The Rising Influence of Rising Affluence

[DewDiligence]

Norsk Hydro Acquires Vale’s Aluminum Assets for $4.9B

[VALE is the world’s largest producer of iron ore, but it has had little commercial success with other minerals such as nickel and aluminum. See the annotations below vis-à-vis the rationale for this deal.]

http://online.wsj.com/article/SB10001424052748704608104575220193467056322.html

›MAY 3, 2010
By MARK NAJARIAN

Norway's Norsk Hydro ASA struck a $4.9 billion deal Sunday to take over mining company Vale SA's aluminum operations in Brazil, a move the aluminum producer said secures enough raw material to run its operations for decades.

The deal gives Norsk Hydro, whose main business is running aluminum smelters and producing aluminum products, control of the world's third largest bauxite mine and the world's biggest alumina refinery.

Vale, the world's largest iron ore miner, will receive $1.1 billion in cash and a 22% stake in Norsk Hydro for its assets. Norsk Hydro said it plans to finance the transaction with a rights issue that will raise about $1.75 billion, and assume about $700 million in debt.

Norsk Hydro said the transaction and the rights offering have the backing of the Norwegian government, which is the company's biggest shareholder. Under the deal, the government's stake in Norsk Hydro will be reduced to about 35% from 44%.

The Norwegian company will get 60% control of Paragominas, a large bauxite mine in northern Brazil. Bauxite ore is refined into a white powder called alumina, which in turn makes the aluminum used in the world's cars and planes. Norsk Hydro also has the right to take over the remaining 40% stake in two installments, in 2013 and 2015, for $200 million each.

Norsk Hydro is also buying a 91% ownership in the world's largest alumina refinery, Alunorte; 51% of the Albras aluminum plant; and 81% of the CAP alumina refinery project. All the assets are located in Brazil.

The transaction gives Norsk Hydro direct control over its supply of raw materials. It will "significantly improve our competitive position, making us more financially robust and well-positioned for growth," said Norsk Hydro Chief Executive Svein Richard Brandtzaeg.

Around 3,600 Vale employees will be transferred to Norsk Hydro, which employs around 19,000 people in 40 countries. The move is a significant expansion into Brazil for Norsk Hydro, which has largely used joint ventures with Vale and has about 400 workers in the country.

Vale said it was selling the assets because its presence in the "primary aluminum metal industry is small, and has no growth potential due to the lack of access to low-cost sources of power generation" in Brazil. [Aluminum processing does use prodigious amounts of electricity, but Norsk Hydro will face the same power requirements as Vale, and hence I don’t think a lack of cheap power is really the impetus for this transaction. Rather, Vale simply wants to leverage its industry-leading position in iron, and this asset sale is a way to finance continued investments in iron such as the one in the next paragraph.]

The deal comes days after Vale said it would pay $2.5 billion for a majority stake in an iron-ore miner in Guinea, BSG Resources.

The Paragominas mine has a current annual capacity of 9.9 million tons. A planed expansion will increase the mine's capacity to 15 million tons, Norsk Hydro said.

According to the agreement, Vale can't increase its ownership in Norsk Hydro above 22% and will hold its shares for at least two years after the transaction closes. Following the two-year period, Vale won't sell shares representing more than 10% of Norsk Hydro's issued shares to any single buyer or group.

The Government Pension Fund Norway, which owns 5.9% of the issued shares, also supports the issue, Norsk Hydro said. The company said the closing of the transaction with Vale is expected in the fourth quarter.‹