Vale has big money to spend on mining equipment and supplies and it’s sourcing it now

Almir Rezende has a problem that most of us would love to have: How to spend US$1 billion a month over the next five years.

The global procurement head of Vale (RIO-N), the world’s top iron ore producer, told a Toronto group of Canadian mining suppliers that it’s actually “not easy” to spend the US$59 billion earmarked in the Brazilian iron ore giant’s strategic five-year plan.

“We’ve never invested that much money before,” he explained. Between 2001 and 2007, Vale invested a total of US$43.1 billion.

The multi-billion investment program involves more than 40 projects in Brazil, Peru, Canada, Australia, Indonesia, New Caledonia, Mozambique and Oman.

Vale is the second-largest mining company in the world with a market capitalization of about US$151.7 billion. (Its market cap stood at just US$9.2 billion in 2001.) It is the largest producer and exporter of iron ore and pellets and holds 33% of the transoceanic market. The company is also the world’s second biggest nickel producer after Russia’s Norilsk Nickel (NILSY-O, MNOD-L).

One of Vale’s biggest challenges, however, is to keep a lid on costs. The company is at a geographical disadvantage to its peers in Australia, which are closer to the lucrative Asian markets, Rezende explained.

While Vale maintains it is still the lowest-cost producer in the industry, its cost of production has doubled from about US$4-5 per tonne in 2001 to US$8-10 per tonne today.

“Give us new solutions so that we can drop our costs,” Rezende urged the group of Canadian suppliers on June 18. “If you prove that we’re going to save money over time [with your products] you’re going to be part of Vale.”

Global operations director Marcos Saraiva added that while Vale might have alliances with bigger suppliers like Caterpillar, there was still much room for other companies in the industry to become parts suppliers and to introduce better designs and innovative products.

Vale has particular interest in the procurement in fuels and consumables; mining equipment; railway equipment, materials handling; project engineering; and process equipment.

“We are doubling everything,” Rezende said. In terms of equipment, for example, its fleet of light trucks will jump 132% between now and 2013 to 646, while the number of OHT trucks will grow 95% to 352, motor graders 119% to 96, dozers 114% to 291, loaders 78% to 253, hydraulic excavators 102% to 172, and rope shovels 66% to 32.

On the rail side, Vale’s railway procurement manager, Elberti Lopes, said the company will be building more than 800 km of railway in Brazil and about 600 km of track in Africa. “We will be purchasing 339 locomotives in the next four years and 17,000 cars,” he said. “We’re looking for alternatives for spare parts, wagons, components and so on. We don’t buy everything from the major suppliers.”

Longer lead times have become an issue, however. According to Vale, the lead time for locomotives has grown to 24 months, up from 13 months in 2004, from 5 months to 12 months for railroad equipment, from 12 months to 24 months for rope shovels and from 5 months to 12 months for OHT trucks.

That’s one reason why Vale’s procurement team has to be on top of its gameanticipating its needs well into the future. “With a 12-month lead time to buy a truck it’s very challenging,” Saraiva said. “We need to guess sometimes what we need to buy.”

The shopping list is endless: conveyor belts, tires, sulphur (Vale’s demand for sulphur makes up 5% of the world’s total), explosives, lubricants, fuel oil, diesel, natural gas, rail wagons, auxiliary machines, undercarriages, drilling tools, blades for motor graders, buckets for loaders, bodies for trucks, buckets for excavators, blades for dozers, engine parts, hydraulic parts, wheels, bodies and buckets, auxiliary fleets, fittings for auxiliary fleets.

“The amount they’re spending is phenomenal,” said Gary Robinson, general manager of P.R. Engineering in Oshawa. “We’d be happy with the crumbs.”

Vale will be spending a good portion of the funds in Canada after purchasing Inco for US$18 billion in September 2006.

Vale Inco’s Ontario operations in the Sudbury basin alone include six mines and the Gertrude open pit. Last year it approved US$45 million for a feasibility study to deepen its Creighton mine in Lively, Ontario. The mine has been in operation for more than 100 years and Vale believes it has the potential to nearly double the mine’s proven and probable reserves.

Vale is also investing US$400 million to re-open the Totten mine, which will be the first mine in Sudbury in 35 years. Totten is expected to move into production in 2011 with a 20-year lifespan.

But to do that it needs suppliers to help.

“We need to have competent suppliers,” summed up Saraiva. “We have money to spend and we have the ambition to be No. 1 in the world.”