A letter from Latin America - (June 2011) - Brian Nicholson


Despite the legal niceties spelled out in the Constitution and copious laws, Brazil’s public and private sectors rub shoulders in a vast and murky twilight zone. Rarely has this been more explicit than in the recent ousting of the CEO of Vale, the Brazilian-based mining giant. Vale is a US$170 billion private corporation with half a million stockholders. Its shares are traded in São Paulo, New York and Paris. But in early May senators in Brasília grilled Finance Minister Guido Mantega about what one opposition leader called the government’s ‘blatant’ interference.

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So, does Dilma Rousseff, Brazil’s new leftist president, plan to emulate Venezuela’s Hugo Chavez, an inveterate meddler? Probably not. But the episode can hardly help as Brazil seeks tens of billions of dollars in private investment prior to the 2014 World Cup and the 2016 Olympic Games.

In early April, controlling shareholders in Vale issued a laconic statement advising that CEO Roger Agnelli would be replaced by Murilo Ferreira as of 22 May. After two paragraphs extolling Ferreira’s qualifications – 30 years’ experience in mining, most recently running Vale Canada, a major nickel producer – the shareholders offered a brief ‘appreciation’ for Agnelli’s performance and contribution to Vale’s success. Well they might. Since taking over in 2001, Agnelli multiplied billings ten-fold to US$40 billion and profit five-fold to US$15 billion. Market capitalisation soared no less than 25-fold from US$7 billion as Agnelli turned the company into the world’s largest iron ore producer, second largest nickel producer and a global rival to BHP Billiton and Rio Tinto. Total shareholder returns in the period 2002–2010 were 39.8 per cent, compared with 29.1 per cent and 20.9 per cent respectively for those two rivals, Vale said. So why would shareholders kick out an obvious winner? The answer lies in the aforementioned twilight zone.

Privatised in 1997, Vale never truly escaped government influence. Brasília retains a golden share to veto, among other things, moving the company offshore, selling key assets like mineral deposits, and modifying shareholders’ voting rights. Ample potential control, perhaps, but nothing about kicking out the CEO. The mechanism for this lay in the share structure.

A 52.3 per cent majority of Vale’s voting stock is held by Valepar, a holding company in which the government indirectly has 60.5 per cent control through Previ, the pension fund of employees of the state-owned Banco do Brasil, and the Brazilian Development Bank. Anyone less familiar with Brazilian history might wonder why the country’s largest pension fund would want to fiddle with the management of such an apparently profitable investment. But most of Brazil’s bigger pension funds are sponsored by state companies, and have a habit of participating in projects of interest to the government – more twilight zone. However, under a shareholders’ agreement Valepar needs a two-thirds majority to topple the Vale CEO, meaning that the government was still around six per cent short. It needed support from another major Valepar shareholder.

‘I spoke with shareholders, including Previ,’ Mantega told Brazilian legislators, admitting that he also met with Bradesco, a private bank that holds a substantial minority stake in Valepar. Press reports, strenuously denied by Bradesco and the government, suggested that Bradesco was perhaps swayed to the government’s side by considerations of its other links with the public sector – it has for example a lucrative deal running a retail bank for the Postal Service, under a partnership due for renewal this year.

‘There was blatant interference by the government in Vale,’ said Senator Alvaro Dias, leader of the opposition Social Democratic Party. ‘When the government was putting pressure on Vale, directors threatened to resign en masse, upset about what they called the ‘Venezuelisation’ of the company.’

All of which begs the question: why would the government want to get rid of the demonstrably successful Agnelli? Once again, the answer appears to lie in the twilight zone. The Workers’ Party (PT) to which Rousseff and her predecessor Luiz Inácio Lula da Silva both belong has never fully accepted the privatisation of Vale, saying that it and other state companies were ‘given away’ by the previous Social Democrat government. More recently, Lula took umbrage at Vale’s order for 19 giant bulk carriers in Chinese and South Korean shipyards. Agnelli said Brazilian yards cost double and would take far longer to deliver – logistical effi cient is critical for Vale, whose main customer, China, is 45 days away, while Australian mines can ship to China in 15 days.

Lula also complained that Vale suspended expansion plans and fi red 1,200 workers during the recent global economic crisis, which caused a sudden slump in iron ore demand. Furthermore, the company was far too eager to export iron ore rather than investing in valueadding processing, even though Vale is a worldclass mining company and Brazil has several large steel companies, not to mention current excess smelting capacity.

Most economists would argue that boosting regional development, promoting specific industries, creating or retaining jobs and adding value to exports are all worthy goals, but ones that a government should achieve in other ways. Leaning on private companies to distort their investment and operational priorities is not the best option.

‘He (Lula) expressed his dissatisfaction publicly, and Sr Agnelli simply ignored it, continuing to do what he thought was necessary,’ Mantega told legislators. ‘The government likes Vale and wants it to be successful, because we receive taxes on the profi t… But it’s not just a matter of making a profit; the company also has to contribute to the national interest.’

Possibly with an eye to his own future, Agnelli apparently chose to go quietly. ‘I understand Lula’s position… The company’s mission is to generate results and gain capacity to invest more, but the government’s mission is completely different,’ he told journalists while showing them round the brand new 400,000- ton Vale Brasil, freshly delivered from Daewoo Shipbuilding in South Korea and claimed to be the world’s largest ore carrier.

For Miriam Leitão, a leading economic commentator, the question now is how Vale will be managed going forward. ‘Given that there was such an explicit intervention, who will dare to take decisions that displease the government? Vale has to win back the confi dence of major investors that it really still is a private company.’


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Brian Nicholson is a freelance journalist. He can be contacted at brian@minimaxeditora.com.br.

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