Resources
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Of Note:


An investigation by The Globe and Mail has found that commitments made under the Investment Canada Act are
not only difficult to enforce but also provide ample room to be breached, amended or even rescinded.

Most foreign resource companies that have taken over major Canadian metals and mining firms in the past decade
have been able to avoid living up to at least some of the undertakings that were made to the Canadian government.

And in most cases, the undertakings, which are confidential and not accessible to the public even under freedom of
information requests, were contravened with Ottawa’s blessing.



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Broken promises mark foreign mining deals

ANDY HOFFMAN — ASIA-PACIFIC REPORTER

VANCOUVER— Tuesday's Globe and Mail

Oct. 05, 2010

On a cross-country Canadian tour last month aimed a winning support for its hostile $38.6-billion offer for Potash Corp. (POT-N143.03-1.02-0.71%), the head of Australia’s BHP (BHP-N77.170.791.03%)was making promises to anyone who would listen.

At stops in Saskatchewan, Toronto and Ottawa over three days, chief executive officer Marius Kloppers vowed that if successful in its takeover, BHP would maintain Potash Corp.’s employment levels, increase investment in the company’s Canadian mining operations and create a so-called “centre of excellence” in Saskatoon that will serve as BHP’s global potash headquarters.

For Mr. Kloppers, those commitments are one part of the effort to win expected to win federal approval for the buyout of one of the mining industry’s crown jewels. The other part, he insists, is BHP’s stellar behaviour in other foreign countries. “The best predictor of future performance is past performance,” he said in an interview.

The record of global mining companies in keeping their promises, however, might give the government second thoughts. An investigation by The Globe and Mail has found that commitments made under the Investment Canada Act are not only difficult to enforce but also provide ample room to be breached, amended or even rescinded. Most foreign resource companies that have taken over major Canadian metals and mining firms in the past decade have been able to avoid living up to at least some of the undertakings that were made to the Canadian government. And in most cases, the undertakings, which are confidential and not accessible to the public even under freedom of information requests, were contravened with Ottawa’s blessing.

Foreign mining firms including Vale SA of Brazil, Anglo-Swiss miner Xstrata PLC and London-based Rio Tinto PLC have all been able to cut Canadian jobs and, in some cases, reduce spending in Canada, less than three years after taking over Inco, Falconbridge and Alcan respectively, despite undertakings made to Investment Canada to maintain staffing and spending. But this is also true of BHP Billiton. The Globe has learned that 10 years ago, the company made a commitment to the government to locate a global headquarters for base metals in Toronto, in return for permission to buy copper producer Rio Algom – but it sought, and received, federal permission to break that pledge less than a year later.

Under the Investment Canada Act, BHP must show there’s a “net benefit” to the country. However, “the net benefit test has not worked well,” said Dominic D’Alessandro, the former CEO of Manulife Financial Corp., who has long called for takeover protections for Canada’s largest resource firms, similar to those enjoyed by the country’s major financial, cable and telecom companies.

“We need something else.”

Given its bid for Saskatoon-based Potash Corp., previous commitments made by BHP Billiton to Industry Canada under the Investment Canada Act are particularly relevant. And in the Rio Algom case, the Australian mining giant was able to convince Ottawa to let it renege on a commitment.

The story began in August of 2000, when Billiton PLC of London struck a friendly $1.7-billion deal with Toronto-based Rio, trumping a hostile bid by Canada’s Noranda.

In a press release announcing the deal, Billiton said Rio Algom’s copper mines and its “experienced and skilled operational and technical management team” were “expected to form the nucleus of Billiton’s global copper and base metals business.”

According to sources who worked on the deal as well as former executives from Billiton, Rio Algom and current officials from BHP Billiton, an official undertaking was made with Industry Canada to locate Billiton’s global base metals business in Toronto.

With Investment Canada approval in place, the Rio Algom takeover closed in October of 2000 and, according to former employees, about 120 Rio Algom staff continued to work at Billiton’s new base metals headquarters in Toronto.

Just a few months later, however, in March of 2001, Billiton and BHP Ltd. of Australia agreed to a blockbuster $28-billion (U.S.) merger to create one of the world’s largest resource companies. BHP already had a significant base metals division with major mines in Chile and elsewhere. Once the deal closed in June, it was decided that Billiton’s Toronto base metals headquarters would be moved to Houston, Tex., where it would share back office facilities with the merged company’s oil and gas division.

