More than a century of tradition in the Sudbury Basin drew to a close in October as Brazil’s Companhia Vale do Rio Doce, (CVRD) assumed control of Inco Ltd. Following the acquisition of Falconbridge Ltd. by Swiss-based Xstrata plc, the CVRD absorption of Inco brought closure to a year-long drama of boardroom maneuvering and deal making that kept ownership of the Sudbury Basin’s rich nickel reserves and infrastructure up in the air.
Required to demonstrate a “net benefit” to Canada to obtain Canadian government approval of the transactions, both companies have pledged to increase exploration, capital spending and research and development. CVRD committed to spending more on apprenticeship programs, student employment programs, employee recruitment and environmental compliance. It also pledged to “maintain its involvement and commitment to the growth of Ontario’s mining cluster and honour its commitments to Sudbury’s new Centre for Excellence in Mining Innovation.
The company asked Inco chairman and chief executive officer Scott Hand to carry on in his post and oversee the expansion of the nickel miner’s assets under its new Brazilian owner.
“This is the way we do things in Brazil, easily, smoothly without any big changes..We don’t need to be in a big hurry to make changes. We don’t need a revolution,” said CVRD president and chief executive officer Roger Agnelli at a press conference in Toronto.
Another management decision saw Sudbury-based Mark Cutifani promoted from president in charge of North American and European operations to chief operating officer.
The company has also committed to creating a Toronto-based global nickel business (CVRD Inco), which will assume responsibility for Onca Puma and Vermelho, two nickel projects under development in Brazil. Onca Puma is a laterite deposit acquired by CVRD in 2005as part of its purchase of Canadian miner, Canico Resource Corp. It will produce 57,000 tons of nickel per year beginning in the first half of 2008. Ironically, Canico acquired Onca Puma from Inco in 2003. Vermelho, another laterite deposit, is expected to begin production in the second half of 2008 at a rate of 46,000 tons/year. Both properties are located in the state of Para. Together, they represent an investment of US $2.3 billion.
CVRD’s Sossego copper mine, 15 km from the Vermelho project, could also be folded into the Toronto-based business unit.
One of the big question marks remaining from the changes in ownership is whether CVRD and Xstrata will combine their assets in a joint venture to realize the annual savings of $550 million Inco and Falconbridge hoped to achieve through a friendly merger.
Prior to achieving Investment Canada approval, Agnelli was quoted as acknowledging that he discussed a possible joint venture with Xstrata president and CEO Mick Davis.
“Of course, we need to sit down and see how we can develop this idea,” Agnelli told the Financial Post. “We don’t have any agreement, we don’t have any commitment, and we don’t have anything written down toward that sort of thing.”
With its $19.4 billion acquisition of Inco, CVRD became the second largest mining company in the world, leaping ahead of Rio Tinto and Anglo American. Prior to the acquisition, it boasted a market cap of $55 billion and had 33,000 employees. A world leader in the iron ore and pellet market and the second largest producer of manganese and iron alloys, CVRD recorded US $13.4 billion in revenue in 2005 and net earnings of US $4.8 billion.
The company’s shares trade on the New York, Sao Paulo and Madrid stock exchanges. Inco’s shares, which traded on the Toronto and New York exchanges, will be delisted.
Inco isn’t the first Canadian company to be purchased by Brazilian interests.
Gerdau Ameristeel owns three steel mills in Ontario and Manitoba, Grupo Votorantim purchased Ontario-based St. Mary’s Cement and AmBev has assumed oversight of Labatt Breweries as part of a deal that saw Belgium’s Interbrew merge with the Brazilian brewer in 2004.
There is also a long tradition of investment in the opposite direction, notes Americo Dyott Fontenelle, Brazil’s consul general in Toronto. Brascan Energetica, a subsidiary of Toronto-based Brookfield Asset Management, has been generating electricity in Brazil for more than a century, said Fontonelle.
The largest and most populous country in South America, Brazil has been identified as one of Canada’s three priority emerging markets. But there is a long way to go. Exports to Brazil account for only one-third of one percent of Canada’s total exports, for a mere $1 billion, while Brazil’s exports to Canada are three times as high.
According to International Trade Canada, Canadian mining sector exports to Brazil totaled $12 million in 2004 “in a market supplied locally and valued at some $5 billion.” Demand for mining equipment is projected to grow at a rate of 30 per cent per year over the next five years and is expected to be worth $22 billion by 2011.
CVRD alone plans to spend $11 billion over the next five years on an assortment of coal, nickel and iron ore projects.
While some Sudbury-area mining supply companies report sales in Brazil, the prevailing sentiment is that high import tariffs make it a difficult country in which to do business.
CVRD’s purchase of Inco could help ease the entry of Ontario suppliers into the Brazilian market, particularly with its Toronto-based nickel division assuming responsibility for some Brazilian assets. On the other hand, with 1,700 open pit mines and only180 underground operations, the opportunities are heavily skewed in favour of suppliers with surface mining expertise.
Canada and Brazil have much in common, observed Fontonelle, Brazil’s consul general in Toronto. Both countries were colonized by Europeans, have large sparsely populated hinterlands and are ethnically diverse. “If a Canadian businessman is worried about what will be the culture, I would advise him not to worry about it,” he said.
Urging Sudbury mining suppliers interested in doing business in Brazil to contact the consulate with any questions, Fontonelle said, “Canadian expertise in mining is very important to us.”