Iron Domination.

CVRD girds up its position as the world leader in iron ore.

THE LEGACY OF MORE THAN 50 YEARS of state control weighed heavy on Brazil's Companhia Vale do Rio Doce (CVRD) following its controversial privatization in 1997. The operations of the world's largest iron ore mining company were widely dispersed and the sale, which was preceded by a host of legal challenges spawned an unwieldy ownership structure.

CVRD has come a long way since then. It has streamlined the corporate structure, emphasized the core business of mining and embarked on fast-track growth. Earnings before interest, taxes and depreciation have grown nearly 26% annually over the last three years. The company announced net profits of US$292 million for first quarter 2001, the highest quarterly earnings in its history.

Last year, CVRD went on a spree, buying local iron companies Samitri and Socoimex and iron pellet plant Samarco. But the biggest feat came in April when CVRD won a fierce battle with international mining giants over control of Brazilian ore companies Ferteco and Caemi Mineracao e Metalurgia--deals which are still subject to Brazilian and European regulatory approval.

The acquisitions boosted CVRD's reserves and expanded its share of the iron ore global market to 35% from 26%. It also kept competitors such as Australia's BHP Ltd. out of its back yard. "It was a serious battle and CVRD pulled off a fantastic deal," says Mauricio Reveco, iron and steel analyst with Salomon Smith Barney in New York.

Although BHP had made a winning bid of $332 million for control of Caemi, Japan's Mitsui trading company used its pre-emptive right to buy 60% of Caemi's ordinary shares and raise its stake in the company to 100%. Mitsui then turned around and sold 50% of its shares to CVRD for $280 million. "CVRD negotiated very skillfully," says Mauricio Xavier, an industry analyst in Sao Paulo. Behind the deal, observers say, was the Brazilian company's ability to convince Mitsui that an Australian partner might eventually challenge the Japanese steel industry.

CVRD also acquired 100% of Ferteco Mineracao from Germany's Thyssen-Krupp Stahl (TKS) for $700 million. Xavier says CVRD was able to outbid competitors because of its ties with Ferteco. Ferteco's Fabrica mining complex, for example, is linked by rail to the port of Tubarao in Espirito Santo state. Both rail and port facilities are owned by CVBD.

Blockbuster portfolio. Ferteco is Brazil's third largest iron ore producer, with reserves of 263 million tons of ore and annual production of 25 million tons. The acquisition of Ferteco and Caemi will increase CVRD's annual production to 173 million tons, from 116 million.

Apart from its aggressive acquisitions, CVRD slashed costs and invested $3.4 billion over the past four years in exploration and capacity expansion. As it concentrates on mining, it is divesting other holdings. Between April and June, it sold its main pulp and paper assets-Bahia Sul and Cenibra--for $990 million.

Most important, CVRD last year unraveled a mutual-shareholding arrangement with Companhia Siderurgica Nacional (CSN). As owner and client of CVRD, CSN had a conflict of interest that interfered with CVBD's strategic decision making. Under the deal, CSN and CVRD sold off each other's shares.

Still, investor concerns remain since the company's market value of about $9 billion is still below that of its industry peers. And there are questions about the company's planned entry into the international arena and the copper business.

Gabriel Stoliar, CVRD's executive director of investor relations, insists that management is addressing these issues. "We are working to reassure minority investors with new regulations on corporate governance, and to the extent that we can consolidate our core business," he says, "we will be able to generate additional value."