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Top 10 Priorities of Vale’s CEO Roger Agnelli

September 2, 2010 2 comments

Roger Agnelli

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

PotashCorp calls BHP’s behaviour ‘unethical’

September 1, 2010 Comments off

“The hostilities between PotashCorp and its suitor BHP Billiton escalated on Tuesday when the Canadian fertiliser producer accused the multinational miner of “highly unethical” behaviour.

Potash said that BHP had made unsolicited contact with its customers as part of BHP’s $39bn hostile bid for the Canadian company.

Stephen Dowdle, PotashCorp’s sales chief, said in a letter to customers that the company had learnt that BHP had ‘begun to cold call many of you’.”

Source: Financial Times, September 1, 2010

Observations:

  • PotashCorp complains about BHP Billiton calling the key customers of the company, trying to convince them about the value of the deal.
  • BHP has launched a campaign to win over stakeholders to sell their shares at $130. Marketing to other stakeholders like government, suppliers and customers is obviously part of the strategy to achieve a positive public opinion to the deal.

Implications:

  • BHP’s move to discuss the results of the acquisition with PotashCorp’s clients & suppliers is not strange in itself. Paying $39bln for the company without knowing the thoughts of key stakeholders would be rather naive. However, the ‘marketing objective’ of calling the stakeholders at this stage is obvious.
  • PotashCorp itself is not fully innocent of dubious practices either. When publishing the brochure to convince shareholders not to sell to BHP Billiton, the company announced talks were ongoing with various parties that could lead to other deals. This has been one of the main reasons for the share price to increase to $150, making a quick deal for BHP Billiton unlikely.
  • Most likely BHP will have to make a new offer around $145-$150 per share to get the required two thirds of the shares. This will cost the company an additional $4.5-5.0bln.

©2010 | Wilfred Visser | thebusinessofmining.com

BHP faces potash cartel backlash

August 27, 2010 Comments off

“Mosaic and Agrium, the partners of PotashCorp in Canada’s fertiliser cartel, have launched a campaign defending the industry’s pricing and marketing arrangements in a move that could impede BHP Billiton’s $39bn takeover bid for PotashCorp.

BHP has signalled it plans to use infrastructure such as port and rail facilities that belong to Canpotex, the cartel that comprises PotashCorp, US-based Mosaic and Agrium of Canada. “

Source: Financial Times, August 26, 2010

Observations:

  • The fertiliser cartel, which controls 70% of the global market in cooperation with the Russian cartel and PhosChem, is currently regulating supply in order to keep stable, high prices.
  • BHP is planning to operate PotashCorp’s mines at full capacity and has also indicated it wants to move the fertiliser market to a day-based pricing system.

Implications:

  • BHP will have to play according to the rules of the cartel at least in the first years after the acquisition (if it succeeds). The cartel shares logistical assets that are crucial for the Saskatchewan operations to operate at low costs. Breaking the rules of the game would seriously impede BHP’s access to these assets.
  • BHP’s incentive to break the rules of the game are grounded in the production cost curve. Lowering the global price would force many small operators (including Vale) out of business.
  • The move of BHP into the phosphate business will force the high cost suppliers to lower cost. This is the main reason various players are trying to prevent the acquisition from happening.

©2010 | Wilfred Visser | thebusinessofmining.com

BHP results underline financial strength

August 25, 2010 2 comments

“BHP Billiton, the Anglo-Australian miner that last week launched a $39bn hostile bid for Canada’s PotashCorp, has reported its second best full-year net profit on record fuelled by strong growth in earnings from its petroleum and base metals operations.

The Melbourne-based miner, the world’s biggest, underlined its financial clout when it said on Wednesday that it generated $17.9bn in cash flow from its operations, with net debt falling to $3.3bn and a gearing ratio of 6 per cent.

Profits on a pre-tax basis rose from $11.6bn to $19.6bn in the year ended June on revenues that increased from $50.2bn to $52.8bn. After-tax profits grew from $5.9bn to $12.7bn, falling short of forecasts of around $13.3bn.”

Source: Financial Times, August 24, 2010

Observations:

  • BHP has managed to increase output by $2.9bln while improving operating performance by $0.3bln. The improvement vs. 2009 is mainly explained by higher copper, base metals & petroleum margins. Revenues and profits do not yet come close to pre-downturn levels, mainly because of lower iron ore prices in the second half of 2009.
  • The published project pipeline shows that the Navajo St. Energy Coal project has been dropped in the feasibility stage in the past year.

Implications:

  • Main take-away from the executives’ Outlook presentation is the expected slowing of government-driven growth in China and Europe. The board appears to be trying to lower expectations for next year’s results.
  • The net gearing of the company of 6% is stressed to demonstrate the ability to increase debt in order to purchase PotashCorp. This figure is the most positive leverage-related ratio from the balance sheet. The regular debt-to-equity ratio (debt/equity) is 80% and will exceed 100% after the acquisition.

©2010 | Wilfred Visser | thebusinessofmining.com

BHP turns hostile with $39bn Potash bid

August 23, 2010 Comments off

“BHP Billiton launched a hostile bid for PotashCorp on Wednesday, ignoring cries of undervaluation from the Canadian fertiliser group’s executives, as the mining company took its $39bn offer directly to shareholders.

Analysts and investors expect the bid to rise, despite the claim of Marius Kloppers, BHP chief executive, that the $130 per share offer was full and fair. ‘The investors are saying that $160 per share is the level at which they start listening,’ said a US mining analyst.

In the biggest bid of the year, there was no hint last night of any competitors coming forward with rival offers that would drive the price immediately higher. By opening its move at nearly $40bn, BHP erected financial barriers to entry that are insurmountable to all but a handful of global miners such as Rio Tinto, Vale, Aluminum Corp of China or Xstrata.”

Source: Financial Times, August 18, 2010

Observations:

  • BHP Billiton offers $39bln in cash. As the company has only $9bln in cash, over $30bln has to be borrowed. This will double the debt load of the company. Goodwill on the balance sheet of the new company will increase by $26bln.
  • Analysts suggest BHP might increase its offer to $150 per share. At a higher price, developing its own potash mines would be cheaper. Current share price of $149.7 supports this analysis. Potential synergies would allow a premium of close to 60% to pre-offer share price.

Implications:

  • Rio Tinto executives can relax if the deal is closed. Spending $39bln or more on PotashCorp signifies Marius Kloppers deems a take-over of Rio Tinto no longer feasible.
  • Vale and Sinochem have approached PotashCorp in order to assess opportunities of collaboration that would pursuade the shareholders not to sell their shares to BHP Billiton. Especially Vale, which is building its own fertilizer business, would clearly benefit from any deal it could strike with the distressed management of PotashCorp.
  • The strong move of BHP into potash demonstrates the material is becoming mainstream for diversified mining houses. For a long time, potash mining has been regarded a separate business. PWC included potash miners in its yearly analysis of the mining industry this year for the first time. With Vale and BHP Billiton holding a strong stake in the industry, more diversified miners might start looking for potash deals.

©2010 | Wilfred Visser | thebusinessofmining.com