Brazil's Vale confirms talks with Xstrata (Source: Mining Weekly) and more

By: Liezel Hill
Published: 21 Jan 08 - 16:17

The world's biggest iron-ore producer, Companhia Vale do Rio Doce (Vale), confirmed on Monday that it had held talks with the management of diversified miner Xstrata.

However, it said that the discussions “had not produced any material results yet”.

“Vale continues to analyse several other options, involving different mining assets,” the Brazil-based firm said in a statement.

The firm has also had talks with banks regarding financing options, should it decide to pursue any of the possibilities being discussed.

But, in the same breath, the company cautioned that current conditions in global financial markets could "constrain the realisation of a major strategic move".

Brazilian newspaper Valor Economico reported on Monday that Vale was planning to offer as much as $90-billion for Xstrata.


Xstrata and Vale own neighbouring nickel-mining operations in Canada's Sudbury region, after Xstrata bought Falconbridge in 2006, and Vale bought Inco in the same year, following a failed attempt by the two Canadian companies to merge.

Vale and Xstrata have said they are discussing ways to create savings through cooperation in the Sudbury Basin, which contains one of the largest nickel deposits in the world.

Xstrata Nickel corporate affairs director Peter Fuchs told Mining Weekly Online last week that the companies continued to work closely to unlock value from the operations, although no "formal arrangements" had been made yet.

"The timing of such arrangements has not been finalised, but our target is to realise the potential benefits as soon as possible," he said, but declined to provide further details.


Xstrata spokesperson Pam Bell said that the company noted Vale's statement, but that it had "no further comment" on the issue.

Xstrata said last month that it was “continually reviewing opportunities”, and that ongoing talks with a number of industry participants had covered topics including “industry consolidation”.

The UK's Financial Times also reported, without naming its sources, that Xstrata CEO Mick Davis had asked advisers Deutsche Bank and JPMorgan Cazenove to take any interested parties seriously.

London-based Anglo American plc has been mentioned by analysts as a potential suitor for the company.

However, any bid for Xstrata would need the blessing of privately-held Swiss commodities trader Glencore, which owns about 35% of the group.

An offer by Vale for Xstrata would be the second potential tie-up between two resources giants to emerge in recent months, with London-based Rio Tinto fending off a (still to be formalised) takeover bid by BHP Billiton, the world's biggest mining company.

BHP is proposing to exchange three of its own shares for every one Rio share, but Rio Tinto CEO Tom Albanese says the ratio undervalues his company.


Posted: Thu, 24 Jan 2008

[] -- VALE was struggling to secure $50bn in financing to take over Xstrata, said 'O Estado de S. Paulo', a newspaper in Sao Paulo, citing people close to the discussions.

A group of as many as 12 banks wants Vale to pay higher interest rates if it loses its investment-grade rating, Estado said. Vale would also have to sell $10bn of new preferred shares to boost capital should its rating be cut, Estado said. CEO Roger Agnelli was to ask the board to consider the plan this month. Vale said on 21 January it was in talks to buy Xstrata. Vale spokesman Fernando Thompson declined to comment when contacted by Bloomberg News.

The big Brazilian

Vale has Xstrata firmly in its sights in its quest to become the world's largest miner, writes Jamie Freed. (The Sydney Morning Herald)

Back in November, Roger Agnelli, the charismatic chief executive of Companhia Vale do Rio Doce, stood before investors in Paris as the proud leader of the world's 33rd-largest company and second-largest miner.

But the stunning five-year journey up the ladder from its 2002 ranking as the world's 446th-largest company wasn't enough to satisfy the seemingly insatiable appetite for growth of the 48-year-old former banker.

"I think we have a lot of strength and potential to grow more, much more than that," Agnelli said. "We are committed to becoming the largest mining company in the world."

Just a few years ago, Agnelli's bold proclamation, with its accompanying plans to invest $US59 billion ($67.5 billion) in organic growth over the next five years, probably would have provoked laughter from an informed audience. Back then it seemed impossible that a Rio de Janeiro-based iron ore miner with a junk credit rating could take on giant rivals such as BHP Billiton, Rio Tinto or Anglo American.