“The idea was that Toronto was going to be the headquarters for the copper division of what was then Billiton. Then the BHP merger happened and, of course, they had a much bigger copper division already. So it was a case of Mohammed and the mountain,” said Paul Blythe, CEO of Canada’s Quadra FNX and a former Billiton employee.

Like the majority of the staff at the Toronto office, Mr. Blythe was offered a job in Houston, but elected not to go.

“I wasn’t very interested in that move ... basically we were offered positions in Houston but most people didn’t take them,” he said.

Undertakings made under the Investment Canada Act are supposed to be binding even if the foreign company that made them falls under new ownership. So how was a merged BHP Billiton able to close the Toronto office? According to BHP, changes were made to the original undertakings after the acquisition was completed.

“These changes were made with the full agreement of the Investment Review Division and Minister of Industry and were the result of the significant changes that arose from the combination of the BHP and Billiton businesses,” BHP spokesman Ruban Yogarajah said in a statement.

Reached on a business trip in China, Brian Tobin, who served as Canada’s industry minister at the time, said he didn’t recall the changes that were made to Billiton’s original undertakings. But he said the amendments would have been made “inside the department,” and, he added, “it would not have been a political decision.”

According to Mr. Yogarajah, BHP agreed to “maintain an exploration presence” in Vancouver in exchange for moving the Billiton base metals office to the U.S. Even before the Billiton merger, however, BHP already had an exploration office in Vancouver with about 35 to 40 staff, former employees have told The Globe and Mail.

More recently, foreign mining giants Xstrata, Vale and Rio Tinto have been able to close mines%2>have been able to close mines, shutter production and lay off workers, even though all had committed to Ottawa that they would maintain previous staffing levels.

Citing the financial crisis and plunging prices for nickel, Xstrata cut 700 jobs in Sudbury and closed nickel mines in February, 2009. Xstrata had paid $18-billion for Falconbridge in the summer of 2006 and made an undertaking to Industry Canada not to cut jobs for three years.

Industry Minister Tony Clement allowed Xstrata to cut the jobs after the company said it would spend $250-million to build a new mine in Sudbury. The funds, however, were not the “new money,” as the minister had insisted. Xstrata had already said it would spend the money on the Nickel Rim South mine in Sudbury in its annual financial statements, which had been published a few weeks earlier.

Brazil’s Vale was also able to lay off mine workers in Sudbury and cut Canadian jobs to counter the global economic downturn, even though it had made commitments to Industry Canada to maintain staffing levels for three years after taking over Inco. In March, 2009, Vale cut 463 jobs in Canada, including 261 in Sudbury.

Mr. Clement initially demanded answers from the company and vowed to investigate. But in June of that year, the Industry Minister said he was satisfied that Vale had lived up to its commitments in the face of the market downturn, and that the pain had been felt equitably across the company’s operations.

Cuts at the former operations and headquarters of Alcan came even faster following Rio Tinto’s blockbuster $38-billion (U.S.) takeover in the summer of 2007. By December of that year, the new Rio Tinto Alcan halted more than $7-billion of spending to build and upgrade smelters in Quebec and British Columbia in response to the global financial crisis. The spending commitments had been part of Rio Tinto’s undertakings to Industry Canada to win approval for the takeover.

By January, 2009, Rio Tinto Alcan was cutting jobs including 300 in Quebec and closing smelters in the province. By April of that year, 18 per cent of the head office jobs at the company’s “Maison Alcan” headquarters in Quebec were chopped. Rio Tinto also decided to halt a $50-million expansion of the headquarters that would have seen the renovation of a historic former church next door to the Alcan offices. Today, the church, one of the last architectural jewels from Montreal's storied “Golden Square Mile” along Sherbrooke Street, remains largely unchanged from when Alcan bought the property in 2007.

Rio Tinto Alcan’s Montreal office now has 700 employees, according to a recent speech given by the division’s CEO Jacynthe Côté. In 2007, before the Rio Tinto takeover, it had 854 employees, according to regulatory filings.

“The decision to reduce our work force was difficult but necessary. It complies with both the terms of the continuity agreement signed with the Government of Quebec and commitments made to the Government of Canada when Alcan was acquired by Rio Tinto,” Bryan Tucker, a company spokesman, said in a statement.

John Manley, who served as industry minister from 1993 until late 2000 and oversaw a number of foreign takeovers of Canadian companies, says commitments made under the Investment Canada Act are problematic because a shift in economic fortunes can make them untenable.

“It is always in the minister’s mind that an undertaking is only effective as the business conditions allow it to be. When you have a major downturn in the economy and the business prospects of the Canadian branch are in decline, the ability to fulfill some undertakings is going to be compromised from the outset,” Mr. Manley said.

