Canadian Competitiveness in the Global Economy

William D. Laidlaw, Executive Director, Ontario Community Newspapers, and Past President, The Empire Club of Canada; Melissa Tan, Grade 12 Student, Agincourt Collegiate Institute; Reverend Douglas Kramer, St. Philips Lutheran Church, Etobicoke; John Stackhouse, Editor, Report on Business, The Globe and Mail; Peter Penashue, Former President, Innu Nation; Mayor David Courtemanche, Mayor, City of Greater Sudbury; Reverend Dr. John S. Niles, MSM, Rector, St. Andrews United Church, Markham, and First Vice-President and President-Elect, The Empire Club of Canada; Derek Pannell, CEO, Falconbridge; and James Buchanan, Partner, SECOR.

Introduction by William Whittaker

Scott Hand is the second speaker in our luncheon series entitled "Canadian Industry in a Global Economy" which focuses on the challenges Canadian businesses face today in a rapidly changing world. The sponsor of this series is Secor Consulting, the largest independent strategy-consulting firm in Canada, which is celebrating its 30th anniversary this year.

Mr. Hand will speak to us today about some of the challenges Inco Limited faces in today's international mining environment. An undercurrent to today's luncheon is of course Inco's takeover bid for Falconbridge Ltd. to create the world's largest nickel producer. With Derek Pannell of Falconbridge at our head table today, I suspect Mr. Hand will have something to say about their proposed merger.

The Canadian mining and mineral processing industry is vital to Canada's economy contributing 4.1 per cent to Canada's GDP in 2003 and directly employing 389,000 people that year. The old image of miners and prospectors with picks and shovels has been replaced by workers using robotics, computers and other high-tech equipment. Women today are employed as mining engineers, equipment operators, technicians, environmental specialists, geologists and executives. Canadian mining today is light years removed from the conditions described in Richard Llewellyn's classic novel "How Green Was My Valley" about depression-era coal mining in Wales. However, Canada has had its mining tragedies. We all remember the 1956 and 1958 Springhill, Nova Scotia, tragedies and the 1992 Stellarton, Nova Scotia, tragedy.

Canada is one of the world's largest exporters of minerals and mineral products, which accounted for approximately 13 per cent of our exports in 2003 with some 80 per cent of our mineral and metal production being exported. Canada is a powerhouse of mining technology and financing much of which is also exported. The Toronto Stock Exchange is the mine-financing capital of the world, raising an average of $2.5 billion a year in new equity financing.

Just think of how minerals have changed our lives. Take sports as an example. Hockey players used to skate on blades of steel. Now their skates are composed of complex alloys, and they use hockey sticks of graphite. Baseball players use aluminum bats, golfers graphite drivers and tennis players graphite-fibre and aluminum racquets.

Inco Limited, which has been in business for over 100 years, is foremost a primary metals producer employing over 10,000 people worldwide in its mining and refining operations, research centre and in marketing and sales. As a leading international producer of nickel, Inco is also an important producer of copper, precious metals and cobalt. One example of the significance of Inco's worldwide activities is its Goro Project on the South Pacific island of New Caledonia, an overseas territory of France, which when completed will be the largest Canadian investment in France.

While Inco helps Canada maintain a favourable external trade balance, Mr. Hand also personally does his part for Canada by exporting its cultural icons. In his address earlier this year to the prestigious Mining Club of Melbourne, Australia, Mr. Hand played an audio clip of Stomping Tom Connor's "Sudbury Saturday Night" no doubt to illustrate that Inco is part of Canadian folklore. I understand it was well received by the audience. While we have the Mayor of Sudbury at our head table today, alas there is no Stomping Tom.

Scott Hand was elected Chairman and Chief Executive Officer of Inco Limited in April 2002. Prior to this, he served as President, Executive Vice-President, General Counsel and Secretary, and was also responsible for Inco's Strategic Planning and Business Development.

Mr. Hand joined Inco's legal department in 1973 and is a rare example of what most inside lawyers aspire too--making the transition to line management and then heading up the whole show. I think his capacity for non-legal responsibilities was tested early on by Inco with his assignments in El Estor, Guatemala and Sulawesi Island, Indonesia, where no doubt his 1960's Peace Corps experiences in Ethiopia helped him.

Mr. Hand is a director of the Nickel Development Institute and the Canadian Council of Chief Executives. He is also a member of the U.S. Council on Foreign Relations and a director of the Ontario Heritage Foundation and Tafelmusik.

Mr. Hand was educated at Hamilton College and Cornell University Law School from which he graduated with a Doctor of Jurisprudence in 1969.

Ladies and gentlemen, please join me in welcoming Scott Hand, Chairman and Chief Executive Officer of Inco Limited.

Mr Hand.

