Brazilian mining giant Vale gears up for ‘in-house’ diversification, possible acquisitions
September 6 2017
Speculation has mounted in recent weeks on possible plans by Brazilian mining company Vale’s new CEO Fabio Schvartsman to diversify and make new acquisitions. New strategic partnerships are in theory ruled out because Vale is big enough “to set its own, even more ambitious goals,” according to the new CEO.
New developments may be known on October 18, the date of Vale’s next general shareholders’ assembly, when a “diagnostic report” on the company’s activities, called for by the new CEO, may be considered by board members.
Indications are that Schvartsman — CEO of a paper and pulp concern before he took over the helm of the Brazilian mining giant in May — is concerned over Vale’s dependence on standard iron ore products, the company’s mainstay.
“We are heavily dependent on iron ore, which is extremely volatile,” Schvartsman said in a recent webcast, stressing that this has forced Vale to continue reducing debt. “Carrying debt with this degree of volatility in our principal product is very dangerous.”
The idea is that new diversification will come from within Vale, Schvartsman said, with acquisitions potentially made to support this strategy, where necessary.
There appear to be two areas of immediate focus: nickel, the company’s second biggest product area, which needs to be contributing more, according to the new CEO, particularly from its project in New Caledonia; and value-added iron ore products, which would help the company capitalize on its enormous Carajas iron ore mines, which are among the world’s highest-grade deposits.
Vale is the world’s biggest producer of both iron ore and nickel, with expected 2017 output of 365 million mt and 295,000 mt, respectively. The downside is that in recent years these have been among the most volatile commodities in the world of metals.
In terms of nickel, cost challenges have arisen from difficult start-ups and older and more pollutant mines. But long-term market prospects are good on the back of stainless steel growth and the use of nickel in batteries, including in the electric car sector.
In terms of iron ore, the market now offers Vale the opportunity to place significantly greater emphasis on higher-value products, including pellets and ore blends, which today command healthy premiums to the volatile spot market price.
While the iron ore market in general is oversupplied, causing price volatility, at the higher-quality end supplies are tight, in particular in China where an anti-pollution drive is phasing out smaller blast furnaces and new larger furnaces are being built, which require low-impurity high-iron quality ores to ensure productivity.
Vale is already the world’s biggest iron ore pellets producer but next year the company will significantly enhance its position in this area, bringing back on stream three idled pelletizing plants to boost its overall pellets production capacity to 60 million mt/year.
NEW SHAREHOLDER STRUCTURE
Vale’s strategic moves follow its introduction in July of “a new organizational structure that will support the company’s value-generating strategy…fostering greater integration in our value chain.”
A revised, simplified shareholder structure now gives management more autonomy and, according to observers, reduces the potential for interference by federal-government owned shareholders.
Integration of the company’s ferrous activities is to come via automation and a new Belo Horizonte-based operations control center. A new emphasis on core assets follows divestments worth more than $16 billion.
The company has shrunk an unproductive fertilizers business after complications over a project in Argentina, sold the bulk of its shipping fleet and oil assets. Coal, copper and cobalt interests meanwhile continue in ascension over the longer term, with new mine capacity ramping up in Brazil and abroad.
POSSIBLE ACQUISITION TARGETS
As for acquisitions, local speculative press reports have said Vale may be eying the purchase of its rival Cia Siderurgica Nacional’s Casa de Pedra iron ore mine in Minas Gerais state as well as BHP’s stake in the Vale-BHP Samarco pelletizing joint venture.
Any move to acquire Casa de Pedra is flatly denied by Vale and the latter rumor has been dismissed by both miners as “merely speculative.”
Nonetheless, Vale’s purchase of the Samarco stake could make good sense. BHP is thought anxious to reduce its “Brazil risk” following the November 2015 tailings dam accident at Samarco, which caused 19 deaths and a major environmental disaster, as well as landing the miners with an environmental fine of approximately $46 billion — the timetable for payment of which is under negotiation — and has put the pelletizer out of action possibly until 2019.
Informed market sources close to Vale indicate that Vale would be able to get BHP’s 50% stake in Samarco at a discount were it to buy before Samarco resumes operations. “The longer it takes to close the deal the worse it will be for Vale,” the source said.
And the price? “There’s lots of uncertainty: iron ore prices, when it might return to production and how much it will produce. Samarco operating at a rate of 30 million mt/year, and without environmental debt or other debts, would be worth around $6-8 billion.”