peer review

Vale Sheds Invisible Shackles

The dead hand of the state has hardly been strangling the Brazilian mining giant.
As of 11:51 AM EDT
47.84 BRL
At Closing, April 19th
1890.50 JPY

Have a look at the share-price performance of these five mining companies. One is controlled by a shadowy influence network of Latin American politicians, while another is managed by a group of red-in-tooth-and-claw capitalists beside an Alpine lake. The trouble is, which is which?

Politics Ain't Everything

Vale's share price performance hasn't suffered in recent years from its controlling shareholder

Source: Bloomberg

Note: Rebased. Feb. 27, 2014=100.

If you're not seeing much evidence of the dead hand of the state weighing on any of those stocks, that's because Vale SA is as well-run a company as the other big miners. (Glencore Plc, based in the Swiss canton of Zug, is the only one that performs better on a three-year time frame).

That's reason not to expect dramatic changes for investors from the boardroom drama last week, which included the removal of Chief Executive Officer Murilo Ferreira and the shaking up of a shareholder structure that had given government an outsized say in Vale's decision-making.

Voting Rights

A multiple-class share structure allows Valepar and the government to control appointments with a minority of shares

Source: Company reports

Note: As of December 2016. Doesn't show 12 government "golden shares."

On the whole, investors (and Gadflies) are fond of good corporate governance. So replacing the current set-up, whereby Valepar (a consortium of Brazilian state pension funds, banks, and Japanese trading house Mitsui & Co.) controls appointments to Vale's board of directors, ought to be a good thing.

At the same time, the move is probably less dramatic than it looks, due to the nature of Vale's triple-class structure and the limited ways in which just one of those classes is changing.

The common stock that's controlled by Valepar and the Brazilian government only has one additional right over the more widely held preferred shares -- that of voting on director appointments. That's hardly the sort of sweeping disparity you see at Snap Inc. or Alphabet Inc.

Meanwhile, the government won't be disposing of its golden shares, which give it a veto on matters including, importantly, the spinoff of non-core parts of the iron-ore business such as railways and ports.

As a result, the shakeup of Vale's shareholder register has the feel of a solution that's looking for a problem rather than a pivotal change. Unlike its debt-laden Chinese counterparts, state control doesn't appear to have made Vale any more sclerotic than its peers.

Indeed, in many ways it's been an outperformer. Returns on invested capital -- not a strong point for miners in recent years -- were better in each of the last two fiscal years than those of the other big five miners.

Return to Sender

Vale has had the best return on invested capital of its major peers over the past two years

Source: Bloomberg

Note: Fiscal years. All companies have December fiscal year-ends except BHP Billiton, which is in June.

In valuation terms, it traded at a discount to rivals in terms of Ebitda-to-enterprise value multiples a few years ago -- but that divergence, and its disappearance, seems to be more to do with investor expectations around the iron ore price and Vale's $14.3 billion S11D mine than anything fundamental about its governance.

Value Proposition

Vale's common stock doesn't suffer a noticeable discount to peer companies despite its weak corporate governance

Source: Bloomberg

Note: Based on enterprise value to blended forward 12-month Ebitda estimates.

The move may be better understood not as a corrective for past problems, but as a prophylactic against future ones.

Ferreira took several years to shake off the perception that he was too beholden to former President Dilma Rousseff after his predecessor Roger Agnelli was ousted by Valepar following public clashes with the government. Local analysts in turn link his departure to the influence of Michel Temer, who became president last year after Rousseff was impeached.

For all that Vale has held up well against its international peers, its fortunes have also been inextricably bound up with those of Brazil itself.

That was all very well when the country was booming -- but with the government this month sending in troops to quell looting in Vale's home state 1 of Espirito Santo after police went on strike, the association is looking more like a liability than an asset. Vale will be stronger on its own.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Its headquarters are in Rio de Janeiro but it's named after the valley of the Rio Doce, a river that flows through the state. The port of Tubarao in Espirito Santo is the main export harbor for iron ore from Vale's mines in Minas Gerais state.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at

Before it's here, it's on the Bloomberg Terminal.