Scott Hand

It's a real pleasure to be here at the Empire Club.

Thank you all for coming and a special welcome to our head table guests. I'm very glad that Falconbridge's President and CEO Derek Pannell could make it.

The two of us recently did an investor road show together where we presented the vision for our new company. And I'm starting to depend on having him with me to keep me out of trouble.

For instance I've learned that whenever he waves his arms and shakes his head back and forth, it means I should stop talking.

Of course a month ago Derek and I were onstage to announce that our two companies would come together through a friendly takeover by Inco--and that we will create the world's number-one nickel producer, and a great leading copper producer.

Which brings me to what I was asked to speak about today--Canadian competitiveness in the global economy.

There's a library full of theories about what it takes for companies to become globally competitive. And a special wing is devoted to theories about Canadian competitiveness.

But as my favourite philosopher Yogi Berra once said, "In theory there is no difference between theory and practice. But in practice, there is!"

My remarks today about Canadian competitiveness will be very light on theory, and heavy on practice.

Not surprisingly I'm going to talk a lot about our plan to bring Inco and Falconbridge together. Obviously, it's been on my mind!

But I also think it offers a very relevant, real-life answer to the questions, "How can Canadian companies stay competitive in a global economy?" and "What are the implications for the rest of the country?"

Let me start by talking about Canadian mining in general. If you'll forgive the comparison, for Canadians mining is a bit like hockey. It's something we've been doing for a long, long time. And it's something we're very good at--as good, or better, than just about anyone else.

In developing our great mineral resource base during the last century, Canada developed vast expertise in exploration, mining and processing. Later, we began taking our home-grown expertise around the world in the global hunt to discover--and profitably develop--new mineral deposits. As a result, mining was one of the first industries where Canada really cut its teeth on the global stage.

And over the years Canadian mining has continued to grow and to take a leading position. Today, for instance, Canadian mining and exploration firms hold the largest share of global exploration in Canada, the U.S., South America, Central America and Africa.

Of course mining is a capital-intensive business and along with our technical and engineering expertise, we've developed some very impressive financing capabilities.

The Toronto Stock Exchange today maintains the largest peer group of mining companies in the world, and is the best access point to equity capital for exploration and mine development.

Mining companies represent some 15 per cent of the total companies listed on the TSX, and 10 per cent of the total TSX market cap.

In 2004, the value of mining shares traded on the TSX was over US$140 billion.

Add it all up, and today Canada has become the world's number-one centre of excellence in mining and metals. There's no other place where you find the same concentration of technical expertise, management know-how, and financing capability as right here.

I would add the important fact that Canada's strong position in mining has depended on what I like to call "critical mass." That is, Canada's leadership in mining depends on having a critical mass of multi-national, and growing, mining companies with head offices here in Canada.

Look at exploration.

A huge amount of the activity on the TSX involves junior mining and exploration companies. But many of those junior companies are able to thrive here in Canada--and around the world--only because of their partnerships and alliances with bigger companies like Inco and Falconbridge.

Look at research and development.

That also depends on Canadian companies with the critical mass to make investments, like Inco has, in dedicated research facilities like the one we maintain at Sheridan Park in Mississauga. Places where we can invest in major research like our hydromet technology for Voisey's Bay, and high-tech nickel products for the battery industry. And where we can employ Canada's best and brightest.

Then think about all the other specialized corporate support services that have grown up around our Canadian mining industry. I'm thinking of the financial analysts. The brokers. The auditors. The underwriters. Not to mention the investment bankers and the lawyers.

Believe me, I've seen a few of them pass through our office in the last few months.

And don't forget the IT support companies. The HR consultants. The telecommunication specialists.

The list goes on and on.

The fact is we need those services to compete globally. In turn, they need companies like ours, with head offices in Canada, to help build their world-class capability. That's why Canada simply can't afford to let our great mining industry become a series of branch plant operations.

As you probably know, we've been seeing a period of major consolidation in the global mining and metals industry.

Commodity prices have been at record highs, and the big multi-national mining companies are flush with cash.

Meanwhile, not many mining companies have the same attractive options for profitable organic growth that Inco does with mining projects like Voisey's Bay in Labrador and Goro in New Caledonia. Or that Falconbridge has with projects like Collahuasi and El Morro in Chile, and El Pachon in Argentina.

But for some companies, the most viable strategy is to grow through acquisition. Which is why we've seen mounting concern and speculation in the business press and elsewhere about whether Canadian mining companies might be gobbled up by offshore interests.

I'll leave speculation to the pundits.

And instead I'll tell you what we've done to take our destiny into our own hands and create the best possible future for two Canadian-based mining companies.

At our press conference Derek and I called the Inco Falconbridge combination a great Canadian solution--because that's what it is. And because the long-term result can only be good news for Canadian mining and other sectors that service it and depend on it. In short, it will be good for Canada!

