The Brazilians are Coming, the Brazilians are Coming – by Stan Sudol

This column was originally published in Northern Life, Greater Sudbury’s community newspaper on August 16, 2006

Combined assets of CVRD and Inco would create the third-largest mining company in the world

Like most other analysts and columnists who have been following this nickel soap opera, we were all collectively given a sucker punch out of nowhere by the Brazilians!

Last Friday, Brazilian iron ore king, Companhia Vale do Rio Doce (CVRD) made an all-cash offer to buy Inco Limited at the price of CDN$ 86.00 per share. The offers of both Teck-Cominco and Phelps Dodge are a mix of cash and share. The hedge fund boys and girls dance with delight with all cash offers as these always trump any cash/share combination and give maximum short term gain.

In addition, Atticus Capital, a large American hedge fund that owns about eight percent of Phelps Dodge does not support the merger with Inco and will recommend shareholders to vote against this deal. If there are no regulatory hurdles, this does appear – notice my hedging – to be a knock-out punch.

Roger Agnelli, chief operating officer of CVRD said in a statement, “This is an exciting opportunity for CVRD. The operations of the two companies are complementary and the combination will enhance our capabilities to benefit from the fast changing global landscape in the metals and mining industry.”

CVRD is the world’s fourth largest mining company and the largest producer of iron ore, the key ingredient of steel. With the industrialization and urbanization of China, which could not happen without steel, the historic high prices for iron ore have created a new mining titan. CVRD is also the second largest producer of manganese and ferroalloys, one of the world’s lowest cost producers of aluminum products as well as copper, potash and kaolin. Regardless of the other metals, roughly 80 percent of profits are tied to iron ore, the main reason for the company’s desire to diversify from that mineral.

One of the key issues emphasized in the CVRD press release is Inco’s “specific knowledge, long-term experience in nickel mining and technological leadership in nickel metallurgy.” Nickel mining and refining of sulphide and laterite deposits is very difficult due to the complexities of the ore. There is no other company with as an extensive knowledge of this strategic metal.

Brazil has enormous laterite and sulphide nickel deposits which would make a perfect fit with Inco.

Last December, CVRD spent almost one billion dollars taking over Canadian junior miner Canico Resources. Canico’s Onca Puma nickel laterite project is located in Brazil’s Para State in the northeast close to CVRD’s vast iron ore deposits. CVRD is also building another nickel laterite project in the same region. The Vermelho project, combined with Onca Puma will together produce up to 100,000 metric tons of nickel when they reach full capacity in 2009.

Created in 1942, CVRD was put together from a combination of American and British owned mining and railroad properties. At that time the Brazillian government owned 80 percent of the company. In the late 1990s, CVRD was privatized but due to the company’s enormous impact on the national economy with the building of essential infrastructure like railroads, ports and employment, the government probably still has significant influence.

As with all these press releases, CVRD is confident that this takeover will deliver significant benefits to Canada. They intend to establish a global nickel business in Toronto, continue to invest in R&D as well as capital projects in Canada and support the communities where Inco operates. CVRD also stated that it intends to “work with key stakeholders to optimize the Sudbury operations in order to support its long-term competitiveness.” This sounds like the company is open to joint ventures with Xstrata/Falconbridge.

Furthermore, CVRD is committed to the highest standards of corporate social responsibility, environmental protection and “the creation of channels of social and economic mobility in low-income communities.” The third remark is someone odd and makes me think that there could be some significant cultural problems or misinterpretations.

By and large CVRD has had a lot of experience dealing with – forgive me if I am politically incorrect – third world or developing countries. Many of the regions they operate in do not even have basic infrastructure, education or health care facilities. Sudbury does not fall in that category. Our expectations are very different.

Sudbury, the richest mining district in North America and among the top ten most important globally, is the source of most of Inco’s enormous wealth and expertise. There must be major concrete benefits for this community if they want to buy control of a near-trillion dollar ore deposit. That was completely missing from the press release! 

Do not think I am against this deal because the company is from the third world. Canada’s direct investment in Brazil has increased 280 percent in a decade; from $2 billion in 1993 to $7.6 billion in 2003 (roughly 10 times Brazil’s investment in Canada). With a population of almost 190 million, the country is Canada’s largest trading partner in South America. It is estimated that almost 800 Canadian companies are involved in Brazil including major players like Alcan, Encan, Nortel, Bank of Montreal, Scotiabank and CAE just to name a few.

Brazil is one of four emerging economies that will change the economic balance of the world. The other three are Russia, India and China – collectively known as the BRIC countries.

However, “Mother Inco” and “Aunti Falconbridge” were like part of the family. As a community, we grew up with them and accepted their quirks. If they were late with the rent, no problem because we knew they were always good for the money. We also knew if we had serious concerns, they would give us a good hearing, but all that has changed. Head office for Xstrata is in Switzerland and if CVRD is successful, Rio De Janeiro. These companies do not have the historically deep roots in the well being of this community.

These are strangers, the gloves have come off and our expectations will be much more demanding. I look forward to hearing CVRD’s proposed benefits for the community of Sudbury – an essential part of getting Canadian government approval for this deal.