What are the things the CEO of the world’s second largest mining company is worried about? What is Vale’s CEO Roger Agnelli doing to catch up with BHP Billiton? What is on top of his “To Do”-list?
An analysis of Vale’s latest annual and financial reports, investor presentations and the news about the company in the last months yields a list of 10 issues that are likely to be at the top of Agnelli’ list of priorities.
The list holds strategic, operational, financial and relational activities, each of which are scored in terms of importance and urgency. Priority 1 on the list is trying to prevent BHP’s acquisition of PotashCorp. Priority 10 is managing breakthrough innovation of copper processing in Carajás. Read on for the full list of priorities.
1. Assess opportunities to prevent BHP Billiton’s PotashCorp acquisition
BHP Billiton has made a hostile $39bln acquisition offer for PotashCorp, thus following Vale’s move of entering the potash business as a diversified miner. However, the potential changes to the market and to potash pricing (currently controlled by regional cartels) are likely to make Vale’s potash assets uncompetitive. Although the company has denied being in talks with PotashCorp to find alternatives, Agnelli will certainly devote a large portion of his time to finding a response to BHP’s offer.
2. Manage integration programs to reduce costs
Vale has grown rapidly partly because of a large number of acquisitions. Insiders comment that many of the acquired companies have never been integrated completely, creating operational inefficiencies and a lack of corporate culture. To sustain growth, Agnelli will be working hard on realizing the synergies from acquisitions by building global businesses. Part of this assignment is the carve-out of the aluminium business, which has been sold to Norsk Hydro this year.
3. Anticipate on Brazilian election results
Brazil will elect a new president, senate and governors on October 3rd 2010. Both economic policy and environmental policy on federal and state level could be impacted significantly by election results. Agnelli is certainly developing scenarios to react on post-election regulatory changes.
4. Study increase of gearing in order to accelerate growth
The company has traditionally grown by M&A, but is currently guarding its gearing carefully. However, in order to enable further acquisitions, Agnelli will be discussing increasing the gearing and accessing debt with the new CFO Cavalcanti, who took over from Fabio Barbosa at the end of June, and banking partners.
5. Compete for position in China
Compared to BHP Billiton and Rio Tinto, transportation distance poses a disadvantage to Vale in supplying iron ore to China. While Rio Tinto is creating strong ties with Chinese government via its partnerships with Chinalco, Vale will need to find alternative ways to improve relationships with clients and government in the country that is responsible for most of the growth in demand of its products.
6. Manage development of Guinean iron ore deposits
An important part of the growth of the iron ore production in the next decade should be coming from Guinea, where Vale will develop the Simandou South deposit. Vale will need to get infrastructure in place and start development soon in order to please the government, which recently took development rights away from Rio Tinto because the company was not proceeding fast enough.
7. Reduce iron dependence
Growing the copper business unit and building a fertilizer business are two of the ways in which Vale tries to reduce its dependence on iron ore. Although the iron ore business is a star business with solid growth perspectives, the volatility caused by the dependence on one single commodity will worry Agnelli. Diversification into other business units is crucial for the long-term stability of the company.
8. Gain access to coal in Latin America
Although a lot of iron ore is shipped to China, Brazil is booming too. In order to produce steel for the domestic market, Vale needs to develop coal capacity in Latin America, which will require strategic acquisitions and targeted exploration.
9. Manage employee relations after Vale Inco strike
The board will need to prevent repetition of strikes like they experienced at Vale Inco during the last two years in Canada. Reviewing and improving international employee relations is both crucial for the company’s productivity and to improve the image in labor market, where Vale still has difficulties to attract international management talent.
10. Manage technological processing innovation for copper in Carajás
The company is trying to scale hydrometallurgical copper processing technology to commercial level in the Carajás UHC plant. Success in this project would have significant profit impact and would position Vale with the current deposits in development as one of the most competitive copper producers globally.
Sources: Vale annual report 2009, Vale summary review 2009, Vale investor presentation February 2010
“…the company is spending $1.5 billion to create a new, low-cost bauxite mine. The aluminum maker hopes that by spending now it will be able to become a lower-cost producer once the economy finally stabilizes.” The issue of when, where and how much company cash to spend is a puzzle for top metal and mining executives during the best of economic times. But adopting either a save or spend strategy is critical for a company like Alcoa in this tough economic environment, because for years it has lost ground to more nimble and efficient competitors Rio Tinto, UC Rusal and to small upstarts. Source: Wall Street Journal, June 22 2010
“…the company is spending $1.5 billion to create a new, low-cost bauxite mine. The aluminum maker hopes that by spending now it will be able to become a lower-cost producer once the economy finally stabilizes.”