Only once in the 25-year history of the Investment Canada Act has the federal government tried to use the act’s legal powers to force a company to live up to its commitments. Ottawa sued U.S. Steel for shutting down Stelco’s operations and cutting jobs and reneging on spending commitments. But the case is still inching its way through the courts and it is unclear if the government will be able to force the American company to change course.

Both Mr. D’Allesandro and Mr. Manley believe that BHP’s attempted acquisition of a Canadian global champion such as Potash Corp. may finally invoke a different response from the federal government rather than its usual takeover rubber stamping and willingness to allow vague and difficult to enforce commitments.

“If I were in BHP Billiton’s position, I would not presume that this is a done deal. I would presume that there is a lot of work to be done to convince everybody. Any day is a potential election day and in that environment this could be easily politicized,” Mr. Manley said.

When reviewing BHP’s application, Ottawa might also want to consider comments made in 2008 by BHP’s chairman at the time, Don Argus. Calling on his fellow Australians to continue investing in domestic mining assets, he cautioned that Australia’s resource sector was at risk of becoming globally irrelevant – just like the mining sector of another former British colony.

“If we fail to remain competitive,” the BHP chairman warned, “Australia will incur a substantial opportunity cost and in the worst-case scenario, our resources will fall into overseas hands and we will also become a branch office – just like Canada.”


The Globe and Mail


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THREE DEALS, THREE UNKEPT PLEDGES



1. Billiton-Rio Algom

The deal: Billiton PLC of London agrees to take over Toronto's Rio Algom for $1.7-billion in August, 2000.

The pledge to Investment Canada: Billiton promises to make Toronto its global base metals headquarters.

The result: Less than a year later, Billiton agrees to merge with BHP of Australia. The merged company's base-metals headquarters is moved to Houston with the blessing of Industry Canada. About 100 head office jobs are lost.




2. Xstrata-Falconbridge

The deal: Xstrata PLC wins a heated takeover battle for Canadian nickel and copper miner Falconbridge with an $18-billion offer in 2006.

The pledge to Investment Canada: Xstrata promises not to cut jobs at Falconbridge's operations for three years.

The result: Xstrata closes mines and cuts 700 jobs in 2009. Industry Minister Tony Clement acquiesces after Xstrata pledges to spend $250-million on a mine in Sudbury, a commitment the company made in its financial esults published weeks earlier.




3. Vale-Inco

The deal: Vale SA of Brazil takes over Inco in 2007 for $19.4-billion, acquiring the company's nickel operations in Sudbury.

The pledge to Investment Canada: Vale pledges not to lay off workers for three years.

The result: In 2009, Vale cuts 463 Canadian jobs including 261 in Sudbury. Mr. Clement does not object and is satisfied the pain of the financial crisis is being spread across Vale's operations. A bitter year-long strike ensues in Sudbury. Workers at Voisey's Bay operations in Newfoundland remain on the picket line.


Andy Hoffman

The Globe and Mail


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58 comments

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Score: 20
Name withheld
AlexB2

7:59 PM on October 4, 2010


So I guess we should not believe promises made by anyone who come to Canada with a takeover offer. The only thing we can rely on is that if accepted they will be broken.

I hope the feds understand this now.



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Score: 19
Name withheld
Oscarh1

9:42 PM on October 4, 2010


Time to shut down the BHP deal and repatriate most of the Potash Corp head office from Chicago back to Saskatoon. The Conference Board report suggests that Saskatchewan will be screwed royally if the BHP deal goes through. Also time to reign in Bill Doyle and senior management who take more from the Company than the Sask government gets in royalties. Enough already.


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Score: 19
Name withheld
Scenic Sask!

8:28 PM on October 4, 2010


BHP Billiton is opening the Jansen potash mine in Saskatchewan at a cost of $12Billion, $1Billion already invested.

If they acquire Potash Corp. they will be able to write off the Jansen costs against the five potash mines that are owned by Potash Corp. which will cost the Saskatchewan government $200Million per year for ten years ($2Billion).

Saskatchewan can NOT afford this deal.

NO SALE!


