450. According to Statistics Canada’s most recent data for 2014, the median family income in Greater Sudbury is higher than in Toronto, Vancouver or Montreal.
Couple those ample incomes with home prices that are remarkably reasonable by big-city standards and you have a powerful lure for many people. “Sudbury surprises people,” boasts Brian Bigger, the city’s mayor. “Of any mining complex in the world, it’s the best place to live.”
He has a point. For the most part, Greater Sudbury is a comfortable, friendly community full of bungalows, big-box stores and Tim Hortons outlets. Contrary to stereotypes, the city’s unique charm lies in the surrounding landscape – a tableau of lakes, rocks and forests that can resemble a Group of Seven painting come to life. Major regreening projects over the past four decades have erased the bleak postindustrial vistas Sudbury was infamous for in the 1970s and restored nearly all of the city’s once-acidified lakes to life.
To be sure, Sudbury still flaunts its Northern Ontario roots. It’s a hard-drinking town where the local paper dispenses hunting tips and a neighbourhood restaurant advertises venison pizza. Standing prominently in front of the local hockey arena is a statue of Stompin’ Tom Connors, the iconic country singer who wrote an ode to Sudbury’s booze-filled Saturday nights.
But just down the street from Stompin’ Tom are signs of an emerging, more cosmopolitan Sudbury – a gallery of conceptual art, a well equipped theatre centre and a karaoke-and-comedy club. A brief drive away is Health Sciences North, a major regional hospital. And just beyond that is Laurentian University, home to more than 7,000 full-time students, a medical school and the brand new McEwen School of Architecture.
Thanks in large part to its increasingly diversified, white-collar economy, the city of 160,000 people weathered the 2009-10 strike at Vale with relatively little disruption – certainly far less than during a previous marathon strike at Inco in 1978-79. Mr. Bigger wants to keep on diversifying the city’s economy, positioning it as a research and technology hub centred on the city’s university and two colleges.
Despite the diversification drive, hard-rock mining remains central to the city’s vision of the future, he stresses. At first glance, that might not appear to be the smartest choice. The big miners employed a total of about 23,000 people in Sudbury in the early 1980s. Today, largely because of increased mechanization, they provide work for only about 6,000.
Increasingly, though, Sudbury’s mining scene focuses less on the big guys and more on local entrepreneurs, many of them former employees of the two big miners. Those entrepreneurs have launched more than 300 mine-service-and-supply companies in Sudbury. In total, the firms employ 14,000 or so people, the mayor estimates. Net result: a local mining industry that, broadly defined, has remained surprisingly stable over the past few decades. “We’ve built on what we know best to create a cluster of mining expertise that is unique in the world,” Mr. Bigger says.
The expertise is supported by a swarm of non-profit organizations and academic departments. The Northern Centre for Advanced Technology (NORCAT) operates a working mine that allows fledgling inventors to try out new technology in an operating environment. The Goodman School of Mines at Laurentian University focuses on educating a new generation of mine leaders. The Mineral Exploration Research Centre, also at Laurentian, concentrates on advancing exploration geoscience. And so on.
Walter Siggelkow offers a dramatic demonstration of how the local industry has evolved. A former heavy-equipment operator, he co-founded HLS Hard-Line Solutions Inc. in 1996 to cater to the growing demand for remote-controlled equipment in mines.
Today, Mr. Siggelkow presides over an operation that has grown to employ 70 people in the tiny hamlet of Dowling, just outside Sudbury, as well as 20 more in offices in Chile and Peru. Hard-Line makes remote-control devices that allow mine operators to drive and control heavy equipment from a safe position several metres back in a tunnel. It also manufactures teleoperation systems that enable operators on the surface to control equipment underground and it is developing systems that will enable mine vehicles to drive themselves.
As he guides a visitor through his 25,000-square-foot office and factory – complete with robot welders and a machine for assembling integrated circuit boards – Mr. Siggelkow mulls the impact of the big mining takeovers in 2006. The entry of foreign buyers broke the bonds of loyalty that once tied many third- and fourth-generation miners to Inco and Falconbridge, he acknowledges. On the other hand, it shook the Canadian mining industry out of its complacency.
“All things considered, it was probably a good thing,” he concludes. “This is an international business. If I can go into foreign markets, how can you say to a foreign buyer that they can’t come here?”
In the 1970s, Sudbury was famous for its devastated landscape, a barren postindustrial sweep of black rocks and dead lakes. Over the past four decades, the city has engineered a remarkable rejuvenation of the local environment. Working with local mining companies and other levels of government, it has slashed sulphur-dioxide emissions from refineries, restored once-acidic soil and lakes to fertility and replanted more than 11.5 million new trees.