Norsk Hydro Buys Vale's Aluminum Assets for $4.9 Billion


Wonder where aluminum prices are headed? Norway's Norsk Hydro ASA, which has agreed to pay $4.9 billion for Vale's (VALE) aluminum mining business in Brazil, is betting that the commodity is headed higher.

The transaction gives Vale $1.1 billion in cash and a 22% equity holding in Hydro. To pull off the deal, there will also need to be a subsequent rights issue and it looks like a key buyer will be the Norwegian government, which already holds a 43.8% stake in Hydro.

The deal should provide Hydro with enough aluminum to last until the end of the century. And interestingly enough, it comes just days after Vale agreed to pay up to $2.5 billion for a majority stake in an iron-ore mine in Guinea.

Choice Properties

Hydro operates a vast system of aluminum smelters and plants. While this is a good business, with demand for aluminum forecast to rise 76% between 2010 to 2020, there is a big problem: wide swings in commodity prices. So why not control the aluminum supply? In its deal with Vale, Hydro will get a 60% interest in Paragominas, the world's third largest bauxite mine (this is an ore that can be transformed into aluminum and is used in cars and planes). There is a right to buy up the remaining stake for $400 million over the next five years.

Next, Hydro will secure a 91% interest in Alunorte, the world's largest alumina refinery. It will also get a 51% stake in the Albras aluminum plant.

Renewed Focus

If aluminum prices are expected to increase, why is Vale unloading lucrative assets? There are several reasons. First of all, aluminum requires large amounts of electricity to produce and Vale has a weak supply. However, this is not the case with Hydro.

Next, Vale will still have an opportunity for upside with its equity stake in Hyrdo. As a result, Vale can devote more resources to its enormous iron-ore business, which is also seeing strong price increases, thanks to China's insatiable demand for steel.

To bolster its footprint, Vale has recently bought a mining concession in Guinea from Beny Steinmetz, the Israeli diamond-trading billionaire. It is perhaps the most valuable undeveloped deposit of ore in the world. However, it will likely take many years to mine as it is in a remote area afflicted by periodic civil wars. In other words, Vale will certainly need a strong focus and lots of resources to continue to grow.