LONDON, May 4 -- Norsk Hydro ASA, Europe's third- largest aluminum maker, agreed to buy mine assets from Vale SA for $4.9 billion, securing a century's worth of bauxite supplies and making the Brazilian miner its No. 2 shareholder.

Hydro, based in Oslo, will give Vale $1.1 billion in cash, a 22 percent stake and take on about $700 million of net debt in return for bauxite, alumina and aluminum assets, the company said yesterday. As part of the deal, Hydro will take control of Paragominas, the world's third-biggest bauxite mine, and 91 percent of Alunorte, the largest alumina refinery, it said.

"This deal is a quantum leap for Hydro and will position the company for the best access to some of the highest quality bauxite mines in the world," Chief Executive Officer Svein Richard Brandtzaeg said in an interview in Oslo today. "We are now long in raw materials and that makes it possible to expand primary production."

Hydro is seeking greater access to the raw materials used in aluminum production to become less reliant on mining companies supplying bauxite and alumina, such as competitor Rio Tinto Group. Vale is selling aluminum assets because higher power costs are restricting its ability to expand.

Electricity accounts for about a third of the cost of producing aluminum. Hydro is "long in energy" and short of bauxite and raw materials, meaning the acquisition of Vale's assets puts it in a "very comfortable position," JPMorgan Chase & Co. wrote in a note today.

'Makes Sense'

"For Hydro it makes sense to consolidate in the aluminum space and move higher up the value chain," John Meyer, head of natural resources at Fairfax I.S. Plc said by phone. "All the mining companies like their long positions in alumina and Hydro will now be a major supplier."

Hydro plans to raise 10 billion kroner ($1.69 billion) in a sale of shares to finance the transaction, after which Vale will own 22 percent of Hydro.

The shares rose 1.2 kroner, or 2.6 percent, to 47 kroner today in Oslo.

"In the long term, this seems like a right move strategically, and I believe the market is in complete agreement about that," Anne Gjoen, an analyst at Svenska Handelsbanken AB with a "buy" rating, said on the telephone from Oslo. "The opinion was somewhat divided on the price, but based on what has been presented it seems like quite a fair one. It was a once in a lifetime opportunity."

'Attractively Priced'

In addition to Paragominas and Alunorte, the company will acquire 51 percent of the Albras aluminum plant and 81 percent of the CAP alumina project, it said.

"This deal makes strategic sense for Hydro and also appears to be attractively priced," Samir Bendriss, head of research at Oslo-based Pareto Securities ASA, said by phone yesterday. "There's a risk that alumina prices decouple from aluminum and will be more expensive."

Alumina producers, including BHP Billiton Ltd., United Co. Rusal and Alcoa Inc., are seeking to change the way the semi- processed material is priced, from closed-door contract negotiations to an index system based on spot transactions. Typically, the cost of the raw material is now fixed at a percentage of aluminum prices.

The Vale assets will "significantly improve" Hydro's financial position and secure bauxite supplies "in a 100-year perspective" Hydro said in its statement. Vale, based in Rio de Janeiro, said it expects the transaction to create "substantial value" for shareholders.

Rights Offer

The Brazilian company, which becomes Hydro's second-largest shareholder after the Norwegian government, will nominate a representative to join Hydro's board of directors. Vale has agreed not to increase its shareholding further, the company's Executive Director Tito Martins said yesterday. Vale doesn't foresee any job losses as a consequence of the deal, he said.

Hydro's rights offer, set for completion in July, will preserve the company's financial flexibility, CEO Brandtzaeg said yesterday. The transaction will cut the Norwegian state's ownership to about 34.5 percent from 43.8 percent, Minister of Trade and Industry Trond Giske said. Norway plans to raise its stake back toward 40 percent "in the longer term," he said yesterday, without giving more detail.

'Next Large Bite'

"The next deals for Hydro will be much more around what we have today than the next large bite," Chief Financial Officer Jorgen Arentz Rostrup said in an interview today. "In our portfolio there are growth opportunities, both on the bauxite side and also on the alumina side. Having a long position in raw materials should also provide new smelter opportunities."

Hydro will respect supply contracts it has with companies including Rio for alumina and bauxite, Brandtzaeg said. Bauxite is an ore that's refined into alumina, a white powder separated during smelting to produce aluminum.

"We are definitely now in a long position where Hydro will also be an attractive partner for aluminum producers that will need raw materials for their production," Brandtzaeg said.

Hydro may scale up production at its aluminum smelter in Qatar, Brandtzaeg said. Qatar Aluminum Co, a joint venture smelter between Hydro and state-owned Qatar Petroleum, began production last year and is scheduled to reach full capacity of about 600,000 tons a year in the fourth quarter. Hydro's CEO said the plant has the potential to increase capacity to as much as 1.5 million tons.

The Norwegian company reported a first-quarter profit of 869 million kroner last week, rebounding from a loss a year earlier, as aluminum prices rose by two-thirds. Hydro last year cut jobs and output as slowing economic growth curbed demand from builders and carmakers.

Hydro and Vale expect to close the transaction by the fourth quarter.