When Vale launched a
billion-dollar offer for Toronto-based nickel miner Inco Ltd.
back in 2006, many analysts and industry executives believed it
was a very ambitious move by the Brazilian miner to diversify
its portfolio. Some also suggested it was an expensive
acquisition-one that would be hard from which to turn a
But Vale proved them wrong, and has
since demonstrated that its diversification wouldn't stop in
Rio de Janeiro-based Vale, the world's
largest iron ore producer, has spent the past few years
expanding production in order to meet the increasing needs of
the global steelmaking industry-mainly the Chinese-with
minerals such as nickel, coal and iron ore.
The Brazilian miner late last year
announced plans to invest $11 billion this year, the biggest
annual investment program ever launched by the company. The
budget for 2008 is part of an aggressive $59-billion capital
expenditure plan for 2008-12 that is focused on organic growth.
And the investment plan could even be revised upward, according
to Roger Agnelli, Vale's chief executive officer.
The message that Vale is sending?
Factors such as the current unstable commodities market and
uncertainties regarding the global economy don't scare it away
and won't prevent it from making higher investments. It remains
bullish on the long term, and the markets appreciate that
"The trend is that these investments of
$59 billion will increase, mainly where we have more resources
and reserves to grow, which would be in the area of copper and
coal," Agnelli said at a press conference.
Vale is a rookie in the coal market,
but it wants more out of the mineral. And the company will
certainly expand its exposure to the market outside Brazil,
with projects in Australia and Africa. Under its current plans,
Vale expects to have coal production of 15 million tonnes in
2012, nearly seven times the 2.2 million tonnes produced in
2007, and Agnelli said the target for 2012 could be revised as
high as 40 million tonnes.
In copper, Vale aims to produce 592,000
tonnes in 2012, double last year's output of 284,000 tonnes,
but Agnelli said his company has the ability to reaching
production of 1 million tonnes of copper in 2012.
But can Vale be successful in its
diversification process? Can it really increase its exposure to
the copper and coal markets and perhaps other minerals? The
answer appears to be a resounding "yes," considering the
company's size and strong cash generation. The favorable
commodities market of the past few years and successive
increases in iron ore prices have provided Vale with enough
resources to take on big projects and make big investments.
A better question might be how it
intends to grow. After it raised around $15 billion in the
summer, Vale certainly has the cash to make an acquisition.
Many in the market are expecting it to do so in an environment
when mergers and acquisitions are running at full speed, and in
a scenario where BHP Billiton is eager to snap up Rio
But Vale has given some indications it
would rather follow the path of organic growth in the coming
years, and it certainly has many projects in the pipeline that
would keep the company busy for quite some time.
In terms of location, Vale is almost
everywhere. Its geologists and exploration teams have fanned
out across the world to identify opportunities in remote spots
of the globe, probably where no other miner is currently
Although an organic strategy could look
simple at first, especially in light of some of the problems
BHP is facing in its ongoing bid for Rio Tinto, obstacles are
likely to appear along the way due to strong demand from the
mining industry. The lack of skilled labor and the availability
of service providers could prove difficult in putting together
a new mine, and the lack of equipment also could easily change
a project's time frame as manufacturers are unable to keep up
But Vale is strong enough to keep
investing in Brazil and abroad and will have the ability to
overcome the obstacles along the way. Even so, the miner will
probably have an eye out for possible acquisitions, but the
market shouldn't expect a big one.