But there was no laughter last year. The other top players in the mining industry were already well aware of the new name in town: the Big Brazilian. And when Vale this week confirmed month-long rumours that it was eyeing a takeover of the world's fifth-largest diversified miner, Xstrata - giving it a much bigger presence in Australia - its rivals were not surprised.

The origins of a giant

In English, the Portuguese name Companhia Vale do Rio Doce translates as "Sweet River Valley Company". The company was named after the region of its first big operations. It was founded as a state-owned company in 1942 following the discovery of massive high-grade iron ore deposits in the Rio Doce basin of Brazil's tropical south-east.

The miner, previously known as CVRD, recently chose Vale (pronounced vah-lay) as its preferred name, along with a new green-and-gold logo mimicking Brazil's national colours.

Australian miners have been familiar with Vale for years, given the powerful role of the world's largest iron ore producer in annual benchmark pricing negotiations. WMC Resources briefly flirted with buying a minority stake in a consortium when the Brazilian government sold most of its majority stake in 1997, but the deal never proceeded.

In May that year, the Brazilian government divested the 41 per cent stake to a group led by Brazil's national steelmaker, Cia Siderurgica Nacional, for $US4 billion. After the sell-down, the Brazilian National Treasury and the country's development bank held a combined 10 per cent holding.

Vale's structure remained cumbersome and bureaucratic, especially given its cross-holding in Cia Siderurgica Nacional. But change was in the air. In 2000, Agnelli, then 41, was appointed chairman. When he was elevated to the chief executive's position a year later, the complex cross-holdings were abandoned. From then on, a group including Agnelli's former employer, Banco Bradesco, some large Brazilian pension funds and eventually Japan's Mitsui controlled the voting stake called Valepar. Billiton bought a 7.7 per cent voting interest in Valepar in 2000, but the merged BHP Billiton sold it for $600 million two years later.

In a rare interview, Vale's executive director of planning and business development, Gabriel Stoliar, on Thursday told the Herald that the shareholder restructuring at the start of the decade was a watershed event. "By 2001, the company that exists today was being designed," he says.

Vale sold off all of its non-mining businesses and began to diversify into other minerals. It started with copper, since it was abundant in the Carajas region near its northern iron ore operations, and alumina, given Brazil's ample supply of bauxite but dearth of the spare energy needed to produce aluminium.

In addition to its organic growth, Vale was on the lookout for acquisitions, given Agnelli's seemingly ambitious goal of growing of nearly tripling its market value to $US25 billion by 2010.

Nickel was one of Vale's priorities. It flirted with France's Eramet, and in July 2004 Vale reportedly offered the Canadian company Brascan $US2 billion for its major stake in Noranda, but the bid was rejected as too low. A year later, Xstrata purchased the stake for $US1.7 billion as a foothold for its eventual bid for the merged Noranda-Falconbridge.

Until July 2005, Vale's hunt for assets was hampered by its junk bond credit rating. Despite its solid financial performance, ratings agencies were reluctant to give Vale an investment grade credit rating given Brazilian government bonds were rated "junk" status.

"We always paid attention to whatever [acquisition] opportunity was in the market," Stoliar recalls. "But we were not competitive at all because the cost of money for a company from a country like Brazil was very high."

Vale eventually won over the ratings agencies and became the first company to be granted an investment-grade rating before its home country. It was a big turning point.

The Big Brazilian goes global

Vale's first overseas acquisition foray was cautious. In September 2005, it spent $C790 million on the purchase of Canico Resources, a Canadian-listed explorer with a big nickel project in Brazil. By then, it was also starting to take a closer look at Australia. That year, it signed an agreement with AMCI to look at the Belvedere coking coal project in Queensland and it unsuccessfully tendered for the rights to develop the Aurukun bauxite deposit in the same state.

But Vale knew it still fell short in terms of market value, and reach, compared to BHP, Rio and Anglo. On the sidelines of the Iron Ore 2005 conference in Fremantle, Vale's Rogerio Carneiro said: "We need to increase our value to be a player with the Australians."

By the next year, Carneiro's wish was granted. While BHP and Rio sat on the sidelines, Vale decided to make a bold, late entrance into the so-called Canadian nickel wars - the battle for control of Falconbridge and Inco. As Xstrata sewed up its purchase of Falconbridge, Vale beat Teck Cominco and Phelps Dodge to purchase Inco for $US18 billion.