The issue of when, where and how much company cash to spend is a puzzle for top metal and mining executives during the best of economic times. But adopting either a save or spend strategy is critical for a company like Alcoa in this tough economic environment, because for years it has lost ground to more nimble and efficient competitors Rio Tinto, UC Rusal and to small upstarts.
Source: Wall Street Journal, June 22 2010
- Alcoa has developed a new high-grade bauxite mine in the middle of the Amazon rain forest. The development cost approx. $1.5 bln.
- Due to a 60% decrease in aluminium prices, net income of Alcoa has been negative for the past 2 fiscal years. However, the company has managed relatively well to bring operating costs down.
- Vale recently sold its Brazilian aluminum operations to Norsk Hydro because of the high risk associated with energy price volatility. Alcoa will have to prevent being hit by high energy prices or black-outs by executing the energy-intensive aluminum production process in other parts of the world.
- Alcoa’s CEO Kleinfeld chooses to invest anti-cyclical, contrary to what many competitors are doing. If the balance sheet allows so, this is generally seen as a good strategy to capture market share. However, Alcoa has only some $1.5 bln in cash, which will make it hard for the company to continue the high level of investment.
©2010 – thebusinessofmining.com
“A deal with Norway marks a change of course for a Brazilian mining giant … For Vale, ridding itself of its aluminium business, its third-biggest source of revenue after iron ore and coal, marks a significant change of course. Its purchase of Inco, a Canadian nickel miner, in 2006 and its failed attempts in 2008 to take over Xstrata, another big competitor, indicated that Vale’s strategy was to become a diversified global mining giant like Rio Tinto and BHP Billiton. But now, as Jordi Dominguez, an analyst at HSBC, puts it, the Brazilian company is ‘de-diversifying’.”
Source: The Economist, May 6 2010
Source: The Economist, May 6 2010
- Vale has done a significant investment in the iron ore business and in the same week as sold its aluminium business.
- HSBC and the Economist interpret these transactions as a significant change of course for the company. Where the company has been trying to diversify in the previous years, the Economist suggests Vale will focus more on the iron ore business.
- The reason Vale has given for their ‘portfolio restructuring’ is the uncertainty of cheap energy supply in Brasil, which is crucial for a sustainable profitability of the aluminium business.
- One of the key messages of Vale’s latest investor presentation was that it would invest more in fertilizer nutrients. One of the major projects coming on steam is the Tres Valles copper project. These signs cannot really be explained as “de-diversification”.
- HSBC and the Economist are likely to have drawn their conclusions too rapidly. Vale has reduced the risk in an important part of its business in a sound deal, at the same time reducing its dependency from the Brazilian government.
“Norsk Hydro has agreed to buy the aluminium assets of Vale, the Brazilian metals and mining group, in a $4.9bn deal that will secure the Norwegian company’s raw material supplies for decades. The move will give Norsk Hydro control of Paragominas, the world’s third-biggest bauxite mine, as well as Vale’s alumina refining and aluminium production facilities in Brazil.
Source: Financial Times, May 3 2010
Norsk Hydro, Europe’s third largest aluminium maker, said the deal would boost its competitiveness by providing a long-term supply of high-quality, cost-efficient raw materials. The Oslo-based company, 43.8 per cent owned by the Norwegian government, will pay Vale $1.1bn in cash, with the remainder in new Norsk Hydro shares and $700m of assumed net debt.”
Source: Financial Times, May 3 2010
- Norsky Hydro ensures access to large resources of bauxite, thus reducing the risk of price volatility between miners and processers.
- Vale’s cash position has improved after the combination of this transaction ($600 million cash now + $200 million in 2013 and $200 million in 2015) and last week’s acquisition of the Simandou assets, for which it had to pay only $500 million immediately.
- Vale gives as a rational that “its participation in the primary aluminum metal industry is small, and has no growth potential due to the lack of access to low-cost sources of power generation, as energy is a key factor for the competitiveness in this business. “ (Source: Vale press release, May 2 2010).
- Vale transfers the risk of electricity costs (and potential associated carbon emission costs) to Norsk Hydro.
- Vale appears to be focusing more on the iron and steel market. However, in order to reduce dependency on the iron ore price targeted acquisitions of companies with good resources of zinc, chromium & nickel or precious metals (given the current operating margins) are likely.