Posts Tagged ‘royalty’

Top 10 Priorities of Vale’s new CEO Murilo Ferreira

June 22, 2011 Comments off

Murilo Ferreira

The world’s second largest mining company has changed the man at the top. Roger Agnelli, who led the company for almost 10 years, was replaced by Murilo Ferreira last month. Though Agnelli grew the company into a global force in the industry, he did not manage to please the Brazilian government sufficiently. As a result the new president, Dilma Rousseff, pushed for a change. What is on top of the “To Do”-list for the new CEO?

An analysis of Vale’s latest annual and financial reports, the press conference to introduce the new CEO, investor presentations, and the news about the company in the latest months yields a list of 10 issues that are likely to be at the top of Ferreira’s 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 to build strong government relationships; priority 10 is to expand the metallurgical coal business in Latin America. Read on for the full list of priorities. For those readers working with Vale: don’t hesitate to forward the list to mr. Ferreira.

1. Build government relationships

Mr. Agnelli grew the company, but he did not manage to please the Brazilian government. The government controls the majority of the voting shares, and hopes to use Vale as a means to stimulate the domestic economy. The key task for mr. Ferreira will be to build strong government relationships without giving in to government requests which would hurt general shareholder value.

2. Develop strategic messages

A first step for each CEO after taking office is to get the key messages to be repeated over and over again to investors and employees. Especially Vale’s communication to the investor world has historically been poor. Selecting the key points to tell to the world the coming year(s) and tuning the communication and communication support is an important task during these first months.

3. Discuss tax & royalty claims

Related to the first point of building government relationships: the government claims a total of $16.0bln tax over the period 1996 to 2008 plus some $4.7bln in royalties (CFEM). Furthermore, Vale’s current effective tax rate is some 10% below official tax rate because of various tax incentives, for which the continuation is not sure. Reaching agreement with the authorities about these claims and the future tax incentives is crucial for the share price to increase.

4. Build global culture, integrate & decentralize

One of the key points mentioned in mr. Ferreira’s first press conference as CEO was the change of the company style towards a more decentralized system in which team work is incentivized more. Next to driving execution mr. Ferreira will need to be the living example of a global cultural change, in which each part of the business feels equally valuable.

5. Manage vertical integration in Brazilian steelmaking

The next (potential) issue with the Brazilian government is Vale’s role in the Brazilian steelmaking industry. The government wants to create a strong vertically integrated player, and therefore needs Vale to cooperate with players like Gerdau and Usiminas. Although it is in Vale’s best interest to stimulate domestic demand for iron ore to offset the disadvantage in transportation costs to supply the Asian market versus Australian mines, the company wants to stay a pure miner. Developing and discussing strategic options for the domestic industry will be an important task for mr. Ferreira to demonstrate his leadership.

6. Solve roadblocks for development execution

Vale plans to invest $17.5bln in new project development this year, but various projects run the risk of delay. Most roadblocks have to do with demands by federal and regional governments (e.g. the temporary suspension of the Rio Colorado project in Argentina), signalling the requirement to more proactively involve governments in planning procedures.

7. Manage operating cost pressures

A key competitive advantage to Vale is the low cost base of its operations in Brazil. The risk of lower iron ore prices forces mr. Ferreira to try to keep costs down at a time of cost inflation. Especially the management of the energy matrix (energy costs account for over 15% of COGS) and of outsourced services, which are sensitive to Brazilian wage inflation, will require management attention.

8. Compete for position in China

A key task for any big mining firm this decade is to fight for pole position in supplying the number one growth market: China. Mr. Agnelli secured various lucrative supply deals, but Vale did not yet sign significant partnerships. Mr. Ferreira has limited experience with the Chinese market and will thus need to spend time on getting to know the key players and developing relationships which are important for both future development and future supply contracts.

