CHAPTER 20 CASE STUDY OF THE RECENT PRIVATIZATION OF COMPANHIA VALE DO RIO DOCE (CVRD) IN BRAZIL

• Jurisdiction: Derecho Internacional

Mineral Development in Latin America
(Nov 1997)
CHAPTER 20
CASE STUDY OF THE RECENT PRIVATIZATION OF COMPANHIA VALE DO RIO DOCE (CVRD) IN BRAZIL
Syllas Tozzini
Roberto N. P. de Cillo
Tozzini Freire Teixeira e Silva
Sao Paulo, Brazil

I. Introduction

I.A The Brazilian privatization program

The Brazilian Federal government started in 1990 an ambitious Privatization Program (the "PND"), which has quite successfully been carried on ever since.

The main purposes of the PND¹ are stated to be:

I. a change in the strategic position of the state in the economy, by means of a transference to the private sector of activities that have so far been performed by the public sector. The government expects that the public administration, focusing on priority areas of government, will become more efficient. Furthermore, it is expected that once in private hands, the privatized companies will become more dynamic and productive;

II. an economic restructuring in the public sector mainly by means of improving the profile and by reduction in the federation's internal debt;

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III. a strengthening of the Brazilian capital markets and a democratization of the capital of the companies to be privatized;

IV. a contribution to the economic restructure in the private sector, mainly for the purpose of modernizing the infrastructure and the industry in Brazil by means of improving competition and strengthening the entrepreneurial capacity in various sectors of the economy, including by means of credit giving;

V. a possibility for the Public Administration to draw its efforts to the activities where the State is deemed to be fundamental in view of the national priorities;

VI. a contribution to the strengthening of the capital market by means of increasing securities offer and by means of democratizing the share ownership in respect of companies that are included in the PND.

Under the PND, the government is allowed to privatize² :

a) companies controlled, directly or indirectly, by the Federal Government, which were created by law or deriving from legislative authorization;

b) companies owned by entities which are directly or indirectly controlled by the Federal Government;

c) companies that were originally private-owned but for any reason have been transferred to the direct or indirect control of the Federal Government.

The government is also allowed to assign certain services to private-owned companies under a concession or authorization. Such services include the following³ :

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• exploration and exploitation of mineral resources⁴ .

• sound and images broadcasting;

• services and facilities related to the electricity supply and to the use of water to produce energy;

• air and space navigation, as well as services related to the infrastructure of the ports;

• railway and waterway transportation between Brazilian ports and the national borders;

• interstate and international road transportation of passengers;

• sea, river and lake ports; and

• telecommunications.

On the other hand, the Federal Constitution⁵ sets forth that some activities are monopolies of the Union and, therefore, such activities are excluded from the PND. Such activities are listed below:

• the mail services;

• the nuclear industry and related services (including exploration, exploitation, improvement and reprocessing of nuclear minerals⁶ );

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• the exploration, the exploitation, refining, importation and exportation of oil, gas and other liquid hydrocarbons;

• the transportation by sea or by pipeline of oil and its by-products, as well as natural gas of any origin.

According to the provisions of Section 177 (1) of the Federal Constitution, the Union is authorized to hire either state or private-owned companies for the purposes of performing the activities related to oil, gas and other liquid hydrocarbons as specified above, provided that the requirements set forth in the relevant law are met⁷ .

Lastly, some words are suitable with regard to the participation of foreigners (individuals and/or legal entities) in the PND.

Section 12 of Federal Law No. 9,491 of September 9, 1997 states that "the disposal of shares for the benefit of foreign individuals or legal entities is allowed to be made and may reach one hundred percent of the voting capital of the company concerned. Notwithstanding the foregoing, such percentage may be reduced as a result of the law or of a decision taken by the Executive Power".

II. The recent privatization of CVRD

II.A History of CVRD⁸

CVRD was incorporated in view of the commitments from the United Kingdom to contribute to the Itabira iron ore mines and from the United States to provide funds for the acquisition of railroad and mining equipment. The initial

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purpose of CVRD was to organize the production and export of iron ore through its Southern System in order to meet strategic raw material needs during World War II.

CVRD went under the Federal Government control by means of the Decreto-Lei No. 4,352 of June 1, 1942, and was included in the PND by Decreto No. 1,510 of June 27, 1995⁹ .

