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Brazil's Vale shells out $2.5 billion for 51% stake in West African iron ore project

Brazil's Vale shells out $2.5 billion for 51% stake in West African iron ore project

By Barry Sergeant,

Brazil's Companhia Vale do Rio Doce (Vale), the dominant name in seaborne iron ore, has seemingly found Guinea's iron ore potential irresistible, following the announcement that it has agreed to pay USD 2.5bn for a 51% stake in BSG Resources Guinea, which apparently holds rights to blocks 1 and 2 in the Simandou iron ore system, discovered in 2004 by Rio Tinto, no 2 in global seaborne iron ore.

The BSG group is controlled by Beny Steinmetz, a diamond dealer. Rio Tinto had claimed a 95% stake in all four Simandou blocks, seemingly until December 2008, when soldiers took Guinea over. A general election in the country is anticipated in about two months from now.

Rio Tinto has spent USD 600m developing Simandou, which it sees as "a potential development of world class significance"; one that could be "a Pilbara class iron ore province". Rio Tinto is currently seeking regulatory clearance to merge its Pilbara, Australia, iron ore mines with those of BHP Billiton, which would collectively create the world's No 1 name in seaborne iron ore.

On 19 March 2010 Rio Tinto announced a non-binding MOU with China's Chinalco to establish a Simandou joint venture, where the new partner would acquire a 47% interest by providing a USD 1.35bn earn-in over the next two to three years.

Back in Brazil, Vale is busy building two additional areas in its Carajás system, for an additional 40m tonnes of iron ore a year, collectively at a capital cost of USD 2.8bn. At the same time, it has several approved iron ore additions in the system on hold: Apolo (capital cost: USD 2.5bn), Conceição - Itabiritos (USD 1.2bn), Vargem Grande - Itabiritos (USD 1bn), and the gigantic Carajás Serra Sul (USD 11.3bn).

The lunge into part of Simandou may further delay the Brazil projects. The full build of an iron ore mine appropriate to the scope of the Simandou deposits may be beyond the resources of even the world's biggest miner; so far, assuming no litigation when civil rule returns to Guinea, three of the world's biggest mining groups are involved.

Vale went big on acquisitions with its USD 18.9bn cash buy of Inco in 2007, at the top of the nickel cycle. To date, the move has returned but little, and remains a something of a headache, although the strike in the Canada division is serving to underpin strong recoveries in the nickel price. In January 2009, Vale announced two purchases from Rio Tinto, where it paid USD 750m for iron ore, and USD 850m for potash, assets.

Vale's presence and activities in Africa have been relatively low profile, especially in countries which are still trying to emerge from murk. So far, its biggest investment has been in now-peaceful Mozambique, where Vale is building for USD 1.3bn the Moatize coking and thermal coal mine, with completion set for the second half of 2011.

One of Steinmetz's bigger African deals went through early in 2008, when Katanga Mining merged with London-listed Nikanor, owner of the KOV pit, an integral part of the original Katanga Mining property in southern Democratic Republic of the Congo.

Nikanor was listed in London in July 2006, when it raised USD 380m in cash; it then raised a further USD 777m a year later. Much of the second tranche came by way of Glencore, the Switzerland-based commodities trader and resources investor.

When Nikanor merged with Katanga Mining, USD 452m in cash was returned to Nikanor shareholders as part of the merger deal. The biggest chunk of this cash went to Steinmetz. Within months, Katanga Mining was in the news talking about the possibility of raising hundreds of millions of dollars in debt. It was eventually bailed out by Glencore.

Vale is paying Steinmetz USD 500m early up, with the balance of USD 2bn to be paid into the future. Vale has been fairly active this year, as seen in February when it announced the closing of USD 4bn worth of acquisitions of various phosphate mines and related assets in Brazil, including Fosfertil.

Earlier, in January, Vale indicated its intention that it would pay a USD 2.5bn dividend in 2010. Today it announced various aluminium and related sales to Norsk Hydro; in one deal, disposals will be made for USD 405m in cash plus a certain number of Hydro common shares, plus Hydro assuming debt of USD 700m. In addition, 60% of a "Bauxite JV" will be sold to Hydro for USD 600m in cash.  The remaining 40% will be sold, going out to 2015, for USD 400m in total.

Iron ore prices have doubled over the past year, and nickel prices have shown an excellent return to health. This is to be welcomed by Vale's shareholders, which saw the group's free cash flow (operating cash flow, less capital expenditure) reverse from a positive USD 8.1bn in 2008 to a negative USD 1bn in 2009, along with net debt doubling to USD 11.8bn. Net debt would have been considerably higher, were it not for a 2008 equity placement of USD 12.2bn. In March 2010 Vale announced the sale of EUR 750m of eight year notes, shoring up its liquidity.

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