e425
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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
Presentation by Scott M. Hand
Chairman and Chief Executive Officer, Inco Limited
UBS Global Basic Materials Conference
Challenges in Current Global Growth
June 7, 2006
London, England
Thanks for inviting me to join this distinguished panel. Achieving strong and profitable global
growth is fundamental to Incos goals. But for us, this does not mean identifying outstanding
opportunities. Weve already got them in spades. Our challenge lies in implementing the best plan
for organic growth in our industry and our great value creating proposal to acquire Falconbridge.
Today Ill discuss the challenge for the nickel industry as a whole and explain why Inco is better
positioned for growth than any other company in our business.
Before I continue, please note on the screen Incos safe harbor statement on forward-looking
information and related statements. Unless otherwise stated, forward-looking information in my
remarks excludes the impact of Incos offer for Falconbridge. Also:
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Actual results could differ materially from the 2006 outlook and other forward-looking
statements I make; |
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Certain material assumptions were made in developing our 2006 outlook and other
forward-looking statements; |
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Inco has filed the text and slides used in this presentation with the SEC and on SEDAR
in Canada; |
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Our filings on SEDAR and the SEC website contain additional information on the material
factors, risks and assumptions that could cause results to differ materially from our
forward-looking information or statements, and were used in developing our forecasts or
projections; |
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And all currency references are in U.S. dollars unless otherwise stated. |
First, a couple of key questions. One, does the world really need more nickel producing capacity?
My response is a resounding yes. And two, will the industry meet the underlying demand? The answer
is clearly no. Lets examine why.
Four key drivers signal a bright future this year for nickel: strong rebounding world stainless
steel output; a tighter stainless steel scrap market; unusual strength in non-stainless nickel
demand; and limited nickel supply growth. Their impact will mean a supply/demand deficit. Losses
from disruptions could constrict
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the market even further. Elevated nickel prices should act to keep demand in line with supply.
Nickel supply is short in part due to five years of under-investment in new supply in the 1990s.
Exploration was low because of soft prices that resulted from the decade-long release of Norilsk
nickel stockpiles into Western markets after the breakup of the USSR and the collapse of Russian
domestic demand. The East-West trade surge accounted for half of the rise in nickel supply to the
West from 1992-to-2002. Also, nickel supply has been curtailed by unrealized expectations of
production from Australian acid leach projects.
Only three nickel projects as large as Incos planned Goro development in New Caledonia have been
built in the last 14 years. But the world needs one Goro-size project every year just to meet
historical nickel growth rates let alone discoveries needed to offset daily depletion of
reserves.
As a result, the nickel market should be tight throughout this decade. Supply will permit demand
growth of only about 5%; a very conservative forecast, given Chinas impact. In the last era of
strong global industrial production growth, driven by Japan from 1960 to 1974, world nickel demand
growth averaged over 7% per year.
The nickel market will remain stronger for longer than in past cycles. Nickel is a supply-driven
story; surprises will likely be on the downside, due perhaps to lack of feed or output disruptions
from strikes, geotechnical factors, mechanical outages or severe weather, rather than upside
factors like output from new technologies, unexpected stockpile releases, scrap growth, or new
producers. 2006 will be another year where high nickel prices encourage producers to operate at or
above capacity. This creates a very high risk of disruption. Last year, 45,000 tonnes, or almost
4%, of world nickel production was lost to these disruptions and 2006 will be no different.
The nickel industry is not meeting the supply challenge. Industry consolidation has resulted in
greater discipline, with producers focusing more on margins than on growth for growths sake.
Moreover, much of the worlds nickel is lower grade and many operating mines will see significant
declines in ore grades in the next few years.
Adding to this dilemma is the exceptional difficulty of bringing on new nickel projects.
Nickel companies only started spending exploration dollars again in 2003. Larger ones have been
restrained in bringing on new capacity because theyve been through 10 years of low prices and they
did not anticipate todays supercharged commodity cycle. So producers were slow to respond and
it takes time to move from discovery to production. Despite a rebound in global exploration
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expenditures, all mines now moving toward production were discovered in earlier cycles. Our
industry has already harvested the low hanging fruit and the next generation of new mines will be
harder to find.
