Glencore, Vale should join forces, analyst says

In a search for cost cutting measures, one mining analyst says a merger between Vale and Glencore should be an option that's considered.

Brazilian mining company Vale released itssecond quarter results Thursday, which showed an 84 per cent drop in profits.

Base metal prices are also down across the board.

Terence Ortslan, managing director with TSO and Associates, an independent mining, metals and fertilizer research firm, said combining operations could help reduce redundancies.

"I think the question is, is it going to be out of necessity, or is it going to be creative in doing things? I think the assets have to be put in a pool to see who can do better and how it's going to be streamlined in terms of a critical path."

Long term view required

Glencore recently took over Xstrata a firm that took over Sudburys Falconbridge Ltd. in 2006. Sudbury residents have, for decades, heard and talked about mergers between Falconbridge and Inco Ltd., the company now known as Vale. The two mining giants employ and subcontract to thousands of people in the northern Ontario region and have come together through mining partnerships over the years.

Ortslan confirmed the two companies continue to work together on some projects. But he noted a more long-term view needs to be taken by both companies when it comes to developing the Sudbury Basin.

And while Vale's chief financial officer Luciano Siani says they "have no intention to do any divestment, on [its base metals] business," local cost containment has become an ongoing company mantra.

Vales local spokesperson Angie Robson added: "We have to find ways to sustainably reduce our spending. I certainly can't speculate on what might happen in the future, but I can say we're going to do our best to minimize the impact on our people as best we can."

But Ortslan said Vale should do the opposite: spend more, not less.

"You have to invest money, you have to get more critical mass out of the ore bodies, you have to use the equipment and you have to explore into the higher grade ore bodies," he said.

Vale said it does plan to pursue future investment projects in Sudbury including plans to reopen the Totten nickel mine by the end of this year.

Poor capital investments

Nevertheless, Vale's earnings have dropped every quarter for the past two years.

"The cyclical nature of mining is very turbulent and certainly we know that, here in Sudbury, which is why here locally we continue to remain focused on maximizing value, containing costs where we can and remaining competitive as we can," Robson said.

"We've had a very long history here in Sudbury and we have a very long future in Sudbury and I think that's reflected by the enormous capital that's been invested here to make sure that our assets continue to work in the coming years."

Ortslan noted Vale is being hit a bit harder by the mining downswing because it's made some poor capital investments in projects like the Goro nickel operations in New Caledonia. Those results of those projects have undercut the gains made by its Sudbury mines, which Vale says has seen the best production improvement in years.

Thats an important fact Vale should consider when it comes to making investments in the region, Ortslan said.

"Sudbury will be another 100 years if it's properly managed."

More partnerships between the two miners may be exactly the kind of management Sudbury needs, he added.