(Bloomberg) – Norsk Hydro ASA, Europe’s third- largest aluminum maker, agreed to buy mining assets from Vale SA for $4.9 billion, securing a century’s worth of bauxite supplies and making the Brazilian miner its second-largest shareholder.
Hydro, based in Oslo, will give Vale $1.1 billion in cash, a 22 percent stake and take on about $700 million of net debt in return for bauxite, alumina and aluminum assets, the company said yesterday. Hydro is taking control of Paragominas, the world’s third-biggest bauxite mine, and 91 percent of Alunorte, the largest alumina refinery, as part of the deal, it said.
Hydro is seeking greater access to the raw materials used in aluminum production to become less reliant on mining companies supplying bauxite and alumina such as competitor Rio Tinto Group. Vale is selling aluminum assets because higher power costs are restricting its ability to expand. Electricity accounts for about a third of the cost of producing aluminum.
“For Hydro it makes sense to consolidate in the aluminum space and move higher up the value chain by securing their own supply of bauxite and expanding in a big way in alumina,” John Meyer, head of natural resources at Fairfax I.S. Plc. in London said in a telephone interview. “All the mining companies like their long positions in alumina and Hydro will now be a major supplier.”
Hydro Chief Executive Officer Svein Richard Brandtzaeg described the deal as a “transforming transaction” at a press conference yesterday in Oslo. In addition to Paragominas and Alunorte, the company will acquire 51 percent of the Albras aluminum plant and 81 percent of the CAP alumina project.
‘Strategic Sense’
“This deal makes strategic sense for Hydro and also appears to be attractively priced,” Samir Bendriss, head of research at Oslo-based Pareto Securities ASA, said yesterday in a telephone interview. “There’s a risk that alumina prices decouple from aluminum and will be more expensive.”
Alumina producers, including BHP Billiton Ltd., United Co. Rusal and Alcoa Inc., are seeking to change the way the semi- processed material is priced, from closed-door contract negotiations to an index system based on spot transactions. Typically, the cost of the raw material is now fixed at a percentage of aluminum prices.
Bauxite is an ore that’s refined into alumina, a white powder which is separated during smelting to produce aluminum.
The assets will “significantly improve” the Norwegian company’s financial position and secure bauxite supplies “in a 100-year perspective” according to Hydro’s statement. Rio de Janeiro-based Vale said yesterday it expects the transaction will create “substantial value” for shareholders.
“I think this should be well-received by Hydro shareholders,” Bendriss said. “The shares should move up on this news.”
Expanding Production
Vale is focused on expanding iron ore production after securing price increases of about 90 percent this year. The company said April 30 it agreed to pay $2.5 billion for iron-ore deposits in Guinea from BSG Resources (Guinea) Ltd. as it diversifies supply of the steelmaking ingredient. Brazil is home to the Carajas mine, containing some of the world’s best ore.
“This deal’s unique side is that Hydro isn’t facing any competition from Chinese or Middle Eastern rivals,” Gudmund Halle Isfeldt, an Oslo-based analyst at DnB NOR ASA, said in a telephone interview. “This gave the parties a good opportunity to strike a deal to strengthen their business relations.”
The rights offer, set for completion in July, will preserve Hydro’s financial flexibility, Brandtzaeg said at the press conference. The transaction will reduce the Norwegian state’s ownership in the company to approximately 34.5 percent from 43.8 percent, Norway’s Minister of Trade and Industry Trond Giske also said. Norway’s “ambition in the longer term” is to bring the holding back up towards 40 percent, he said.
Share Sale
Hydro plans to raise 10 billion kronor ($1.69 billion) in a new share sale to finance the transaction. After the rights issue, Vale will own 22 percent of Hydro’s outstanding shares, according to the statement.
Vale becomes the second-largest shareholder in Hydro after the government. A representative of the miner will join the Norwegian company’s board of directors and the company agreed to not increase its shareholding, Vale’s Executive Director Tito Martins said in an interview yesterday. Vale doesn’t foresee any job losses as a consequence of the deal, he said.
–With reporting by Meera Bhatia in Oslo and Brett Foley in London. Editors: Dale Crofts, Simon Casey
To contact the reporter on this story: Brett Foley in London at bfoley8@bloomberg.net; Firat Kayakiran in London at fkayakiran@bloomberg.net
To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

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