Vale gets and gives bargains in latest deals

We’ve had two big deals from Vale, Brazil’s mining giant, over the past few days. One of them makes perfect sense. The other is more puzzling.

On Friday, Vale snatched iron ore deposits in Guinea from under the nose of Rio Tinto. The Simandou field, now split half and half between the Brazilian and Anglo-Australian rivals, has been called the Carajás of Africa, after Vale’s giant iron ore mine in the Amazon rainforest. It is probably the world’s last great unexploited iron ore deposit. It may be in a remote and war-torn region but, as one analyst put it, if you don’t go there, you won’t get the ore. At a total price of $2.5bn, it looks like a snip.

Less easy to understand is Vale’s deal with Norsk Hydro, announced on Sunday during the Labour Day holiday weekend. This time it is the Norwegians who seem to have got the bargain. They have picked up Vale’s bauxite, alumina and aluminium processing assets in Brazil for a total of $4.9bn in cash and shares. Vale said the deal was prompted by its inability to secure cheap electricity, the biggest ingredient in turning alumina into aluminium.

Vale has long complained about Brazil’s rising energy costs even as the threat of rationing, last imposed in 2002, has reduced dramatically following fresh investments in generation. Yet aluminium is its third biggest source of revenue and Vale has been investing heavily in the sector in recent years. Alunorte, its alumina processing plant, has absorbed almost as much as Norsk Hydro is paying for the whole business.

The out-of-the-blue sale is unlikely to go down well in Brasília, which has been urging Vale to invest more in steel and other ways of adding value to its raw materials and will not like the slight to its energy policy. Parts of the ruling PT have never accepted Vale’s privatisation in 1997 and would like to see the government – which retains a “golden share” in Vale – take more control over its management. With elections approaching in October, the Norsk Hydro deal looks unlikely to foster good relations with President Luiz Inácio Lula da Silva or Dilma Rousseff, his candidate in October.