Samuel Johnson once said, "Patriotism is the last refuge of a scoundrel." So lest we be accused of wrapping ourselves in the flag, let me make a couple of points.

First, let me say that I'm American by birth, but I'm proud to also be a Canadian citizen. I've even had the privilege of sharing a Molson Canadian with Stompin' Tom Connors at a Leafs hockey game. And if that doesn't give me some Canadian credentials, I don't know what does!

But seriously, I'm a big booster of Canadian mining both at home and around the world. And I'm proud of the Canadian solution we've come up with. Derek, if I can speak for you, I know you feel the same way.

Second, let me add that it wasn't just Canadian pride or nationalism that first brought Derek and me together. Our first priority was to create value for our shareholders. And we're doing that.

And if we're also creating a "Canadian powerhouse"--well, so much the better for all of us. Let me outline some features of this Canadian powerhouse:

The world leader in nickel and a great and leading copper company. Those are the two metals with probably the best supply-demand fundamentals going forward, and we see a great future in both of them.

An enterprise value of about US$25 billion. We'll be in the front rank of global mining and metals companies--only a very few mining companies will be bigger.

Much greater liquidity in North American stock markets. The new Inco will become a preferred holding for North American investors who want to participate in the great metals market.

One of the best portfolios of properties in nickel and copper in the mining industry, giving us a range of options for future growth that are absolutely second to none.

The financial strength and firepower to pursue those growth opportunities.

Great geographic diversification--and a major presence in North America, South America, Asia, the South Pacific, and Europe.

A unique opportunity to realize very significant natural synergies by doing things more efficiently.

No other combination besides Inco and Falconbridge could capture those natural synergies. Sudbury will be run the way Mother Nature says it should. Our situation is truly one of a kind and as we move forward I'm very confident we'll find even more value.

For those of you who haven't been to Sudbury and seen our two operations, let me elaborate briefly on this last point.

To explain it simply, think of the Sudbury basin as one enormous continuous orebody running beneath the earth. That's not quite geologically accurate, but you get the picture.

Meanwhile, at the surface, for the past 75 years, our two companies have been building fences, parallel roads, side-by-side mines, and separate processing facilities to mine and treat this one great orebody.

By bringing our operations together there are scores of ways we can deliver more value and reduce our costs--making sure the right material gets to the right facility, getting the best metals recoveries, and getting the maximum production from our available processing capacity.

In short, for a host of reasons, this combination is a marriage made in heaven from the standpoint of shareholder value.

I mentioned at the outset that Derek and I recently completed a roadshow where we presented the new company to shareholders. And I can tell you, investors liked what they heard.

Of course in a lot of mergers and acquisitions, what sounds great to shareholders often doesn't sound nearly as good to employees and to communities. This time it's different. Our solution is good news for our employees and for our mining communities.

That's not to say there won't be any job impact. As we've said, we expect that about 100 to 150 positions in Sudbury could be affected when we combine our operations. But that is on a total employee base of about 6,000. And bear in mind that so far this year, Inco has had some 200 retirements in Sudbury. That's why Derek and I are confident we'll be able to manage the job impact largely through attrition.

Over the medium and longer term this combination means growth in Sudbury, because we will be bringing on new mine development sooner.

At a corporate level there will be some rationalization, as inevitably happens when you combine two head offices.

Again, as much as we can, we'll be handling this through retirements and attrition. And again, we believe this Canadian solution is the best long-term alternative when you think of the jobs both inside and outside our companies that depend on it.

We've been very gratified by the response from elected officials, from community leaders, and from union leaders.

We are honoured to have Mayor Courtemanche of Sudbury at our head table today and I won't try to put words in his mouth. But I will remind you of what some others have said.

Leo Gerard, a Sudbury native who today is president of the United Steelworkers union, was recently quoted as saying, "My sentiment is that the Inco Falconbridge proposal is probably the best deal for Sudbury, for the community of Sudbury, for the steel workers of Sudbury and for Canada."

We've come a long way when a buttoned-down guy like me and a down-to-earth guy like Leo can stand together and both say how great the new Inco will be for Sudbury!

Meanwhile, Canada's Minister of Industry David Emerson had this to say: "It's very important to have Canadian championed companies and it is important for them to come together in a friendly way to build deep roots right here in Canada."

Ontario Premier Dalton McGuinty called our new company "an international resource powerhouse which will be headquartered in Ontario and controlled by Canadians."

He went on to say, "Anytime there's a takeover that's exercised by a foreign company, they just don't have the same kind of commitment to Ontario and Canada. I happen to think that is really good news that bodes well as we assert ourselves in the highly competitive global economy."