By the time CVRD went under the Federal Government control, the latter intended it to own and operate iron ore mines located at Itabira, in the State of Minas Gerais, and the Vitória-Minas Railroad, which did and still does carry iron ore and farm produce through the Rio Doce valley in southern Brazil to the Port of Vitória, in the State of Espírito Santo.

In 1970, CVRD was part of a joint venture to develop high quality iron ore mineral deposits located at Carajás. After acquiring the other party's interests in 1977, CVRD commenced the construction of the Carajás iron ore mining complex and the related Carajás Railroad with financing from various multilateral and commercial financial institutions, including the World Bank and the European Coal and Steel Community. The Carajás mining complex and related transportation facilities initiated commercial scale operations in 1987. CVRD's annual sales of iron ore and pellets first exceeded 100 million tons in 1994.

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II.A.1 CVRD'S BUSINESSES

II.A.1.1 IRON ORE AND PELLETS

The iron ore mining activities are concentrated in two regions in Brazil — the Southern System, in the States of Minas Gerais and Espírito Santo, and the Northern System, in the States of Pará and Maranháo, each of which incorporates iron ore reserves and mineral deposits, operating mines, ore processing facilities and integrated railroad and terminal transportation facilities.

II.A.1.2 MANGANESE

CVRD commenced manganese ore mining operations in 1985. CVRD produces manganese ore products from the Azul mine in the Carajás region, in the State of Pará, and from the Urucum mine, in the Pantanal region, in the State of Mato Grosso do Sul.

II.A.1.3 GOLD

CVRD commenced gold operation in 1984 and currently has seven active mines, two of which were scheduled to close in 1997. CVRD's gold mines are located in the States of Minas Gerais, Bahia, Tocantins and Pará and use underground and open pit mining techniques. Each of CVRD's gold mines includes an on-site processing facility to produce gold bars from raw ore.

II.A.1.4 COPPER AND SILVER

CVRD does not produce copper and produces only a small amount of silver as a by-product from its gold operations. CVRD is developing the Salobo copper, gold and silver deposit (located 77 kilometers northwest from its Carajás iron ore mine), in the State of Pará, through its affiliate named Salobo Metais Ltda.

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II.A.1.5 CHINA CLAY

CVRD's China clay activities are conducted through Pará Pigmentos S.A., a CVRD joint venture with other non-stated companies. The joint venture was formed in 1992 to develop proven and probable China clay reserves located in the State of Pará.

II.A.1.6 POTASH

CVRD leases a potash mine in the State of Sergipe with a capacity of 400,000 tons per year from state-owned Petróleo Brasileiro S.A. — Petrobrás. The mine is the only working potash mine in Brazil.

II.A.1.7 TRANSPORTATION SERVICES

II.A.1.7.1 RAILROAD TRANSPORTATION

CVRD operates two railroad systems, the primary business of each of which is to transport CVRD's iron ore products from inland mining locations to port and terminal facilities at the coast side. The two railroad systems also play important roles in serving the general passenger and freight transportation needs of their regions. Such systems are:

• Carajás Railroad. The Carajás Railroad network originates from the Carajás iron ore mines in the State of Pará and extends 892 kilometers to CVRD's Ponta da Madeira marine terminal facilities located near the Port of Sço Luís, in the State of Maranhço.

• Vitória-Minas Railroad. The Vitória-Minas Railroad network originates near the city of Belo Horizonte and CVRD's Itabira mines in the State of Minas Gerais and extends 898 kilometers to CVRD's Tubarço marine terminal located near the Port of Vitória in the State of Espírito Santo.

II.A.1.7.2 SHIPPING

CVRD's shipping activities are principally conducted through Vale do Rio Doce Navegaçço S.A. ("Docenave"), which

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was founded in 1962 to transport iron ore products to foreign customers and has expanded to provide several cargo shipping transportation for domestic and foreign customers.

II.A.1.7.3 PORT AND TERMINAL FACILITIES

CVRD's port and terminal facilities handled a combined total of 123 million tons in 1995, 76 million tons of which represented iron ore and other cargoes for CVRD and other members of the CVRD Group and 47 million tons of which represented iron ore and other handled for third parties. Terminal facilities are the following:

• Tubarço/Praia Mole Marine Terminal, which is located near the Port of Vitória, in the State of Espírito Santo. CVRD's joint venture pelletizing facilities are also located within the Tubarço terminal area.

• Ponta da Madeira Marine...