The Rising Influence of Rising Affluence

[DewDiligence]

Vale Buys Iron-Ore Stake in Guinea

[Some analysts expect Guinea to eventually become the third largest producer of seaborne iron ore after Australia and Brazil.]

http://online.wsj.com/article/SB10001424052748703871904575216330005213358.html

›MAY 1, 2010
By JEFF FICK

RIO DE JANEIRO—Brazil's Vale SA on Friday made its second acquisition of the year, picking off a relatively light-weight contender and resuming a strategy that created the world's largest producer and exporter of iron ore.

Vale paid $2.5 billion for a 51% stake in Guinea iron-ore miner BSG Resources, which is owned by the holding company of Israeli billionaire Beny Steinmetz.

Guinea has attracted considerable attention from global mining companies. In March, Rio Tinto PLC and Aluminum Corp. of China, or Chinalco, signed a $1.35 billion memorandum of understanding to create a joint venture that would develop an iron-ore mine in the country's Simandou area.

Vale's deal for BSG Resources follows its $4 billion-plus purchase of Fertilizantes Fosfatados SA, or Fosfertil, including the upstream fertilizer assets of Bunge Ltd., earlier this year. The acquisitions return Vale to the role of opportunistic buyer after its failed play for Anglo-Swiss mining group Xstrata PLC in 2008 and the troublesome 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. [I.e., it was like the deals COP always makes, LOL.] 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.

Chief Executive Roger Agnelli has had his greatest successes building the company through smaller transactions. Vale purchased several small iron-ore mining companies, starting in 2000, that helped solidify its position as the world's top producer of the key steel-making ingredient.

Diversification efforts then followed with the company's 2005 purchase of nickel producer Canico Resources for about $800 million. In 2007, Vale bought Australian coal-mining company AMCI Holdings for about $650 million.

With a cash pile of more than $7 billion at the end of 2009, Vale appears willing to hit the acquisition trail in search of affordable assets that will mesh with its existing operations.

Brazil and the West Coast of Africa are believed to have been part of the same continent millions of years ago, and that shared geology [as oil & gas investors know] could help the iron-ore deposits acquired in Guinea reach levels seen in Brazil.

BSG Resources holds iron-ore concessions in Guinea's Simandou Sul region, as well as exploration licenses in Simandou Norte. Vale sees the Simandou area as similar to Brazil's massive Carajas mining complex, which produces more than 100 million metric tons of iron ore per year [#msg-38865647]—and is expected to grow further as expansion projects continue.

Simandou could start producing iron ore by the end of 2011 or early 2012, a Vale spokeswoman said. Initial output is expected to reach 10 million metric tons annually, rising to 50 million tons by 2014 or 2015.

The acquisition also expands Vale's presence in Africa, where the company is active exploring for minerals in seven countries. Vale currently has a presence in Angola, Congo, Gabon, Guinea, Mozambique, South Africa and Zambia. Vale's projects include development of the massive Moatize coal project in Mozambique.

Vale said it will make a $500 million cash payment in the deal with BSG Resources, with the additional $2 billion subject to meeting specific targets. Vale declined to give any details on the targets.

The joint venture created between Vale and BSG Resources will include development of the Zogota deposit at Simandou Sul, as well as feasibility studies in Block 1 and Block 2 of the Simandou Norte area.

A logistics corridor will also be created to transport iron ore to port via neighboring Liberia, including renovation of the 660 kilometer Trans-Guinea railroad, Vale said.‹