Nickel's New No. 1

When you're a basic metals company and you want to get bigger, you only have two real options: Dig more metal out of the ground, or buy another miner. The world's second-largest nickel producer, Canada's Inco (NYSE: N  ) , is taking door No. 2 and buying fellow Canuck Falconbridge (NYSE: FAL  ) to create the world's largest nickel producer.

In what should be about a $10.6 billion deal, Inco is offering close to $29 a share to Falconbridge shareholders -- roughly a 9% premium to yesterday's close. Under the terms of the agreement, Falconbridge owners can choose to receive that sum entirely in Inco shares, all in cash, or in a combination of the two. That said, Inco won't dish out more than $2.4 billion in cash or 201 million shares, so investors may receive a prorated amount vs. what they initially request.

On a combined pro forma basis, the two companies will produce about 735 million pounds of nickel in 2005 -- a figure that I believe will put them well ahead of the former No. 1 nickel producer, Russia's NorilskNickel (Nasdaq: NILSY  ) . In addition to aluminum and zinc operations, Falconbridge is also a sizable copper producer, and while the combined company won't produce copper quite on the scale of Phelps Dodge (NYSE: PD  ) , it'll be a large player nonetheless.

This is a tricky deal to analyze right now. The price doesn't seem terribly out of line, but there is the risk that Xstrata, a Swiss company that owns 20% of Falconbridge, could play hardball and try to greenmail Inco into a better price -- perhaps by threatening to make a competing bid. What's more, Inco is buying Falconbridge at a time when the equities of basic materials stocks are quite high on a historical basis. By and large, buying a commodity company when the commodity in question is expensive means you're likely overpaying.

Nevertheless, Inco is about to become an even more major and globally diversified player. When it's all said and done, management efficiency and the price of nickel and copper will go a long way toward determining the success of this move. Though management is optimistic about future nickel prices, other companies such as Motley Fool Income Investor pick POSCO (NYSE: PKX  ) , which uses nickel to make stainless steel, seem a bit more conservative. Only time will tell, but Inco is certainly putting its shareholders' money where its mouth is.

More Takes worth more than a nickel:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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