Vale Opening Door to Stock-Market Return After Nine-Year Hiatus

(Bloomberg) -- The world's biggest iron-ore miner is getting closer to snapping an equity-market drought that has stretched nine years.

If its voluntary share-conversion is successful, Vale SA will be able to tap the stock market to fund investments rather than relying on debt, Chief Financial Officer Luciano Siani Pires said in an interview Thursday. The last time Vale sold stock was an $11.5 billion transaction in July 2008, at the time the biggest ever share offering by a Brazilian company.

“We don't intend to use debt anymore to finance inorganic or organic growth,” Siani Pires said from Rio de Janeiro. "This share conversion opens, theoretically, the possibility of using the Vale stock as currency for acquisitions."

The company piled up one of the industry's biggest debt loads during years of expansion, including acquisitions and building the $14 billion S11D mining complex in northern Brazil. Now it's trying to pay down more than $22 billion in net debt.

While Siani Pires said the Rio-based company has no immediate plans to raise capital through new shares, in theory it will be able to do so once this first conversion phase is passed on Aug. 11. It will prevent Vale shareholder groups from blocking future equity issuance.

For more than 20 years Vale has been controlled by a bloc of shareholders that included state pension funds and the country's development bank BNDES. A proposed new ownership structure is set to transform it into one of only a few major Brazilian corporations without a clear controlling group.

Cheap to Peers

Under the current setup, Vale has been seen as susceptible to government intervention. That's one of the reasons it trades at lower multiples than its two biggest peers Rio Tinto Group and BHP Billiton Ltd.

The new-look Vale aims to boost transparency and flexibility, in part by opening itself up to more independent participation on its board. The first two independent board members are likely to be elected at the end of this month, should the company hit the minimum conversion rate needed to proceed, something Siani Pires is highly confident about.

“The expectations are for a very substantial approval,” he said of the company's need to convert at least 54 percent of preferred shares. “Basically, the two groups of investors who did not show up at the shareholders' meeting were individuals and some index funds and sovereign wealth funds.”

Siani Pires said that since that first meeting in June, a lot of traction has been made with the investors who did not attend.

The company wants to push through the initial voluntary conversion before the controlling group known as Valepar meets in late August. A new three-year shareholder agreement will then go into effect until the company has completed its transition into what it calls a “true corporation” by 2020. This will include a structure where it is possible state-run shareholders may no longer have a seat at the board.

“Board elections starting from then will be highly contested," Siani Pires said. "Anyone could appoint a board member and there will be no controlling group.”

--With assistance from Peter Millard

To contact the reporter on this story: R.T. Watson in Rio de Janeiro at rwatson71@bloomberg.net.

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net.