9. Transform internationalization organization

Vale still is a very much Brazilian company: out of the 120 thousand workers (incl. 40% contractors) 80% is located in Brazil. However, this Brazilian focus is starting to hinder the company in attracting international investors, customers, and employees. Even press conference in which new CEO was presented was conducted in Portuguese, certainly posing an obstacle to some investors. Appointing CEO with experience of working in North America is step in the right direction, but mr. Ferreira will need to do more to improve the international image of his company.

10. Build metallurgical coal business in Latin America

Partly driven by the need to diversify the company’s revenue base (68% of revenue still comes from iron ore & pellets, with an even higher percentage when looking at profits), partly driven by the need to build the domestic steel industry, Vale needs to gain access to metallurgical coal close to home. The company operates thermal coal mines in Brazil, but metallurgical coals needs to be imported. Exploration in Colombia is promising, but more needs to be done to build the coal business.

Sources: Vale annual report 2010, Vale CEO press conference May 2011, Vale investor presentation February 2011

©2011 | Wilfred Visser |

Rio Tinto signs agreement with Guinean government

April 25, 2011 Comments off

“Rio Tinto’s most troubled mining project appears poised for multibillion-dollar development after the company agreed to pay $700m to the government of Guinea and grant it a 35 per cent stake in its iron ore mine. The deal was reached on Friday ahead of plans by Guinea, a west African country rich in iron ore and bauxite, to review all mining licences as part of its push to secure bigger returns from its mineral wealth.

Vale and other multinational miners active in Guinea now have a precedent for their negotiations with the government. Vale, the Brazilian company that is the biggest iron ore miner, paid $2.5bn for a stake in a Guinean deposit last year. Rio’s deal allows Guinea to move towards a 35 per cent stake in Simandou, the iron ore deposit – located in a remote corner of the country – that is thought to be one of the world’s best untapped lodes of the ore.”

Source: Financial Times, April 23 2011


  • Last month Guinea announced a review of mining licenses, including the demand to get minority stakes in all major mining projects in the country.
  • Rio Tinto controls blocks 3 and 4 of the Simandou deposit, with Brazil’s Vale controlling blocks 1 and 2. First shipment of iron ore by Rio Tinto is expected by mid-2015.


  • The agreement of Rio Tinto to construct a railway through is a major blow for the government of Liberia, which hoped to convince the miners to export the ore with a shorter route via Liberia. The decision on the export route will further trigger challenging negotiations with Vale about using the same infrastructure to export ore from the area.
  • The 35% government stake can be build up over time, with the final 10% to be bought at market value in 15-20 years time. Tax rate is set at 30% after the first 8 years, with additional 3.5% royalties. The $700mln payment is only made conditional on granting the concession and approving the Rio Tinto / Chalco joint venture. Based on these conditions it appears Guinea intends to be a friendly host to international mining companies in the long term, but requires strict payment and infrastructure development contribution in the short term.

©2011 | Wilfred Visser |

Fresh victory for miners on Australian tax

March 25, 2011 1 comment

“Canberra will refund any increase in royalties that cash-rich mining companies are forced to pay Australian states, amid concerns that governments around the world may not be receiving a fair share of their mineral wealth.

Julia Gillard, Australia’s prime minister, last year tried to end a dispute with mining multinationals, including Rio Tinto and BHP Billiton by watering down a proposed “super profits tax”. But the issue of who would pay higher royalties in states such as Western Australia, where much of the world’s iron ore is mined, remained a bone of contention. The minority Labor government said on Thursday that it had agreed to all 98 recommendations from a policy review group led by Don Argus, the former chairman of BHP . These included a provision that miners should receive credits for “current and future royalties” charged by state governments.”

Source: Financial Times, March 24 2011


  • The minority government needs to secure enough votes for a tax to get it approved. The (Green) Liberal-National coalition has announced it might vote against the proposal, as it is favoring a higher tax rate.
  • The new tax is a watered down version of the super profits tax proposed by former prime minister Kevin Rudd. The new tax, which could increase tax revenues for Australia by several billion dollars, should become effective next year.