Given todays strong cyclical demand and a structural shift in the cost curve, long-term price
assumptions have moved up and mining companies have increased their metal price assumptions for
2005 reserve calculations; capital costs for nickel projects on a per-pound basis have been
escalating rapidly for the last decade.
The long-term historic nickel price of $3 a pound does not support new development. We estimate
that a long-term nickel price of $4.50-to-$5.00 per pound is required to earn the cost of capital,
given that it takes about $2.5 billion to build a 40,000-tonne per annum nickel mine/processing
facility, compared to about $1.5 billion per copper project and less than $1 billion for a zinc
project.
Most greenfield nickel projects face delays. Theres a growing gap between initial per pound
capital cost estimates and actual costs. Often this is due to underestimated project complexity,
scope and input costs and lower than expected throughput after completion.
Given the Australian laterite project failures, bankers are reluctant to lend money until Inco and
BHP have shown that pressure acid leach processing works on laterites at Goro and Ravensthorpe,
respectively.
And then theres political risk. The resource havens of the world are not reliably stable; most
untapped resources are in emerging markets with relatively poor infrastructure. Even in areas
deemed mining friendly over the past several decades, an uncertain political landscape could lead
to higher royalty payments and taxes, and a generally less hospitable attitude towards investment.
Few major greenfield projects two of them Incos will come on-line before the end of the
decade Voiseys Bay late last year, Goro, BHPs Ravensthorpe, CVRDs Vermehlo and, perhaps, Onca
Puma.
It takes 7-to-10 years to bring on new nickel capacity, including three years for permitting;
1-to-2 years to complete a feasibility study, 2-to-3 years to build an operation; and 1-to-2 years
to ramp up production.
On top of this, the industry is experiencing peak cycle characteristics and bottlenecking supply
side issues, such as a shortage of skilled employees. For instance, in Canada the industry needs
81,000 new workers in the next decade or double todays levels. Fully 40% of current workers are
set to retire over the period; this loss could be almost impossible to replace due to competition
from sectors like oil and gas. So operations could start up understaffed, with all the
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attendant risks. Fixing this situation will require time-consuming and major investment by industry
and governments.
The industry is coping with shortages and high costs of equipment and raw materials, plus long lead
times on deliveries. Prices for used tires for 240-tonne trucks, if you could get them, rose 150%
over an 18-month period, from $14,000 to $35,000 each. A 63% increase in industry cash costs from
2001 to 2005 is partly related to a structural shift upward, which means costs will remain elevated
for some time. Also, the declining U.S. dollar and high energy costs are affecting metal price
assumptions that companies, banks and investors use to make long-term construction commitments.
So how does Inco fit into this picture? The reality is very well, indeed. We account for half of
confirmed growth in world nickel output.
We are poised to escalate production at Canadas Voiseys Bay and to bring on Goro, plus brownfield
growth at PT Inco in Indonesia and the Sudbury Basin in Canada, where nickel/copper separation
should capture up to 40% of copper in feed from Q4/06 meaning more nickel to the smelter. We
expect to get 48% growth in nickel production by 2009 from 2005 levels.
Ill say a few words here about Incos planned use of technology at Goro. Nickel is a tough and
technically challenging business. People tend to underestimate project challenges, whether they use
smelting or hydromet processes. Nickel is less free flowing than other metals and harder to
separate from trace metals so its production involves more capital and higher operating expenses
than copper, for instance.
Nickel pressure acid leach actually worked for the Australian laterite projects; their issues were
building materials and operations. Nearly all of Incos technology is already used effectively for
nickel. We ran a 21/2-year pilot plant program at Goro. PT Incos wet laterites have taught us a lot.
Weve hired veterans of other projects. Crucial operating team members are already on site. Were
on track and we will succeed.
