Vale announces billion in new domestic investments

The move comes after months of government criticism about a lack of involvement in the Brazilian economy.

RIO DE JANEIRO (Reuters) - 

Mining giant Vale on Wednesday announced billions of dollars in new domestic investments after months of government criticism that the company was not doing enough for Brazil's economy.

Vale (VALE.N: Quote)(VALE5.SA: Quote), the world's largest iron ore producer, said it would invest 9.5 billion reais, or $5.6 billion, by 2015 to boost production capacity of iron projects in the mining state of Minas Gerais.

The move followed repeated attacks by President Luiz Inacio Lula da Silva that Vale was not investing enough in Brazil, highlighting a falling out between Lula and the leadership of a company he once lauded as a model for the country.

"Vale unveiled the projects it plans to implement in the state of Minas Gerais to meet the growing demand for iron ore in the global market" in a deal signed with the state government, the company said in a terse statement.

The investments, if approved by Vale's board, would boost production capacity at the Apolo, Conceicao Itabiritos and Vargem Grande mines and create a combined total of 10,000 direct and indirect jobs.

Vale began attracting criticism late last year, when it laid off some 1,200 Brazilian workers, after idling capacity amid the financial crisis, and again in May, after it slashed 2009 investments by 37% to $9 billion.

Lula later charged that Vale was not doing enough to promote the country's steel industry, and said it could not rely only on exports of raw materials because this was not creating enough jobs in Brazil.

"I'm taking these comments with a grain of salt, but, clearly, given the rate and number of them, we have to think that where there's smoke, there's fire," said Jorge Beristain, an analyst at Deutsche Bank in New York.

Wednesday's announcement shows Vale maneuvering to maintain the government's good graces as the tensions have fueled speculation Lula wants to oust Chief Executive Roger Agnelli.

The usually hermetic Vale, has, in recent months, spent heavily on a massive advertising campaign playing up domestic investments and contributions to foreign exchange earnings.

The growing tensions have come as the government has casually discussed an increase in mining royalties that has infuriated industry leaders, who say it will discourage investments in new operations.

Brazilian mining and energy entrepreneur Eike Batista also recently confirmed he was interested in owning a stake in Vale and repeated many of Lula's criticisms -- further fueling talk of a management shake-up at the Rio de Janeiro-based company.

CHANGES NOT EASY

Forcing a management overhaul at Vale may not be easy. The government has considerably less sway in Vale than it does in state-run oil company Petrobras (PETR4.SA: Quote)(PBR.N: Quote), which Lula has increasingly used to spur economic development and help Brazil emerge swiftly from the economic crisis.

The government has veto rights in Vale, but it must negotiate major changes with Mitsui & Co (8031.T: Quote), Japan's second-biggest trading house, and Brazilian bank Bradesco (BBDC4.SA: Quote)(BBD.N: Quote), which are also shareholders in the company.

Agnelli, a former banker who has become one of Brazil's best-known corporate executives, was named to the top job at Vale by Bradesco.

Analysts say Lula may be seeking a convenient target to heat up the political environment ahead of the 2010 presidential race, in which his chosen candidate, Dilma Rousseff, his chief of staff, faces an uphill battle.

"It's political noise," said Pedro Galdi of the SLW consultancy in Sao Paulo.

Despite Lula's complaints of Vale's reluctance to invest in steel, the company recently upped its stake in a steel mill joint venture with ThyssenKrupp (TKAG.DE: Quote), after the German steel giant could not come up with the necessary financing.

The tensions do not appear to be affecting Vale's stock price, which has soared 42 percent in the past three months. Brazil's benchmark stock index, the Bovespa .BVSP, rose 34 percent in the same period.

Vale shares closed up 4.61% at 40.41 reais on the Sao Paulo stock exchange on Wednesday, outpacing a 2.41% gain by the Bovespa. ($1 = 1.704 reais)

(Additional reporting by Marcelo Portelo in Belo Horizonte, Brian Ellsworth and Denise Luna in Rio and Natuza Nery in Brasilia; Editing by Todd Benson and Walter Bagley)

© Thomson Reuters 2009 All rights reserved

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