  • By ensuring that miners are not hurt by royalty increases from local and regional governments the policy review group tries to reduce uncertainty for Australia’s miners. Being able to accurately predict royalty and tax cash flows is of great importance to investment planning.
  • Colin Barnett, the premier of Western Australia could play an important role in securing support for the MRRT. Barnett does not agree with federal influence on state royalty systems, arguing that the resources are owned by the state (of Western Australia) and that too much money is going from his state to other parts of Australia. He is campaigning to stop the reform.

©2011 | Wilfred Visser |

The Economist on Vale: Brazil’s mining giant

September 27, 2010 Comments off

The Economist published a strong article describing the rise of Vale:

“It is perhaps the biggest firm you have never heard of. The Boston Consulting Group says it has created more value than any other large firm in the world over the past decade. Yet few people know how to pronounce Vale’s name (it’s “vah-lay”).

This giant Brazilian miner has stayed out of the spotlight even as ravenous demand from China has propelled it from insignificance ten years ago to a market capitalisation of $147 billion. It is now the world’s second-largest miner: smaller than BHP Billiton, but bigger than Rio Tinto and other better-known rivals.

That Vale has kept its success quiet is partly an accident of history. It is not the product of a headline-grabbing mega-merger. Rather, it was a staid state-owned firm until it was privatised in 1997. It hatched plans to build itself into a big, diversified mining company only in 2001.”

Source: The Economist, September 23, 2010

Where the Economist is right:

  • Vale has grown steadily organically and by small acquisitions from a state-owned local player to a state-backed global player.
  • The company is still heavily depending on its iron ore production (65% of revenues, at times an even larger part of profits), diversifying into other metals mainly to hedge risks. Only the fertilizer business is set up to become a future star performer, but this might be frustrated by BHP’s Canadian plans.
  • The capital expenditure of the company in the coming years will by far be superior to the competitors’ investments. Rio Tinto is bound to a $5bln capex for this year, while Vale is said to invest around $100bln in the next 5 years.

Where the Economist might be wrong:

  • The vertical integration into transportation is more a necessary evil than a strategic asset. The company started the railway expansion because it could not trust the government to provide the infrastructure required for its operations and it bought bulk tankers mainly because its geographic locations makes ownership of the ships a better option than contracting the shipping. However, the ownership of a fleet might make Vale an interesting partner for various commodity trading houses that are looking to strengthen their upward ties.
  • The pressure of the Brazilian government for local investments is certainly not on top of the management’s mind. Although the government should be kept satisfied to keep te current royalty structure, expansion abroad is crucial for the company’s success, which leads to increased international prestige and tax income for the government.
  • The strong presence in the Brazilian iron ore market is a strategic asset rather than a hinderance. In the shadow of China, Brazil is developing an enormous appetite for steel. Vale is not only the most suitable cultural supplier; its domestic production ensures it is by far the lowest cost supplier to the developing Latin American market too.

©2010 | Wilfred Visser |

Australia unveils resources tax

May 3, 2010 Comments off

“Australia’s government plans to reap billions of dollars more in tax from the country’s booming resources industry and use the extra revenue to cut company taxes to a more globally competitive level while offering more generous tax concessions for smaller firms.”

Source: Wall Street Journal, May 2 2010


  • A federal royalty charge of 40% on resources profits will increase Australia’s GDP by 0.7%.
  • Rio Tinto share price decreased by over 4% on Friday as the royalty could decrease corporate profit by 27% (FT May 1 2010).


  • As mining companies are not flexible in their choice of the mining location, companies with a strong production base in Australia will suffer from the tax changes.
  • The new iron ore pricing system will to a large extent prevent prices to be increased to make up for the decrease in profit.
  • Other countries might follow Australia’s example, trying to reduce deficits by taking a larger part of the mining profits.