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Norsk Hydro buys Vale assets

May 4, 2010

“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.
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

Observations:

  • 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).

Implications:

  • 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.
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