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Hydro CEO: to Honor Existing Vale Supply Deals Until 2015
May 5,2010 13:51CST
industry news

LONDON, May 5 -- Norwegian aluminum producer Norsk Hydro ASA (NHYDY, NHY.OS) will honor existing bauxite and alumina supply agreements with customers of Vale V.A. (VALE) until 2015 after which time the new owner of the Brazilian mining giant's aluminum businesses will be freed up from most of the commitments, Hydro's Chief Executive said Monday.

Svein Richard Brandtzaeg told Dow Jones Newswires in an interview that the $4.9 billion deal transforms the company into the world's fifth biggest producer of alumina and the sixth largest bauxite producer.

"We'll honor existing supply agreements with third-parties until 2010, but after that there is a significant fall in volume (of bauxite and alumina that we will have to supply," Brandtzaeg said. "We've gone from being short bauxite and alumina to long in both, and we'll use the additional raw materials both to supply our internal operations and externally to customers. There will still be some third-party contracts (related to Vale) after 2015 but most will now expire then," he added.

Sunday, Hydro said it had agreed to take over the aluminum businesses of Vale, propelling the Norwegian company up the ranks in its production of the raw ingredients used to make aluminum. The deal will be helped financed by a through a fully underwritten rights issue of $1.75 billion.

Brandtzaeg said he approached Vale when he became the Hydro's CEO last year.

"When I took over about a year ago I contacted Vale to express my appreciation of our business relationship and to express that I wished for the development to go even further," he said. Hydro and Vale have had a business relationship since the companies joined in a consortium to start the MRN bauxite mine. In 1999, Hydro entered into a 10-year metal purchase contract for 1.0 million metric tons of aluminum from Albras, and in 2000 Hydro acquired a stake in Alunorte, now the world's largest alumina refinery. Most recently, in 2008, Hydro signed an agreement with Vale to build the CAP alumina refinery in Brazil.

Vale, the world's second-largest metals and mining company, will receive a total consideration of $1.1 billion in cash and new Hydro shares representing a 22% stake in the Norwegian company.

"Vale has seen the best solution for its aluminum assets (through this deal), and has ownership in Hydro," Brandtzaeg said. "We all see the upside in the deal, and expect the value of Hydro to increase as a result-we think this is a good, complimentary deal."

The deal boosts Hydro's production capacity to 12.2 million tons of bauxite initially, rising eventually to 17.2 million tons, while alumina capacity will rise to 6.9 million tons and eventually more than double, to 14.9 million tons. Smelting capacity will rise to 2.4 million tons.

Vale can't increase its stake beyond its initial ownership of 22%, Brandtzaeg said, and has told Hydro the deal is not for the short-term. "Vale has said it sees its stake as a long-term strategic deal…there are some restrictions, including Vale being unable to sell more than 10% in tranches, but we don't expect that in the short-term," he said.

Competition authorities in the E.U. and Brazil need to approve the deal, but Brandtzaeg said Hydro doesn't anticipate any anti-trust issues.

The company sees aluminum demand rising by around 54% in 2010 from 2000 levels, but said it has hedged the majority of the net aluminum price exposure in the assumed Vale assets through 2011 given expectations of weaker metal prices amid a market imbalance and record high inventories.

"There are short-term issues surrounding inventories and the market balance, but we're very optimistic over consumption in the long-term," Brandtzaeg said. The inclusion of more cost-efficient smelting capacity in Hydro's portfolio won't impact its near-term decisions over whether or not to restart capacity idled during the economic downturn because "right now, we're not encouraged (by market conditions) to restart capacity," Brandtzaeg said. "We're targeting an overall cost reduction of $100/ton in a program that will be completed by the end of 2011, so we'll continue to work to reduce costs."


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