......Mon Feb 12/01......
BUY Falconbridge Ltd. (FL : TSE : $17.00 : Issued 177M)
Greg Barnes (416) 869-3092 greg_barnes@canaccord.com
HIGHLIGHTS
* Does Noranda's recent debt issue indicate that a bid to acquire the
outstanding 45% interest in Falconbridge that it does not already own
is coming sooner rather than later?
* With $405 million in cash, $1 billion in unused lines of credit, and
now the US$800 million shelf filing, Noranda has substantial liquidity
and flexibility
* Recommendation upgraded to BUY, $23.00 target price maintained
Recommendation: BUY
Target price: $23.00
52-week price range:$26.70-15.55
Shares O/S: basic 176.9M
Price: book ratio 1.28X
Dividend $0.40
Yield 2.3%
Working capital: $639M
Long-term debt: $1,378M
Market capitalization: $3,009M
Enterprise value: $4,378M
Sector: Metals & Minerals
Web site address: www.falconbridge.com
Noranda announced last Thursday (February 8) that it has filed a shelf
prospectus for the possible issuance of US$800 million in debt
securities during a proposed 25-month period. At the same time,
Noranda indicated that it has a filed preliminary prospectus under the
shelf filing for the issue of US$300 million in 10-year notes.
Noranda indicated that the use of proceeds for the debt issue is
repaying outstanding debt, capital expenditures, and general corporate
purposes.
During its Q4/00 conference call last week, Noranda management
indicated that they fully intend to increase their interest in
Falconbridge over the course of 2001. During 2000, Noranda increased
its interest in Falconbridge by approximately 5% to 55% with the bulk
of the purchases occurring in Q3/00. Under securities regulations,
Noranda has three options with respect to increasing its interest in
Falconbridge in 2001:
1. Over a 12-month period (rolling), Noranda has the ability to
acquire up to 5% of Falconbridge's shares without launching an offer
to purchase the entire minority interest. Based on the timing of last
year's purchases, Noranda would not be in apposition to acquire too
many more Falconbridge shares this way until July or August 2001.
2. Noranda can also complete five private trades to acquire more
shares of Falconbridge, but this route is complex.
3. Finally, Noranda can launch an offer to all minority shareholders
and complete its take-over of the company.
Noranda management has indicated to us that in the past the 60%
ownership level is a rough guide as to when they have acted to acquire
the balance of minority interests in companies that they control. For
example, when the company launched its offer for the balance of
Brunswick Mining and Smelting in July 1995, it had a 63% interest.
When it acquired the outstanding minority interest in Kerr Addison
Mines in February 1996, it controlled a 52.1% interest.
A couple of signs are now pointing to the possibility that Noranda
could act to acquire the balance of Falconbridge that it does not
already own. One is the announcement of the debt issue. The other is
the fact that the massive Antamina p[roject is nearing completion and
appears to be advancing on track to enter production a couple of
months early (i.e., June 2001 as opposed to August under the original
schedule). The risk profile on Antamina is shifting downwards and
this may make Noranda more comfortable with respect to acquiring the
balance of Falconbridge.
The 45% interest in Falconbridge that Noranda does not own has a
market value of C$1.35 billion at its recent share price of about
17.00/share. If we assume that Noranda is willing to pay somewhere
between $20.00-25.00 per share, based on our net asset value for
Falconbridge, then it would be paying a premium of between 20-40% to
the current share price, which is not out of line. A $23.00/share
acquisition cost for the outstanding 45% interest in Falconbridge
equates to $1.8 billion, or about US$1.2 billion.
Assuming that Noranda issues the entire US$800 million in debt,
combined with unconsolidated cash of C$405 million on the balance
sheet (there is another $258 million in cash on Falconbridge's balance
sheet) at the end of 2000 and $1.0 billion in unused lines of credit,
Noranda has substantial liquidity, and balance sheet flexibility,
available.
We would not expect that Noranda would completely run down its
available cash or take on a large amount of debt to acquire the
balance of Falconbridge, so a combined cash and share offer could be
made. We would note that for the first time in several years
Falconbridge and Noranda share prices are trading at parity.
We downgraded Falconbridge to Market Perform on the back of earnings
and cash flow weakness in 2001, due to the strike at the Sudbury
operations that show no signs of being resolved. However, the signals
coming out of Noranda point to the possibility that an offer could
emerge sooner rather than later for the 45% interest in Falconbridge
that it does not already own. We believe that the offer, when it
comes, could be between $21.00-25.00 per share based on our 8% and 10%
discounted net asset values for Falconbridge. We are upgrading our
recommendation to BUY and maintaining our $23.00 target price. |
