Hydro secures bauxite supply in $4.9 bln Vale deal

OSLO Sun May 2, 2010 3:57pm EDT

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OSLO (Reuters) - Betting on a boom in aluminum demand, Norwegian producer Hydro announced on Sunday a $4.9 billion purchase of Brazilian mining giant Vale's aluminum activities, securing bauxite supplies to last it for a century.

Norway's biggest ever foreign acquisition will give Norsk Hydro ASA (NHY.OL) a leading Brazilian bauxite mine and the world's biggest alumina refinery among other assets in Brazil.

Vale SA (VALE5.SA), the world's largest iron ore miner and a leader in nickel, will get $1.1 billion in cash and a 22 percent stake in Hydro, a Norwegian firm whose main business has been aluminum smelters and production of aluminum products.

The deal, which should be closed by the end of 2010, values Vale's stake in Hydro at $3.1 billion and includes $700 million in debts assumed by the Norwegian company.

"The acquisition in Brazil will secure raw materials for more than a hundred years of aluminum production," Hydro Chief Executive Svein Richard Brandtzaeg told reporters. "This gives the entire company greater strength and makes us more robust."

Hydro said industry surveys showed that demand for aluminum would grow by 76 percent between 2010-2020 and that gaining better access to bauxite and alumina would help Hydro expand.

Hydro said it has always been dependent on buying the materials to make aluminum, such as bauxite and alumina.

BASE FOR EXPANSION

"This is the right strategic decision, Hydro had been short in bauxite and alumina," said DnB NOR analyst Gudmund Halle Isfeldt. "They could more easily continue expanding their production base within aluminum smelting."

Isfeldt said Hydro could, for example, over time expand its just-opened Qatalum aluminum smelter in Qatar, if they gain more low-priced natural gas for this energy-intensive industry.

The deal gives Vale cash and exposure to the entire aluminum value chain -- from bauxite to aluminum products, Vale's Executive Vice President Tito Martins told Reuters.

"Vale will benefit from integrating its resources in an organization with both upstream and downstream activities and we expect to grow more in this new organization than we would have independently," said Martins, in Oslo for the announcement.

The deal comes on the heels of Friday's $2.5 billion purchase by Vale of iron ore deposits in Guinea.

Vale said it lacked access to low-cost sources of power generation, one of the main costs in aluminum production, giving it no prospects for growth. Hydro's access to cheaper power would make it more competitive and thereby create more value for Vale shareholders, Vale said in a statement.

Vale was part of a consortium which bid last month for the rights to build a massive 11,000 megawatt hydroelectric dam in the north of the country but it lost out to a rival consortium comprised of several smaller firms.

Analysts said Vale had joined the bid in order to source power for its aluminum operations but it was not clear whether it was the outcome of the auction which prompted the firm to sell the assets.

"VERY GOOD POSITIONING"

The transaction will be partly financed through Hydro's fully underwritten 10 billion crown ($1.7 billion) rights issue.

Hydro's main owner, the Norwegian state, will take part in the rights issue to maintain its stake. When Vale receives its 22 percent ownership stake, the state's shareholding will drop to 34.5 percent from 43.8 percent, Hydro said.

"This looks like a very good positioning by Norsk Hydro," said Trade and Industry Minister Trond Giske.

"The government has concluded that it is acceptable to cut its stake," Giske said, adding that over the long-term the state would seek to push its stake in Hydro back "toward 40 percent."

The rights issue is underwritten by Citi, DnB NOR Markets and BNP Paribas and should take place in July.

Hydro said the deal will give it "full control" and a 60 percent stake in Paragominas, one of the largest bauxite mines in the world, 91 percent ownership in the world's largest alumina refinery Alunorte, 51 percent in the Albras aluminum plant and 81 percent in the CAP alumina refinery project.

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