Brazil's Vale Makes Copper Play, But Still Trails Global Giants

Brazilian mining giant Vale SA (VALE, VALE5.BR) tightened its grip on the domestic metals market with the purchase of copper refiner Paranapanema SA (PMAM4.BR), but the move still leaves Vale far behind its larger global rivals in the copper industry.

Vale, which first stalked Paranapanema in early 2008, said Thursday that it would launch a public tender for up to 100% of the metals holding company in a deal that could be worth as much as 2.01 billion Brazilian reals ($1.13 billion).

While Vale's bid for Paranapanema will fit a strategic niche for the company locally, it does little to advance the mining company's stated goal of becoming one of the world's main copper producers.

Vale has installed copper production capacity of about 300,000 metric tons per year from its Sossego mine in Brazil, as well as nickel byproduct output from Sudbury and Voisey Bay in Canada. That's less than one-fifth the output at the world's largest producer, Chilean state-owned copper company Corporacion Nacional del Cobre, or Codelco, which produced 1.7 million tons in 2009.

Copper production is estimated to climb to about 458,000 tons per year by the end of 2011, when three more projects are expected to come onstream, Vale said.

Paranapanema, however, will give Vale a 34% share of the Brazilian market for refined copper products. It also is the sole Brazilian producer of cathodes certified by the London Metal Exchange. In addition, the copper concentrates Vale produces at Sossego will benefit from refining and processing at Paranapanema's facilities.

The holding company also controls Cibrafertil, a fertilizer company that makes about 306,000 tons of single superphosphate a year. The unit will offer increased synergies with Vale's recent expansion in fertilizers.

Earlier this year, Vale acquired Fertilizantes Fosfatosos SA (FFTL4.BR), or Fosfertil, and the upstream fertilizer assets of Bunge Ltd. (BG). in a series of deals valued at more than $5 billion.

Brazil imports about 90% of the fertilizer or raw materials for fertilizer to support the country's massive agriculture sector.

The Paranapanema, Fosfertil and Bunge deals also returned Vale to its very successful strategy of small-scale acquisitions that paid off handsomely for the company in the early 2000s, creating the world's largest producer and exporter of iron ore. The return to the miner's acquisition roots should please shareholders after bigger plays failed to pay off.

Vale made a failed bid for Anglo-Swiss mining group Xstrata PLC (XTA.LN) in 2008 and has had trouble with the integration of Canadian nickel mining company Inco.

The Inco deal was Vale's first major acquisition, when it paid $18.9 billion in 2006 as nickel prices neared their peak. Vale has since struggled with labor issues and nettlesome start-ups at projects acquired in the deal, such as the Goro nickel mine in New Caledonia.

Vale shares were 0.6% higher at BRL42.75 as of 1530 GMT, while Paranapanema shares jumped 7.1% to BRL6.22. Vale's offer valued Paranapanema's shares at BRL6.30.

Paranapanema's capital is composed of 319.17 million shares, and the company's current free float is at 39.42%. It is controlled by Previ, the pension fund for workers of state-run Banco do Brasil (BBAS3.BR); Petros, the pension fund for workers at the state-run energy company Petrobras (PBR); and by BNDESPAr, the shareholding and investment arm of the government-controlled National Development Bank, or BNDES.

-By Jeff Fick and Rogerio Jelmayer, Dow Jones Newswires; 55-21-2586-6085; jeff.fick@dowjones.com

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