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All growth is ‘organic’ when you are as big as Vale


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 profit.

But Vale proved them wrong, and has since demonstrated that its diversification wouldn't stop in nickel.

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 view.

"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 Tinto.

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 looking.

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 with demand.

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.

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