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Announcement:

MOODY'S AFFIRMS THE Baa3 SR. UNSECURED DEBT RATINGS OF INCO AND FALCONBRIDGE; OUTLOOK STABLE

11 Oct 2005
MOODY'S AFFIRMS THE Baa3 SR. UNSECURED DEBT RATINGS OF INCO AND FALCONBRIDGE; OUTLOOK STABLE

Approximately $4.4 billion of long-term debt affected.

Toronto, October 11, 2005 -- Moody's Investors Service affirmed the Baa3 senior unsecured debt ratings of both Inco Limited and Falconbridge Limited following their announcement that Inco will make an offer to purchase up to 100% of Falconbridge for a purchase price of $10.9 billion, comprised of $8.5 billion of Inco common shares and $2.4 billion in cash, plus assumed debt of $4.2 billion less acquired cash. The cash portion of the bid will be funded by debt. The affirmation of both company's ratings reflect the strong cash flow and asset positions of the combined entities, Inco's intention to reduce debt by $2 billion in the two years following completion of the transaction, and Moody's view that metals prices will remain sufficiently robust to permit this debt reduction to occur in the time period envisioned. The affirmation also reflects that the debt of both Inco and Falconbridge will rank as pari-passu obligations of Inco upon successful conclusion of the proposed transaction. The affirmation applies to the rated debt of both Inco and Falconbridge whether the proposed transaction is successful or not. Any material deviation from the proposed terms of the acquisition, as outlined above, could cause Moody's to lower the ratings or put them under review. The outlook is stable.

The following ratings were affirmed:

Inco Limited:

$1.1 billion senior unsecured debt, Baa3,

$438 million senior unsecured zero coupon debt due 2021, Baa3,

$240 million convertible debt due 2023, Baa3,

$220 million convertible, subordinated debt due 2052, Ba1*PP*.

Falconbridge Limited:

$2.4 billion senior unsecured debt, Baa3.

The acquisition of Falconbridge by Inco will create the world's largest nickel company as measured by both reserves and production. Inco will also be the eighth largest copper producer and will have a significant position in zinc and an integrated aluminum operation based in the U.S. The combined companies, pro forma for a $2.4 billion net increase in debt and a full year's interest thereon, would have LTM 6/30/2005 debt to EBITDA of approximately 3.0x, and EBIT to interest of approximately 5.7x. Moody's has assumed $11 billion of total debt, reflecting the anticipated post closing balance sheet debt amount, and adjustments for unfunded pension obligations, operating leases, preferred shares, and convertible debt. These debt protection measurements are reasonable for a Baa3 rating, but are somewhat weak in the context of the currently very strong profits and cash flows being generated in today's very strong metals price environment. Moody's is concerned that the absolute level of debt is high and that these ratios could deteriorate significantly in a sharp downturn in metals prices. For this reason, the ratings assume that post closing debt levels will be reduced by approximately $2 billion in the next 18 to 24 months and that Inco returns to its target debt to capitalization ratio of 30 to 35%.

The outlooks on both Inco's and Falconbridge's ratings remain stable. If the transaction closes as currently contemplated, the outlook on the combined company would be stable. The stable outlook would reflect the combined company's significant reserve positions in nickel and copper as well as its asset positions in zinc and aluminum that could be sold if necessary. The stable outlook also reflects the recent start-up of production at Inco's Voisey Bay operation and the ramp-up in production that will occur from that operation over the next two years. The stable outlook also considers that Inco's Goro project in New Caledonia will have the bulk of its capital expenditures occur in 2006 and 2007, and that a significant amount of the 2006 equipment purchase requirements have been ordered, reducing the inflation-based price risk that has plagued this and other significant mining projects over the past few years.

The ratings could be lowered if Inco fails to reduce its debt by $2 billion over the next 18 to 24 months or if metals prices deteriorate suddenly and significantly and Moody's believes that the company's debt reduction target is no longer possible.

Based on the current need for debt reduction to maintain the Baa3 ratings, it is not envisioned that the ratings will be raised over the near term.

Inco is a Toronto, Ontario based nickel producer that had revenues of $4.3 billion at December 31, 2004. Falconbridge is a Toronto based producer of copper, nickel, zinc and aluminum that had revenues of $7 billion at December 31, 2004.

Toronto
Terry Marshall
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

New York
Mark Gray
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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