Vale should not become Anglo American
Over a long period of time, Anglo American invested in everything from paper making to aggregates in South Africa. It became a driving force of the South African economy, and in the process of becoming wonderfully diversified, it completely lost sight of its core business. Today, Anglo is a distant fourth in the largest of the world’s mining companies. Vale could become Anglo of 20 years ago if the Brazilian government forces it to diversify outside of mining.
Vale is a world-class mining company. It holds a dominant stake in the iron ore business. With the cash flow from its iron ore stake, what should Vale do next? Should it diversify downstream in Brazil or continue to build what could become the world’s greatest mining company?
The Brazilian government clearly feels it can claim some of the cash flow from Vale’s mining operations and redirect it to local development. The government feels Vale should be building up Brazil first and the global empire second.
Vale, however, will be limited by two factors: corporate attention span and, if the government gets its way, low returns from domestic tolling operations. Vale currently has a pipeline of extraordinary projects that will generate extraordinary returns. It is impossible for management of a major company to manage non-material projects. When you are building the world’s largest iron ore mine, world-class copper mines, and global coking coal assets, do you really want to waste valuable boardroom time and energy on a shipyard or a steel mill?
Vale should stay firm and stay out of building steel mills, shipyards, and other random businesses. If it must, it should fund startups and other companies that build local infrastructure. Nevertheless, it should remain a minority in these companies and use its balance sheet to get these companies going, but not provide any corporate guarantee.
Steelmaking is a tolling operation. Steelmaking companies charge a toll to convert iron ore into steel. That markup is used to pay for everything from coking coal to salaries. The problem with the steel mill is if steel is not continually produced at full production capacity, it is impossible to recover the lost production. In good times, steel mills make money. In bad times, governments keep them operating to keep employment up, even though they turn horrible profits. This is not where Vale should be focusing.
The Brazilian government does not want to create the Anglo American of Brazil. It might think a conglomerate is the way to go, but before it forces Vale down that path, it had better spend some time with retired Anglo executives. Vale is the world’s best iron ore company and a national treasure of Brazil. With the addition of lots of non-mining related companies, however, Vale will go from being the world’s sleek, impressive miner to a tired old barge of a company in less than 20 years.
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