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Score: 17
Name withheld
JWR Bolton Ontario

8:49 PM on October 4, 2010



You are damn right. All multinationals lie and make up stories to make the acquisition. I was part of BHP take over of BHP, fortunatly took my pension plan, and they raided the captial Tsurpuls, totally destroyed a 50 year data base and corporate history, screwed employees and investors (unless directors and insiders, of which I was one). Vale is much more heartless. They are after the treasuries of the companies, steal the money, suck up the resources, and make reinvenstment anywhere in the world. I am a financial, business, operating mining engineer with over 40 yr. experience. This is sad, and worse yet, we cannot compete with the Australians. Ten years from now we will be third world in minerals, just mining out our resources. Zero reinvestment. Come on Harper, wake up like Lulu did in Brazil, and make this a real source of GDP resource including green Oil Sands. Want to contact me? Jroxbur@attglobal.com to start an uprising in the canadian mining professionals, or are we all dead, collecing our payout, and gone? We are bunch of sell out wimps except for the junior mining, which who will listen if there are no major listed mining companies on the TSX?


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Score: 17
Name withheld
Day Trader

7:49 PM on October 4, 2010



Both the Federal Government and the Provincial Government have the obligation to protect the interests of Canada, and they should speak out and ban this kind of foreign takeover on important natural resources.



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Score: 14
Name withheld
B G

10:39 PM on October 4, 2010



I wonder if Saskatchewan will become a "have not" province if this deal goes ahead.

According to the Conference Board of Canada: "Saskatchewan stands to lose at least $2-billion in revenues over the next decade if BHP is successful in its hostile takeover of Potash Corp. of Saskatchewan Inc....the government stands to lose up to $100 million a year in corporate income taxes if BHP writes off interest associated with its fully financed bid against income. On top of that, the province is also worried about a drop in lucrative potash roye will be third world in minerals, just mining out our resources. Zero reinvestment. Come on Harper, wake up like Lulu did in Brazil, and make this a real source of GDP resource including green Oil Sands. Want to contact me? Jroxbur@attglobal.com to start an uprising in the canadian mining professionals, or are we all dead, collecing our payout, and gone? We are bunch of sell out wimps except for the junior mining, which who will listen if there are no major listed mining companies on the TSX?


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Score: 17
Name withheld
Day Trader

7:49 PM on October 4, 2010



Both the Federal Government and the Provincial Government have the obligation to protect the interests of Canada, and they should speak out and ban this kind of foreign takeover on important natural resources.



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Score: 14
Name withheld
B G

10:39 PM on October 4, 2010



I wonder if Saskatchewan will become a "have not" province if this deal goes ahead.

According to the Conference Board of Canada: "Saskatchewan stands to lose at least $2-billion in revenues over the next decade if BHP is successful in its hostile takeover of Potash Corp. of Saskatchewan Inc....the government stands to lose up to $100 million a year in corporate income taxes if BHP writes off interest associated with its fully financed bid against income. On top of that, the province is also worried about a drop in lucrative potash royalties if BHP bows out of the Canpotex marketing arm as planned and operates its mines at full capacity, resulting in lower potash prices."

I suspect BHP has made a deal with China to break up the Canpotex cartel, in order to gain preferential access to the Chinese market in the other commodities that BHP deals in. The Saskatchewan potash industry is the pawn that BHP will sacrifice in it's drive to get greater access to the Chinese market.

Tony Clement has been burned before on these foreign hostile takeovers. As George Bush once said: "....don't get fooled again."


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Score: 13
Name withheld
George Smiley

8:53 PM on October 4, 2010



Why would Saskatchewan sell a company that is a proven winner?

Simply put, its a keeper.


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Score: 13
Name withheld
procanada1

8:20 PM on October 4, 2010



BHP Billiton is the type of corporation that neither Canada or Saskatchewan needs. The mineral wealth of Canada belongs to its citizens. The benefits that flow from mining these minerals should stay in Saskatchewan and Canada.
BHP did not put the Potash in Saskatchewan, they did not invest and develop the infrastructure
to extract it. The investment for mine developement and the infrastructure was put in place through the investment by the Provincial Government ie the citizens of Saskatchewan and Canada. Postash Corp. is doing just fine.It doesn't need Billiton or those of its ilk.
Billliton must Finance the purchase with borrowed money which will carry obligations to the Financiers who will probably be foreign and decisions about a Canadian resource will be made
in a foreign country.


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Score: 12
Name withheld
LesGuv

10:51 PM on October 4, 2010



Good on G&M for bringing the history of these promises to light.


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Score: 10
Name withheld
Longbow

9:20 PM on October 4, 2010



$36B's. Not enough to jeopardize a provincial economy. Double the price to see if they are really passionate about Saskatchewan and I don't believe even that is enough. Futures for potash is huge and the price should reflect that fact.