Premier McGuinty's comments take us back to the key theme of global competitiveness. I've already listed some of the ingredients that will make the new Inco a great competitor in today's global mining world. I'd argue that it's not a bad checklist for Canadian companies that want to perform and win on the global stage.

Excel in your key areas of business. Have the required size and the liquidity to attract investment. Have a solid plan for profitable growth, and the financial wherewithal to act on your growth options.

I'd also add, have a strategy for China. Inco's position with respect to China was very good even before this deal. And as the new Inco it will get even better.

We have something that the Chinese need very badly--nickel. Last year our nickel sales to China totalled some US$400 million.

With the added strength in copper that Falconbridge will bring, our position in China will get that much better. The dragon is hungry--not just for nickel but for copper, too.

Over the past 10 years Inco has built a growing presence in China. Today we have nearly 600 employees working in five different locations, and we've assembled an impressive Chinese management team.

We've grown to be one of Canada's biggest exporters to China--and as the new Inco we will get even bigger. Our pro forma sales to China, based on 2004 totals of nickel and copper, would be starting to push US$1 billion.

Of course there's another area I haven't yet mentioned that plays a very big role in global competitiveness for mining companies. And that is your social license to operate.

Part of the "Canadian brand" around the world has been that Canadians are known to have high standards of social responsibility--and we do the right thing when it comes to the environment and communities.

I believe there's a great opportunity for the new Inco to help strengthen that Canadian brand as a hallmark of how Canadian mining companies do business around the world.

At Inco we don't claim to have written the book on corporate social responsibility. And we've had our share of hiccups.

But we've been clear on our basic objectives. We don't go where we aren't wanted. And we work very hard to be a positive force and a good neighbour where we operate.

The road hasn't always been easy. Peter Penashue is here today, and could tell you how rough that road was when Inco first met with the Innu and Inuit at Voisey's Bay. But I think he'd also tell you how far we'd come together since then. And how today, as Voisey's Bay finally comes into production, the Inuit and Innu people are true partners in our success.

I know from conversations with Derek that Falconbridge shares our views on what it means to be a good neighbour. And it shows in their actions on the ground, whether you look at their programs with the Inuit at Raglan in Northern Quebec, or with communities in the Dominican Republic, Chile and Peru.

Now it goes without saying that when you're interested in buying another company--and the price tag is nearly $13 billion--you do more than just kick the tires. You take a good, long look. The fact is, we've been looking across the street at these guys for an awfully long time--in Sudbury, in Toronto, in New Caledonia, and in other parts of the world. More often than not, even as competitors, we've looked on them with admiration and always with a great deal of respect.

In acquiring Falconbridge we know we're getting truly excellent assets--some of the best in the world. But we know we're getting much more than that. We're getting great people--with a great tradition, and a great culture. One that will fit very well with ours.

Now I realize that for the past 20 minutes I've been guilty of making this sound like a done deal. Which it isn't.

Falconbridge shareholders need to tender sixty-six and two-thirds per cent of the outstanding common shares by December 23rd.

Plus we need to receive all the necessary regulatory clearances.

On the first condition, we believe we've made Falconbridge shareholders a very compelling offer.

We are creating shareholder value--both for the near and long term--which can't be duplicated by anyone else. And we are giving Falconbridge shareholders a great opportunity to participate in the new Inco.

On the second, we are taking the necessary steps to get the clearances that we need, whether in Canada, the U.S., or the EU, and things are proceeding well on all fronts.

So we believe that by sometime early next year, the new Inco will become a reality.

I know I was invited here to talk about Canadian competitiveness. And again I realize that I've devoted a lot of my remarks to our new deal. I admit, I'm hugely excited about the new Inco--and it's hard to curb my enthusiasm.

But let me also re-iterate; this combination says a lot about what you need to be truly competitive in today's global mining industry.

You need to be big enough to be a player on the world stage.

To be the clear leader in what you do best.

To have the financial strength to keep growing.

And to take calculated risks to control your own destiny.

By doing all these things, we'll help create a Canadian mining industry that is more than a survivor, but a leader on the global stage.

We will deliver huge rewards for our shareholders--because, after all, that's whom we work for. But there will also be great and long-term rewards for our employees, our communities and the many businesses and support services who depend on us. In short, this is a great combination for all our stakeholders.

As I said, Falconbridge shareholders have until December 23rd to tender their shares.

We aren't relying on a man in a little red suit to deliver the "new Inco."

But I think it's a good sign that this year, Christmas Eve just happens to fall on a "Sudbury Saturday Night."

Thanks to the Empire Club, thanks to all of you for coming today, and thanks for listening.

The appreciation of the meeting was expressed by Reverend Dr. John S. Niles, MSM, Rector, St. Andrews United Church, Markham, and First Vice-President and President-Elect, The Empire Club of Canada.