Interview held with Mr. Roger Agnelli
President of CVRD

ROGER AGNELLI CEO of Companhia Vale do Rio Doce

Mr. Agnelli begings by giving a brief overview of current affairs in Brazil prior to the first question:
Brazil has started to privatize companies and to make a lot of reforms. Brazilian society has changed and is completely aware that we need to be very strict about inflation. We need to fight inflation; nobody wants to have high inflation back again. Everybody is working to make the country grow. This is a desire and a necessity and everybody is completely aware of it. Nobody wants to see a revolution; what we want to see is an evolution, and that is what is happening in Brazil. Foreigners and investors were saying that Lula was the devil, that he would change the country and lead a revolution. But everybody here, all of Brazilian society, doesn't want to see that happen. We want to have a very safe, a very smooth pace of evolution, not revolution. This is very important.

Since the elections, the world has discovered that Brazil has established a very strong democracy, a very open democracy; that Brazilian society is very strong and has very sustained change or evolution; Brazilian society and even the politicians have made a lot of progress. We have made a great effort; we have paid a very high price to be where we are right now. And we know that we have small room in which to make big changes. What we need to do is to continue to move forward in the right direction.

What is the right direction? We need to fight inflation, we need to have economic stabilization, and we want to finalize this long period of reforms. Everybody supports them nowadays. Lula and the PT have a commitment with Brazilian society to complete the reforms and to get Brazil in a position to start to grow again. We need to grow - this is a necessity. We need to fight poverty in Brazil. Everybody agrees about it. We need to eliminate abject poverty in Brazil.

So, what has happened after six months since Lula took office? Confidence is coming back again. Everybody is surprised because Lula is much better than was expected - so far, so good. And, beyond that, Brazilian society is in a hurry. Everybody wants to finalize the reforms and Lula is 100% committed to fiscal discipline and to these reforms. He's pushing, and he is the right person to really finalize this long period of reforms in Brazil. This is my view. And beyond that, we are in a very strong and very open democracy, and Lula plays this game very well. He is listening to everybody and he is discussing with everybody. He knows exactly where he wants to go, but he is open and discussing everything. He is asking for suggestions, for support, for ideas - but at the same time, it's incredible that Brazilian society in different areas, with different leaders and different personalities, is coming to a consensus.

This is something unique that is happening in Brazil. In the beginning of the Lula administration, everybody was saying that Lula and the PT would waste a lot of time debating everything and not come to any conclusions. This week, we completed the first step in the Constitutional Committee for both social security reform and tax reform. This is very fast. We are only six months into the new administration. In six months, the Brazil risk went down, confidence is coming back, the reforms are in the Congress and in the process of approval. Right now, society is asking for growth. Lula is asking for investors, for entrepreneurs, for the unions, for everybody to see how we can simplify or how can we put Brazil on the path of growth, and everybody is working toward that.

I know that CVRD will be investing something along the lines of $6 billion alone in mining. What do you think are the areas where red tape can be eliminated and produce a more conducive environment for foreign investment?
What I can tell you is that for a mining company like CVRD (of course we already have a strategic plan for growth), we are not driven by the short-term environment, we are driven by long-term considerations. We made our long-term business plan about three years ago, and we are following our strategic plans strictly. In this year, 2003, we are investing almost $2 billion in mining, in logistics, and energy. We are going full-steam ahead with all the investments, on budget, on schedule. We have plans to continue to invest, and between 2003 and 2007, we will invest a total of about $6 billion in projects.

In which areas of your business will this $6 billion be invested?
Mining and logistics, mainly. In iron ore, in aluminum, in copper, in manganese, in exploration - almost $70 million per year in exploration - here in Brazil and outside of Brazil, in logistics, and energy, because we are building right now about 8 hydropower plants in Brazil. The point is that Brazil has a strong potential in some specific areas, in which we have a very strong competitiveness - in mining, for sure. We have a very big country, we have a lot of grain and soybean plantations, and we are achieving a very strong competitiveness in soybeans, corn, in agribusiness - such as orange juice, chickens, alcohol, etc. We have a very strong base and can grow in steel and in pulp and paper. We can grow and have a very strong capability to compete because of our natural advantage compared with other countries in pulp and paper, in wood, furniture, in home servicing. So I think that right now Brazil is discovering the potential we have. We've always had this potential, but now everybody is more focused to make some specific areas grow.

How does the balance of this huge potential fall into the forthcoming FTAA agreement, and where do you see the role that CVRD will take …
I believe that Brazil needs to be involved in the FTAA discussion. We need to face the challenge, we need to be in this specific agreement, and we believe that we have some areas in which we have a very good position to compete. Of course, the United States and all the countries have their own competitiveness, and we need to reach an agreement. Brazil needs markets and we need the possibility to sell our products. We can't continue to have the barriers that we have been facing. So, why do we pay such high taxes to export orange juice, steel, pulp and paper? We are very competitive, so we need to eliminate this kind of barrier. Of course, we need to open our markets for foreign products to enter into Brazil as well. But we need to have access to markets for our products. We cannot continue to have this kind of barrier in developing countries.

How do you see the two strongest countries in the 34-nation agreement taking advantage of the agreement to undertake partnerships and joint ventures?
This is a possibility. Right now, we have some agreements with American companies like Nucor. We have a steel plant in California together with Kawasaki. CVRD is a very internationalized company. We have agreements or associations with Japanese, Chinese, French, Spanish, Italians, Koreans, Americans, etc. We have a plant in Bahrain; we have plants in Norway, in France. But our presence in the U.S. is still very small in terms of our total revenue. So, partnerships and better access to markets will of course be helped by the FTAA.