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Score: 10
Name withheld
child of the north

8:46 PM on October 4, 2010



Remember the days our banks begged Ottawa to grant them permission to join together to form mega banks to compete with the big US and world banks. We now see what can happen when you have TBTF banks. I look at these mega resource companies prowling around the globe trying to corner resource markets and I sense we are heading towards another disaster. Unfortunately, Canada has rescinded control of their resources. We will be spectators as these monster companies collapse and burn.


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Score: 9
Name withheld
B G

11:05 PM on October 4, 2010



If Harper blows another call on a foreign takeover it's going to kill him at the polls. Selling out the people of Saskatchewan could hurt his chances for re-election.


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Score: 8
Name withheld
Chief Ironknee

10:26 PM on October 4, 2010



It is good to see this deal being questioned. Saskatchewan! What the h@ll are you thinking. How could this be anything but a disaster for you? Potash as a stand alone company is completely dependent on being on good terms with the province and its people. As part of BHP it is not. BHP could threaten havoc with the Saskatchewan economy because it could afford to shutdown the whole works to get its way. The iron ore, copper, uranium, coal and oil divisions would carry it nicely. How would Sask fair?
BHP can build a mine and processing facilities if they want potash exposure. Just don't let them take it all. This isn't a good type of foreign investment - the mines are already built and functioning. They are buying control of the industry. Don't allow it, by BHP or any multinational conglomerate. Keep it dependent on the good graces of the province.
The hedge funds and Wall St don't like it? They can sell their shares. If it gets cheaper I'll buy some more.



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Score: 7
Name withheld
the blr chief

10:02 PM on October 4, 2010



Finally, an article from the Globe that looks at some history instead of grabbing the sensational headlines and running with it. It won't be hard to find lots of ex employees of these kinds of takeovers that could tell you some truths about how these companies work.


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Score: 7
Name withheld
B G

10:21 PM on October 4, 2010



BHP has pledged to break out of the Canpotex cartel and ramp up potash production in this Wall Street Journal interview:

http://online.wsj.com/article/SB10001424052748704125604575449640415573142.html

Breaking out of the cartel and ramping up production will drive down the price of potash and destroy Saskatchewan royalties.

That's all we need to know. The deal must be blocked.



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Score: 6
Name withheld
CentristTO

11:21 PM on October 4, 2010



It's surprising and encouraging that the Globe after all these weeks of quietly toadying to the banks puts out a credible article. Well done Andy!

But we all need to be aware that this whole thing is surrounded with pitfalls. Whatever way the governments (both provincial and federal) might approach the task of stopping this appalling deal, they need to be circumspect at not tripping over international rules such as those of the OECD and WTO.

Most developed countries have over the years put industrial strategies in place and buttressed them with laws and processes that are proof against challenges. Canada's politicians have utterly failed at this. They made considerable noises about doing this after the loss of Inco and Falconbridge. Needless to say that no action followed the big words.

Having to improvise at this point will be difficult but needs to be done. An essential part will be the Saskatchewan Government flexing its legislative muscle in terms of the mining concession as well as tax and labour issues.

It's a rare nice day when I can say 'Well done' to the Globe but I wished Iggy would understand that in this situation the role of the opposition is to demonstrate the people's opposition now. Don't wait until the deal actually gets done in order to subsequently make political hay from it. This is more important than politics. It's a serious challenge to our national interest.



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Score: 5
Name withheld
sean smith

12:25 AM on October 5, 2010



Its about time we started re-exerting national control over our resources again.

Every country protects its resources through either public ownership / crown corporations or industrial strategies and protections.

Its time we tossed off the "free market" fairy tales and realized we are giving away to these corporate vampires the future of our country.

Simply put, its time our governments started acting in the people's interests again instead of the current sad crop of politicians who do nothing but collect future Corporate Board appointments for services rendered.

We need another Tommy Douglas.



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Score: 5
Name withheld
B G

11:23 PM on October 4, 2010



At some the Canadian government is just going to have to do what is best for Canada. I know it's difficult in the face of intense corporate lobbying, free lunches, free trips, perks and bribes.

Every other country in the G7 is able to protect it's key industries and resources, why can't our government do it? Look out for Canadians.


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Score: 4
Name withheld
James Cyr Balmertown Ontario

8:35 PM on October 4, 2010

This type of thing would not happen at all if there was such a thing as "holding to account". If a company starts bandying about promises, the government should get them in writing as a condition of acceptance. If the company fails to live up to its obligation, the sale becomes null and void.



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