Noranda, the Canadian base metals producer, is pursuing a partnership with Minmetals, the Chinese state-owned group, to obtain Chinese participation in mining projects in exchange for an assured supply of metals.
The partnership, described by Noranda as a "strategic alliance", would supersede discussions over the past nine months on Minmetals' acquisition of a controlling stake in Noranda.
Instead, Noranda outlined an agreed deal on Wednesday to buy the 41 per cent it does not already own of Falconbridge, the Toronto-based nickel producer. The deal, which requires the approval of Falconbridge's minority shareholders, would create one of North America's biggest copper, nickel and zinc producers.
But it could again turn Noranda into a takeover target at a time when international mining companies are enjoying the fruits of soaring commodity prices in the form of strong cash flows and high share prices.
Brascan, the Toronto-based property and power-generation group, had been seeking a buyer for its 41 per cent stake in Noranda.
Bruce Flatt, Brascan's chief executive, said on Wednesday that the combination of strong metal prices, the merger with Falconbridge and the prospect of an improved market valuation had changed Brascan's view. "We've crystallised about half of our investment, and we'll ride the balance", he said.
Under the Noranda-Falconbridge deal, Brascan will sell about half of its shares to Noranda, reducing its stake to between 16 and 26 per cent. "Control is being placed back into the marketplace with this transaction", Mr Flatt said.
Buoyed by strong metal markets and an earlier restructuring, Noranda's net earnings soared to US$551m last year from $23m in 2003.
Minmetals' talks with Noranda were widely hailed as the start of a wave of overseas acquisitions by Chinese mining and energy groups, but none has so far materialised. Derek Pannell, Noranda's chief executive, said on Wednesday that "there is no expectation on our part that Minmetals will be bidding for a major part of the company".
Still, Mr Pannell said that Minmetals' appetite for raw materials coupled with Noranda's drive to develop new projects could form the basis for the Chinese to take an equity stake in specific mines.
He cited the El Pachon copper project in Argentina and the El Morro copper and gold deposit in Chile, which will require a combined capital investment of about $1.9bn.
"China is a strong consumer of our product and they are extremely keen to work with us", Mr Pannell said. "We don't want to lose the momentum and goodwill that have been created."
The Noranda-Falconbridge deal will take place in two stages. First, Noranda will repurchase 63.4m of its common shares in exchange for three series of junior preferred shares with an aggregate value of $1.25bn
Each Falconbridge shareholder will then receive 1.77 Noranda shares for each Falconbridge share, representing a 15 per cent premium to the recent share price.