Many companies lack organic growth and therefore must acquire others. Inco is not among them. Our
Company as it exists today is blessed with an excellent growth pipeline and an enviable
resource base. Inco has a high-quality portfolio of nickel assets, including large-scale, low-cost,
long-lived deposits. Our asset base remains a sustainable competitive advantage. Hindsight shows
that we have been overwhelmingly right in committing to developing our resources.
So why is buying Falconbridge the best course for Inco and our shareholders? Our deal was
structured to provide both immediate and longer-term benefits to shareholders. Great operations,
diversified in terms of product and geography, will be complemented by significant synergies and
projects that are among the
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worlds best. Our transaction with Falconbridge creates an unrivalled combined project pipeline,
which we believe is perhaps the most compelling in the industry. Well be financially strong and
resource rich, with a terrific exploration portfolio. You cant duplicate these attributes. The New
Inco will deliver shareholder value far beyond the potential of any other player.
The New Inco will have a much more attractive portfolio of assets, focused on the best metals
nickel and copper.
The New Inco will have superior growth in both nickel and copper 65 million more pounds of new,
low-cost nickel production in the Sudbury Basin and at Thompson, Manitoba by 2009 through feed flow
optimization and maximization of throughput achievable only through the combination of Inco and
Falconbridge.
The transaction will be accretive on all financial metrics to our shareholders.
And the synergy story is real. I believe that the unique, tangible operating synergies represented
by the Falconbridge transaction are not reflected in Incos current share price.
In fact, weve been conservative on synergies. With seven months of work behind us, we now believe
the synergies will average about $550 million annually in the first five years. Some of the
increase comes from higher metal prices assumed in valuing the synergies but we have also
identified new projects and refined or dropped others. Price assumptions have added about $80
million to the average run rate and new projects have added about $120 million. On a net present
value basis, synergies are US$3.5 billion after tax, or C$3.9 billion about C$9.20 for each New
Inco share.
The new projects include reconfiguring Falconbridges Strathcona mill to process high copper,
cobalt and PGM ores, which will significantly improve recoveries.
We have further optimized planned production from the North Range in the Sudbury Basin. Our slide
is deliberately complex to make the point that synergies in Sudbury can only be gained through
single ownership of the mines and processing facilities. There are overlapping ore bodies and, more
importantly, there are overlapping exploration opportunities. Since October, we have added a net
$40 million of synergies by optimizing how well proceed with mine development of the North Range.
We identified a further $30 million of synergies by bringing forward mine development in Thompson
and adding mine development
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in Sudbury. These changes mean we will now be able to fill the combined mill and smelter capacity
in Manitoba and Ontario with our own mine sourced production.
A large percentage of the synergies are unique to the combination of our two companies and are
right in our mutual backyard the Sudbury Basin, where we have contiguous nickel mining
operations. It is simplistic to say these opportunities can be gained through some sort of joint
venture. Realizing synergies means major changes in material flows and important long-term
commitments. It requires the support of our people in Sudbury. Also, synergies in nickel are harder
to realize than in other metals. A joint venture might get some limited synergies but it would take
much longer to realize them. We believe the value of these synergies should be enjoyed by the
shareholders who now own the operations.
Ill sum up by saying that despite the growth challenges our industry faces, the Inco of today
and Inco plus Falconbridge enjoy an unparalleled abundance of excellent opportunities. We have a
great pipeline of projects. Our tremendous reserve position allows us to maximize opportunities in
a dynamic and changing marketplace. Incos ability to flex production to our market position is
based on great diversification options. We have an exceptional business with competitive costs;
excellent cash flow; and earnings potential that will continue to underpin our performance and
build value for shareholders.
Forward-Looking Statements
This presentation contains, among other things, forward-looking information (as defined in the
Securities Act (Ontario)) and forward-looking statements (as defined in the United States
Securities Exchange Act of 1934) that are based on expectations, estimates and projections as of
the date of the presentation. Generally, these forward-looking statements can be identified by the
use of forward-looking terminology such as believe, potential, expect, forecast,
estimate, would, could, if and may. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause actual results and developments to be
materially different from any future results, performance or achievements expressed by, or implied
by the forward-looking statements in this presentation.
