Brazil's Vale In Waiting Game Amid Consolidation Wave
June 25 2009 - 4:45PM
Dow Jones News
Brazilian mining giant Vale SA (VALE) dismissed as speculation
talk that it may be on the acquisition prowl, even as other big
players hash out deals that could reduce Vale's clout in the
sector.
The chief executive of the world's largest producer and exporter
of iron ore said Thursday his company is closely watching the
consolidation that is beginning to take shape.
"A lot of companies want to buy, and a lot of companies want to
be bought," said Roger Agnelli, adding that Vale was simply
watching the scenario "calmly and patiently."
He said Vale was not interested in making a play for its
one-time target Xstrata PLC (XTA.LN) or Anglo American PLC (AAUK),
instead focusing on organic projects and resolving the ongoing
dispute with China over iron ore prices.
Closely watching from the sidelines and playing the waiting
game, however, could leave the iron ore powerhouse out in the cold,
industry experts said.
Xstrata's play for Anglo American and an iron ore joint venture
in the works between Rio Tinto PLC (RTP) and BHP Billiton Ltd.
(BHP) could mean Vale would be left with crumbs at the mergers and
acquisitions table if it doesn't get in on the deal-making.
"The greatest consolidation opportunities are vanishing, and if
the BHP-Rio Tinto deal is completed, and there's a possible new bid
by Xstrata for Anglo, then these will be too big for a takeover by
Vale," the Rio de Janeiro-based Ativa brokerage said in a report
this week. The result could be Vale losing its relative strength
compared to its competitors, Ativa said.
The time may never be better for Vale to duke it out with its
mining rivals. The company was sitting on $12.2 billion in cash at
the end of the first quarter, with total debt at only 1.0 times
earnings before interest, taxes, depreciation and amortization.
Vale's balance sheet is in such good shape in no small part
thanks to its failed bid for Xstrata last year, when acquisition
price tags were far higher than they are today. The deal would have
cost Vale in excess of $80 billion at a time when metal prices were
inflated.
The global financial crisis and economic slowdown now has assets
more modestly priced. And with Vale's solid position, the company
is bound to come up in rumors, Agnelli said.
Vale is "a strong company, with the capacity to make strategic
moves in the mining world. But we're quiet, going forward with our
investments. We have an enormous portfolio of investments, so we
have to proceed calmly," Agnelli said.
Unfortunately, that organic growth may not be enough to allow
Vale to continue building its reserve base - especially if other
large-scale players are off the market.
A smaller scale in relation to its peers could also undercut
Vale's bargaining power with China, the mining company's largest
customer.
Iron ore producers are locked in a battle with major Chinese
steelmakers over 2009 contract prices, while the benchmark price
has been set via deals in Europe, Japan and South Korea.
Chinese steel mills are seeking a 40% reduction in prices for
iron ore fines. Vale agreed to a 28.2% decrease in fines and a
44.5% slide in lump ore with heavyweights such as ArcelorMittal SA
(MT), South Korea's Posco (PKX) and several Japanese
steelmakers.
"This is the price we understand to be the benchmark. Whoever
wants to continue operating under long-term contracts, the
benchmark has been set for the entire world," Agnelli said.
A little additional leverage via a merger, while likely drawing
intense interest from antitrust regulators, could help avoid what's
become a complicated negotiating process in recent years.
The economic slowdown, especially in China, caused "a change in
behavior during iron ore price talks," Agnelli said. Economic
uncertainties and tough negotiations also sparked renewed calls for
an iron ore spot market, another area where scale would be an
advantage.
While it would be difficult for Chinese steelmakers to move to a
spot market system, Vale will sell its ore where demand exists,
Agnelli said. Vale is currently selling ore on the spot market, and
will continue to do so, the executive added.
"If spot is the market, that's where we are going to go,"
Agnelli said.
-By Jeff Fick, Dow Jones Newswires; jeff.fick@dowjones.com;
55-21-2586-6085
(John Kolodziejski in Rio de Janeiro contributed to this
report.)
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