With its newly minted investment-grade status, banks were falling over themselves to lend Vale the necessary debt. In the process, Vale also lowered its exposure to Brazil. Before Inco, 98 per cent of Vale's assets were in the South American country, but that fell to 60 per cent after the acquisition.

"It really internationalised [Vale's] operations," says Tony Robson, a mining analyst with the Toronto-based BMO Capital Markets. "The move into Canada and other areas like New Caledonia has certainly broadened its exposure to commodities and its geographical spread."

Although Inco's chief executive, Scott Hand, resigned after the acquisition, many top managers, such as the chief operating officer, Mark Cutifani, remained under the new owner.

Cutifani, an Australian who now heads the South African goldminer AngloGold Ashanti, recalls there were some clear cultural differences when the team from Rio de Janeiro first showed up in Ontario.

"For some of the conservative Canadians … the greatest shock was when Roger [Agnelli] came in and hugged us all," Cutifani says. "He's larger than life."

Speaking from Johannesburg this week, Cutifani says the divide between Canadian culture and Brazilian culture is much more pronounced than the difference between Canadian culture and Australian or South African culture.

"From the CVRD point of view they tended to talk in broader terms and didn't want to get drawn into the details too early," he says. "The Canadian culture is, 'Show us the detail'."

Cutifani says most of the Brazilian managers had "quite good English" but found him the hardest to understand, given they were unfamiliar with his Australian accent.

"They found myself different because I'm very direct and they are not used to very direct conversations," he says. "They were very appreciative of direct feedback. But it has to be a private conversation, not a public conversation."

Cutifani says Vale and Xstrata are among the most astute investors to emerge since the start of the mining boom. "In my view, Agnelli and [Xstrata chief executive Mick] Davis have been the two guys who have appropriately read the industry and knew we were in the new world, and the old world rules didn't apply," he says.

"Quite frankly, there should have been other bidders for the Inco assets. The other guys are starting to play catch-up."

Cutifani left Vale when he was offered the top job at AngloGold, but deems his experience at the Brazilian company "very positive".

But several other sources familiar with Vale - including some former employees and consultants - say there appeared to be a "glass ceiling" for non-Brazilians, given there are no outsiders on the executive committee. Many add that Vale, as a former government organisation, was thick with bureaucracy and headed primarily by bankers, rather than by operators.

Some former top executives have jumped ship to rivals. BHP's base metals head, Diego Hernandez, and aluminium head, Nelson Silva, are both Vale alumni, as is the Nickel West president, Marcelo Bastos. Vale's Stoliar noted that this sort of turnover was normal within the industry's top ranks. Stoliar disagrees with the "glass ceiling" assessment, as does Cutifani.

"By chance, for the time being, we still don't have a non-Brazilian executive director," Stoliar says. "I would guess that very soon we are going to have among the executive directors non-Brazilian people. It is, generally speaking, an objective of the company."

He adds that it is possible that Vale could eventually have a non-Brazilian chief executive, although he notes Agnelli has no plans to retire soon.

Stoliar says Vale is starting to shift to English as its official language for emails and other communications among its corporate managers, with Portuguese reserved more for mining operations.

"In Brazil, normally everyone that reaches a high level of education learns English," he says.

Xstrata in its sights

Despite its move to secure more assets around the globe, Vale still lacks a significant presence in Australia when compared to its peers. But Vale does have offices in Brisbane and Perth and exploration and development joint ventures with the juniors Heron Resources (nickel), Dioro Exploration (uranium) and Aquila Resources (coal). Last year, Vale purchased some of the coal interests of the private company AMCI for $863 million and hosted an information booth at the Diggers and Dealers conference in Kalgoorlie.

Stoliar says Vale is particularly focused on coal and uranium opportunities in Australia, because of the shortage of energy sources in Brazil. The one commodity Vale doesn't appear to be targeting in Australia is iron ore, given the company's pride in its reserves in Brazil, which contain more iron ore and less impurities than production from the Pilbara.