Part of the growth plan is in the next seven years to raise the value of CVRD from $11 billion to $25 billion. What kind of emphasis would you put on the American market and also, considering the company is listed on the stock exchange, what is the plan for growth in terms of the U.S. market, or U.S. investment in CVRD?
We will reach the U.S. market in the right period. The steel industry is very competitive and has the potential to increase exports to the U.S. markets. I believe that we are complementary with the U.S. market in our specific area. Let me explain that. Brazil has the best and the largest reserves of iron ore in the world and we have reserves for the next 400 years. What we need is to have new markets to sell our iron ore to.

We don't sell much iron ore in the United States. Why? Because the steel facilities and the steel plants are around Michigan and the Great Lakes area, where they have the biggest facilities and best furnaces. So, to send iron ore from Brazil to there is not efficient. But at the same time, the United States has a problem. The iron ore reserves are diminishing. The quality is not that good. There are a lot of impurities in the iron ore compared to the Brazilian ore. And you know what's going on there with US Steel, with ISG, they are buying a lot of companies there, and there are a lot of steel mills or steel companies in the United States that are facing a big financial problems.

So, let's bring the idea that the steel industry in the United States needs to modernize. What is very efficient in the United States? - Distribution, market, quality. In what is the United States not so efficient? - In the furnaces of the steel mills. We believe that we can do that in Brazil much more efficiently compared to what you can do there. So, it's complementary. For us, CVRD, if we have a lot of new investors in Brazil, combined with the American companies, we believe that we can grow together with the steel industry toward this American market. What we need is to have a partnership, what we need is to have an agreement with the U.S. steel industry to get there. If we can stimulate our clients or the Brazilian steel mills to be closer with the U.S. market and with the U.S. steel industry, it's in our best interest. So, that's what we are doing. That's why we have a very close relationship with all the steel companies in the United States, we have a strategic alliance with Nucor, because we see that this is a very good path for both companies, and thus for CVRD.

In terms of aluminum, we have very big reserves of bauxite, we have a very efficient plant of aluminum, and we have energy in Brazil, we have water, and we can generate a lot of electricity to produce aluminum. That's what we're discussing with the government in the long-term strategic plan for the Brazilian government. We can be very competitive in this specific area, because we have water, we have large bauxite reserves, and we can grow.

Another area in which we believe we can be very competitive is in the copper industry because we have very good reserves and we believe that the world demand in the future will grow. We have a very low cost, so we are very strong in that. Another point - CVRD is very efficient in logistics, and mining is very dependent on having a low-cost logistic system, and we have that. So we are continuing to invest in that, because we believe that for Brazil to have a long-term stable environment, we need to continue export. We need to export agribusiness, grains, steel, pulp and paper, and all these areas need to have a very efficient logistics system. So, we have a lot of room to grow in these specific areas, combined with mining and energy. Energy is essential for this growth.

We are talking about Brazil; we are talking about the access we can get for Brazil in order to guarantee our organic growth. And we have this potential in several fields of the mining industry. We are one of the largest manganese and iron ore producers in the world. We are very strong in kaolin; we are very strong in potash, and in many other areas. We are a very strong, diversified mining company with a very strong, organic growth potential.

But, we are looking outside of Brazil because, of our revenues, 85% come from exports. And we know that we need to go abroad to see and to analyze all the opportunities in the mining business. We have exploration activity in Peru, Chile, Canada, in Africa, and in Asia. We are exploring for copper, nickel, manganese, coal, and diamonds. And we believe that we are very good in exploration because we have very strong technological know-how to explore in Brazil and abroad. So, we have a huge potential.

We are working together with the government, not because we have any kind of political leaning, but just because the cost of capital is important for us. And we know that we have a very good chance to put Brazil in an investment zone. If we get there, automatically, our CVRD multiple will grow, and we will have a lot of market value. So, this is an opportunity and we have a golden chance together. The government is aware that we need to go in the right direction, and the Lula administration is going in the right direction. Second, we believe that the international community will start to look at Brazil in a different way. Brazil is not the Lula administration, Brazil is more mature: if you compare the standards that we have today to the standards that we used to have 10 or 15 or even just 5 years ago. Beyond that, we have a very strong democracy in Brazil, which counts for the international community's perception.

I think that CVRD deserves, because of the asset quality that we have, to be one of the largest mining companies in the world. We have the quality, we have the potential, we have the know-how, and we have the market position to be that. And I believe that Brazilians have already invested a lot of money and effort to get where we are right now. We know that there is only a small part to be done in the near future to get there, to get where we want to be. We want to achieve our growth potential, we want job generation, and we believe that we are growing very far below our potential. So, I'm very optimistic that we are in the right place.

Of course, we have huge challenges in front of us - for the government and for Brazilian society, but I think we have learned a lot, and I think that we are in a very good position. I'm very optimistic that CVRD can get the $25 billion ideal market capitalization. This is not our goal, this is not our target, but we believe that we have the necessary strength. We have a potential to be developed in the next few years to achieve this kind of market capitalization by our own effort. We are not talking about the change of the Brazilian position in the international market. We are not changing our multiples. So I think we have a huge potential, it's quite possible to get there.

What would be your message of confidence on behalf of CVRD and Brazilian mining to the one million New York Times readers?
I think we have a very strong company, a very strong asset base with a very high quality. We have a very good team inside CVRD, aware that we need to create value for all the shareholders, and we are working on it day and night, every day. We want to put CVRD in the position that it should be, as one of the largest, most diversified mining companies in the world.