Brazil's mining giant, Vale By Economist
Few firms have achieved so much with so little fanfare. But can Vale mine anything other than iron ore?
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.
However, it has not yet diversified much beyond iron ore or its home country. It is by far the world's biggest producer of iron ore, digging up some 230m tonnes of the stuff in 2009 (a weight roughly equivalent to 1,000 of the statues of Christ the Redeemer overlooking Rio de Janeiro—every day). Rio Tinto, the number two iron-ore producer, extracts a mere 172m tonnes annually.
Vale relies on iron ore for 65% of its revenues. Other mining giants spread their risks across multiple commodities and a variety of safe and hazardous countries. Vale, by contrast, mines mainly in Brazil.
Its ambitions to broaden its interests beyond Brazilian iron ore face two obstacles. Does it have the ability? And does it have permission? According to Rene Kleyweg of UBS, a Swiss bank, Vale has yet to prove that it can operate as a diversified miner. And its relationship with Brazil's government, which would prefer it to invest at home, is both tricky and unclear.
Iron ore is largely a logistics business. It is easy to extract, bulky and relatively cheap. The trick is to transport vast quantities around the globe quickly. At this, Vale excels. The firm owns about 10,000km (6,200 miles) of railways, nine ports and a huge fleet of ships.
Vale wants to expand its iron-ore business, a vast cash-generating machine, in Brazil and farther afield, in Guinea-Conakry. Rodolfo De Angele of JPMorgan Chase, a bank, predicts that in ten years' time Vale will still be mainly an iron-ore firm. But despite that wonderful substance's attractions, Vale aims to shuffle its assets to offer a greater variety of minerals to commodity-craving emerging markets.
In May it sold its aluminium business to Norway's Norsk Hydro, for a mix of cash and equity. Aluminium requires lots of expensive electricity to produce. Also, there is no shortage of it in China, which tarnishes its allure. Vale has plans for organic expansion in nickel, copper, coal and potash. Demand for all of these minerals is likely to surge as poor countries get rich.
Critics carp that Vale's ventures in copper and nickel have not been wholly successful. In 2007 it spent $19.4 billion on Inco, a Canadian nickel producer. Its Brazilian managers irritated its new Canadian employees. A year-long strike over pay and pensions by 3,000 workers ended only in July. A nickel investment under way at Goro in New Caledonia may show whether Vale has the skills to manage a big, technically demanding mining project.
If Vale's foreign ventures go poorly, that may not worry Brazil's government. Many in the industry claim that Vale's shareholding structure gives Brazil's president (currently Luiz Inácio Lula da Silva) the power to force Vale to invest and create jobs at home. But some of the pension funds and investment companies that hold big stakes in Vale will not like this at all. They care about returns, not economic nationalism. In theory it is shareholders who control Vale and the government owns only 5.4% of the shares.
However, Lula exerts pressure on the firm behind closed doors and through the media. A future president could do the same. The royalties Vale pays to the government for mining in Brazil are modest, but a new mining code under discussion will probably bump them up after the presidential election next month. The ultimate sanction—renationalisation—is extremely unlikely. That said, displeasure in Brasilia may have nudged Vale into ending negotiations to take over Xstrata, a Swiss mining firm, in 2008. But Vale rejects suggestions that a government "golden share" gives it the power to block deals.
Vale's decision to sell its aluminium business and to order a fleet of enormous ships from China has annoyed the Brazilian government, which is trying to revive Brazil's shipbuilding industry. The firm points out, not unreasonably, that it has to buy Chinese ships because Brazilian shipbuilders are incapable of making vessels that are big enough for its needs. It has half-acquiesced to Lula's pleas that it invest in Brazilian steelmaking; it has put modest sums into joint ventures and other partnerships. But Vale denies that recent investments in Brazilian potash are motivated by anything but commercial good sense. Potash is set to boom, it insists.
After the election Vale will unveil new investment plans. Rumours suggest that these will involve capital spending of up to $100 billion over the next five years—most of it in Brazil. That should keep the government happy, while leaving Vale with ample sums to invest abroad. It may be that the price of iron ore will fall, hobbling Vale's progress. But mining firms everywhere look at all the cars, pipes, bridges and steel-skeletoned skyscrapers that Chinese people seem to want, and doubt it.