This week, the odds of Vale taking a much more active role in Australia - and on the global mining scene - increased when the company revealed it was in talks with the Anglo-Swiss miner Xstrata about a possible takeover. Xstrata has an extensive portfolio of assets all around Australia (see chart).

Stoliar declined to comment specifically on the possibility of a bid for Xstrata. But he added that the diversification path on which Vale embarked in 2001 was not yet complete.

"In terms of completing this diversification process, we have to grow in copper and coal," he says.

Xstrata's key strengths are in copper and coal and it has nickel assets next to Vale's Sudbury operations in Ontario that appear ripe for complete integration.

"We are paying attention to whatever opportunity presents itself," Stoliar says.

This week, Vale said the current state of the financial markets could make it difficult to gather the necessary financing for a bid.

Analysts agree the $US130 billion company would not be willing to sacrifice its hard-earned investment-grade rating, and therefore could not take out more than $US50 billion more in new debt for the mooted $US90 billion offer.

Adding an equity component would be complicated by Vale's dual-class share structure, which gives the voting rights to the controlling Valepar consortium. The other, non-voting shares, are the ones most likely to be issued as part of a bid. To skirt around the issue, Vale might chose to undertake a large equity raising to make an all-cash offer.

Stoliar says it is possible the share structure could be simplified. "If in the future, the controlling shareholder will decide or not to unify the types of shares, it will depend on value or return," he says.

Stoliar adds that the Brazilian Government's "golden shares", which give it a veto over certain actions, would not limit Vale's international growth despite overseas reports to the contrary on Thursday evening.

According to information provided by Vale, the golden shares allow the Government to veto a name change, a head office move, a change in corporate purpose with regards to mining, any liquidation of the company and any disposal of its mines, railways or ports. The golden shares do not give the Government a veto over acquisitions. But all deals require the support of 75 per cent of the Valepar consortium. Pension funds - including the state-owned bank's fund, Previ - control 49 per cent of the voting rights in Valepar and could take their voting advice from the Government.

Nevertheless, Stoliar says the Government is supportive of Vale's global growth plans, and its press office yesterday noted it is an important stakeholder, but one of many in a private company with high corporate governance standards.

"When the acquisition of Inco was decided, it was decided because of the return it offered and the quality of the assets and the strategic fit," he says.

"The international diversification of the company was a strategic target defined by people, including the government representatives that are minority shareholders of our company."

On his way to dinner with Agnelli in Rio de Janeiro on Thursday night, the Brazilian President, Luiz Inacio Lula da Silva, said the Government had not yet considered the potential deal.

"Right now I'm neutral because I don't know about the subject," he said, according to Reuters. "But government will be requested to discuss it and we'll discuss it. So, when we know what the situation is, which is the offer, then we can say yes or no."

Vale bid for Xstrata imminent - reports

The world's biggest producer of iron-ore, Brazil-based Companhia Vale do Rio Doce (Vale), has arranged a $50-billion financing plan from international banks, and plans to launch a bid for rival Xstrata within the next few days, according to newspaper reports.

The UK's Sunday Times said at the weekend, without naming its sources, that the funding was arranged with a consortium led by HSBC, and understood to include Santander, BNP Paribas, Lehman Brothers, Credit Suisse and Citigroup.

Vale bought Canadian nickel-miner Inco for $18-billion in 2006, and CEO Roger Agnelli said last year that he wanted the Brazilian group to overtake the world's biggest miner, BHP Billiton, which itself has one week to formalise a bid for rival Rio Tinto.

Should it prove successful, BHP's play for Rio would create a new iron-ore giant and easily the largest mining group in the world.

A week ago, Vale issued a statement confirming that it had held talks with Xstrata's management, but that the discussions “had not produced any material results yet”.

For its part, Xstrata said last month that it was “continually reviewing opportunities”, and that ongoing talks with a number of industry participants had covered topics including “industry consolidation”.

The UK's Financial Times also reported, without naming its sources, that Xstrata CEO Mick Davis had asked advisers Deutsche Bank and JPMorgan Cazenove to take any interested parties seriously.

London-based Anglo American plc has also been mentioned by analysts as a potential suitor for the company.

However, any bid for Xstrata would need the blessing of privately-held Swiss commodities trader Glencore, which owns about 35% of the group.

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