Refining mining: Roger Agnelli wants to grind iron and other ores into businesses with stable prices and long-term contracts. Here's how. (Cover Story).

For most of 1990s, Roger Agnelli advised people buying and selling Brazilian steel and mining companies, among the world's largest. But the life of the former Banco Bradesco capital markets division chief changed in 2000 when he became chairman of the board of Companhia Vale do Rio Doce (CVRD). He began fighting for shareholder support of a plan to turn the iron ore giant into a big, diversified mining company. After a little more than a year, the shareholders finally agreed but added an unexpected condition.

"Since I planned this focus, [they said] I had to execute the plan," says Agnelli, who became CEO of CVRD in July 2001.

The 42-year-old has not hesitated with his multibillion-dollar plan to transform the world's largest iron ore producer into one of the globe's top-four mining conglomerates by 2010. Through expansions, acquisitions and joint ventures with foreign partners, Agnelli wants to nearly triple the company's current market value to US$25 billion by the end of the decade.

To that end, Agnelli wants dominant market share in iron and other ore businesses so he can grind out stable prices and long-term contracts, analysts say. "CVRD doesn't need to strong-arm iron ore prices up in talks with the Japanese and Europeans because it's already got a good return on capital from iron ore," says Thomas Mello Souza, the mining analyst at Merrill Lynch's Sao Paulo office. "But CVRD might try to change the way price talks are held, like pushing for multi-year contracts instead of yearly ones, to protect against price volatility."

In October 2001, Agnelli landed a prototype deal with Baosteel. The $2 billion accord calls for CVRD to supply China's biggest steel maker with 6 million tons of ore annually for the next 20 years.

To seal its deals, CVRD has spent close to $1.4 billion to buy local iron ore competitors in the last two years. Next, Agnelli plans to make his Rio de Janeiro-based company into a copper leader by 2008. He also wants to boost CVRD's production of bauxite, the ore used to make aluminum, and is thinking about picking up manganese assets abroad.

Boxing out competitors. The company will not have to look outside Brazil for most of its reserves. Indeed, last year, CVRD wrestled in Brazil with Anglo-Australian competitor BHP Billiton for control of a major portion of the world's iron ore reserves. First, the company successfully outbid BHP for control of Brazilian mining company Ferteco and then outmaneuvered it for another iron ore producer, Caemi. BHP won the bidding for a 60% stake in Caemi, but Agnelli's team convinced Japan's Mitsui, the minority shareholder in Caemi, to nix the deal and team instead with CVRD.

"We knew the local market, knew Caemi and had logistic synergies with Caemi," says Agnelli. "But there was no pre-accord between Mitsui and CVRD to become co-controllers of Caemi."

The Caemi deal was crucial. "Just as CVRD's buying Ferteco kept BHP out of the Brazilian market, so did its deal with Mitsui for co-control of Caemi," says Roberto A. Gottschaulk, Ferteco's export manager. "Those deals were meant not only to consolidate CVRD's market share but to keep BHP out of the iron ore market here in Brazil."

CVRD's purchases gave it a 28% stake in the world's iron ore export market, ahead of England's Rio Tinto (22%) and BHP Billiton (15%).

As the number of ore producers shrinks, CVRD and other producers are not necessarily gaining power in negotiations with steel producers. "As we are consolidating, so are our steel-making clients in Europe and Japan," Agnelli says. "Our number of clients is decreasing and their size is increasing. So they have more bargaining power."

Having secured as much in iron reserves as he can without arousing competition authorities' concerns, Agnelli is now eyeing copper. CVRD won't have to look far to find major reserves. In April 2002, the company will begin development of its $400 million, 140,000-metricton-per-year Sossego copper project at Carajas in Brazil's eastern Amazon. The company also plans three other Carajas copper mines by mid-2003 as well as the 200,000-metric-ton-per-year Salobo copper project at Carajas in partnership with South Africa's Anglo American Corp.

Import substitution. "By 2007, we can be producing 750,000 metric tons per year of copper at Carajas, putting us among the top five or six copper miners in the world," Agnelli says. "Through very cautious acquisitions with partners, we can make CVRD one of the three or four biggest copper miners by 2008."

That's why CVRD has formed a joint venture with Chilean state-run mining giant Codelco to identify world-class copper assets in Chile, Peru and elsewhere.

"CVRD's push to develop copper mining here is also linked to Brazil being a net importer of copper, thus giving it a readymade market," says Nelson Grigo, commercial vice president for the Sao Paulo-based investment bank Brascan, which invests in Brazilian mines on behalf of U.S., Canadian and Brazilian interests.

A captive local market for copper reflects CVRD's penchant for close ties with its clients. The mining conglomerate owns stakes in Companhia Siderurgica Tubarao (CST), Brazil's No. 1 steel maker; Usinas Siderurgicas de Minas Gerais (Usiminas), the country's third largest steel mill; and half of California Steel Industries (CSI). "We want these steel makers to grow so that we can grow with them," says Agnelli. "We could invest in other steel makers as a minority partner, but only as leverage to increase our iron ore sales."