These forward looking statements are based on a number of assumptions which may prove to be
incorrect, including but not limited to the various assumptions set forth in the Directors
Circular dated May 29, 2006 filed with the Canadian and U.S. regulators; assumptions in connection
with both the proposed combination of Teck and Inco under the Teck Offer, and the proposed
combination of Inco and Falconbridge under Incos offer for the Falconbridge common shares, in
respect of the results expected to be achieved from the combination of the entities, including
calculating projected synergies and other benefits expected to be realized and the timing thereof.
In respect of these forward-looking statements, factors which could cause actual results to differ
materially from current expectations regarding each of Inco, Teck and Falconbridge, include, but
are not limited to, fluctuations in the prices of nickel and other primary metal products produced;
fluctuations in asset values; the accuracy of ore reserve and mineral resource estimates; the
accuracy of production, cost and cash costs per nickel unit projections; the successful development
of mineral resources, completion of development projects, planned expansions or other projects;
fluctuations in interest rates, exchange rates and demand and supply levels of nickel, copper and
zinc; general economic conditions; competitive conditions; the outcome of pending legal
proceedings; and changes to applicable laws, rules and regulations.
While Inco anticipates that subsequent events and developments may cause Incos views to change,
Inco specifically disclaims any obligation to update these forward-looking statements. These
forward-looking statements should not be relied upon as representing Incos views as of any date
subsequent to the date of this presentation
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Important Legal Information
INVESTORS AND SECURITYHOLDERS ARE URGED TO READ INCOS DIRECTORS CIRCULAR DATED MAY 29, 2006 FILED
WITH THE CANADIAN SECURITIES COMMISSIONS AND BEING MAILED TO INCOS SHAREHOLDERS, AND ITS
SOLICITATION/RECOMMENDATION STATEMENT ON SCHEDULE 14D-9 THAT INCO FILED WITH THE U.S. SECURITIES
AND EXCHANGE COMMISSION (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. All information
contained herein is qualified by the information disclosed in the Directors Circular (the
Circular) filed by Inco Limited (Inco) on May 29, 2006. Readers are strongly urged to review
the Circular in its entirety. The statements contained herein are further qualified by the
sections of the Circular entitled Caution Regarding Forward-Looking Statements, Information
Regarding Falconbridge and Teck and Schedule B Important Information Regarding Incos Ore
Reserves and Mineral Resources including all of the assumptions identified therein, as well as the
description of factors that could cause actual results to differ from the forward-looking
statements. In addition, the statements contained herein are further qualified by the section in
the take-over bid circular filed by Inco on October 24, 2005, as amended and supplemented, in
respect of its take-over bid for Falconbridge Limited (Falconbridge) entitled Risks Related to
the Offer.
This presentation may be deemed to be solicitation material in respect of Incos proposed
combination with Falconbridge. Inco filed with the SEC, on October 24, 2005, a registration
statement on Form F-8 (containing an offer to purchase and a share exchange take-over bid circular)
and has filed amendments thereto, and will file further amendments thereto as required, in
connection with the proposed combination. 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), other
documents regarding the proposed combination, in each case with the SEC.
INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT AND ANY OTHER RELEVANT
DOCUMENTS FILED OR THAT WILL BE FILED WITH THE CANADIAN SECURITIES REGULATORS OR THE SEC WHEN THEY
BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.
Investors and security holders may obtain copies of the Directors Circular, the registration
statement, the Solicitation/Recommendation Statement and Incos and Falconbridges other public
filings made from time to time by Inco and Falconbridge with the Canadian Securities Regulators, at
www.sedar.com, and the SEC free of charge at the SECs web site, www.sec.gov. In addition,
documents filed with the Canadian and U.S. regulators by Inco may be obtained free of charge by
contacting Incos media or investor relations departments.