EDC to lend Vale up to $1-billion

TAVIA GRANT
Source: The Globe and Mail
Published Monday, Oct. 04, 2010

Export Development Canada is set to announce Monday one of the largest deals in the government agency's 65-year history: up to $1-billion (U.S.) in financing to Brazilian miner Vale (VALE-N31.42-0.28-0.88%).

The loan is for Vale's projects in Canada and to encourage the world's second-largest miner to use more Canadian suppliers in its operations outside the country.

Of the total, $500-million is available to Vale for its operations outside Canada. Up to $250-million will go toward the Long Harbour nickel processing plant in Newfoundland while the remaining $250-million will be available for several projects slated for development in Ontario, including the Sudbury area.

The announcement is likely to trigger debate, given the controversial history of Vale's presence in Canada. Rio de Janeiro-based Vale's 2006 purchase of the storied nickel miner Inco Ltd. came amid a flurry of takeovers of Canadian companies, sparking concern about the hollowing out of Corporate Canada. A bitter, year-long labour dispute at the miner's operations in Sudbury ensued in July, 2009, after workers rejected proposed changes to the pension plan and a reduction in the bonus tied to the price of nickel. The strike was finally settled this July, with concessions made on both sides.

The financing announced today will bolster Canada's mining industry, and give smaller companies more access to Vale as it expands globally, EDC said.

"This is done with a view to maintain and expand Canada's position with nickel mines in the international marketplace," Eric Siegel, the agency's chief executive officer, said in an interview.

The export agency has given loans to foreign companies before, to companies such as Amtrak and Brazil's Petrobras, while encouraging them to use Canadian suppliers. In its years of financing Chile's Codelco, the number of Canadian suppliers used by the miner has risen to 80 from five.

But funding a foreign company's operations within Canada is a new approach for EDC, Mr. Siegel said.

Asked whether Vale is obligated to use Canadian suppliers as a condition of the deal, he said it is not formally written into the loan agreement. Rather it is an "understanding" that the Brazilian company involve more Canadian companies, such as engineering firmsand equipment suppliers, in its procurement process.

"It's an understanding. At the end of the day [Canadian firms] have to be competitive from a technical and price perspective, but this is clearly giving them a leg up in terms of access and enhanced attention from Vale," he said.

(On Monday, EDC clarified its earlier comment, saying the obligation to consider Canadian procurement is in fact written into the loan agreement.)

Vale, which posted a second-quarter profit of $3.7-billion, is the world's largest iron ore miner and is expanding its global presence in markets such as Asia and the Middle East.

EDC plans initially to extend a portion of the $500-million for Vale's global operations, and then evaluate whether more Canadian companies are winning contracts from Vale. It would only grant the rest of the loan if Vale demonstrates it's giving more business to Canadian companies.

Vale's expansion plans, within Canada and around the world, will create "hundreds of millions" of dollars in potential supply and service opportunities for Canadian companies over the next few years, EDC believes.

Terms of the loan weren't disclosed. The unsecured loan was underwritten "at market rates," EDC says. The agency is "confident" about Vale's credit strength and says it has no concerns about repayment.

The Crown corporation has been profitable in 64 of the past 65 years, Mr. Siegel said. After lending to a foreign company, EDC typically sees the amount of Canadian procurement match or exceed its original loan within four or five years.

The country's export credit agency helps Canadian exporters and investors expand their international businesses through loans, advice and insurance. About 80 per cent of its customers are small and mid-sized firms. Much of its effort in recent years has been focused on trying to get Canadian companies to diversify into foreign markets, beyond the United States, particularly into emerging economies like Brazil.

The agency's mandate has been expanded since the credit crunch to support more businesses within Canada through additional lending, insurance and advisory services.