For the same reason, CVRD controls Albras, Brazil's largest aluminum smelter. CVRD is also the major shareholder of Mineracao Rio do Norte, which will have a bauxite production capacity of 16 million metric tons per year by the end of 2002, among the world's biggest.

Getting to market. "CVRD could merge Albras with another aluminum producer in Brazil, like Alumar [the second-largest smelter, owned by Alcoa and BHP Billiton], or a smaller smelter, which would give the resulting company far greater economy of scale," says Jose Vita, head of corporate finance for the Rio de Janeiro-based Banco Pactual investment bank.

Agnelli is more pragmatic. "If energy costs make expanding the Albras smelter economically unfeasible, we can invest in smelters outside Brazil where energy costs are lower and ship our alumina there," he says. "CVRD isn't imprisoned in Brazil."

In October 2000, CVRD invested $91 million for 50% of Bahrain-based pellet producer Gulf Industrial Investment Co. (GIIC). And the deal with China's Baosteel lets CVRD ship ore to the market where steel production is growing the most.

As CVRD's involvement with foreign producers grows, so do its logistics operations. With the acquisitions of major interests in ore producers Ferteco and Caemi, the company now holds a stake in the six major cargo railways in Brazil. It has also invested heavily in ports and sees an opportunity to go from supplying cargo services to aggressively selling its capabilities to third parties.

Similarly, the company is investing heavily to produce its own power as a hedge against higher energy costs and as a stand-alone business. CVRD is a member of industrial consortiums that have constructed two dams, are building three others and have won government concessions for four more. It plans to invest $1.3 billion through 2007 to ensure that the nine dams produce 48% of its current energy consumption.

But what most has gained Agnelli points with CVRD shareholders is his focus on existing interests. In March 2001, he helped untangle cross shareholdings of CVRD and steel maker Siderurgica Nacional (CSN) to allow each to concentrate on core businesses--iron ore and steel, respectively. He also oversaw the sale of its wood pulpmaking assets, raising almost $1 billion.

Whether Agnelli will be able to catapult CVRD into the top tier of global mining remains to be seen, but his focus on the low-risk iron ore business is producing rising profits. During the first nine months of 2001, the company posted a record $2.1 billion in gross revenues and $903 million in net profits--a nearly 51% increase in profits compared to the same period in 2000.

The results amid a tough global market reflect the CEO's preparedness. In 1981, at age 21, economist Agnelli entered Bradesco's investment banking subsidiary as an analyst. He eventually served as the bank's top financial adviser through dozens of big mergers, acquisitions and privatizations, including the $3.1 billion sale of then-state-owned CVRD to a consortium led by CSN.

"At Bradesco, being involved in lots of M&A and privatization deals--in particular the sale of many state-owned power companies, the sale of state-owned steel companies like CSN, CST and Usiminas, and the sale of CVRD--gave me a strategic vision of various industrial sectors," says Agnelli. That vision has made his transition from adviser to administrator a smooth one.

RELATED ARTICLE: Iron Man

Roger Agnelli, head of mining conglomerate Companhia Vale do Rio Doce (CVRD) cuts a forceful figure at his desk, a huge world map on the wall behind him. Tall and athletic, the dapper CEO only has to start his self-assured pitch about CVRD growth strategies to make the impression that building the business into one, of the world's largest mining companies in fewer than eight years will be a piece of cake. Agnelli talks with LATIN TRADE contributor Michael Kepp about the global ambitions of his and other Brazilian corporations.

How big will mining company CVRD be by 2010?

CVRD has a current market capitalization of US$9 billion, which puts us in fifth or sixth place, considerably behind companies like Alcoa, BHP Billiton, Anglo American [and] Rio Tinto with market caps of over $25 billion. By 2010, we want to have a market cap of $25 billion, nearly triple our current market cap.

Will CVRD acquire other iron ore companies abroad?

No. We have, at Carajas, 400 years worth of hematite reserves, the best-quality ore in the world, which we could expand a lot. It makes far more sense to, via partnerships, expand abroad in copper, in aluminum, in ferroalloys, and in other minerals like manganese and minerals we don't produce here. Such foreign partnerships are key to our growing at a greater velocity.

Will that take CVRD into the select ranks of Brazil's multinationals?

CVRD, because of its reserves and clients, is by nature an international company. Our clients are global and nearly 85% of CVRD revenues are in dollars. We have a 50% stake in California Steel Industries (CSI), a U.S. steel maker; a ferro alloy producer in France; a pellet producer in Bahrain; and offices on all continents. So, we have a base for expansion in terms of high-quality mineral assets. What we need to do now is consolidate our position within the global context and with economy of scale considerations in mind.

Why are there so few Brazilian multinationals?

Brazil has a vast internal market and a company needs to consolidate its market share here before competing on foreign markets where ... critical mass is essential, AmBev [Brazil's largest brewer], only started buying companies out side Brazil [in 2001] after this country's two biggest brewers merged to form it.