Vale is a global company based in Brazil. It is now the second-largest mining company in the world, operating on five continents and, in 2011, had a record net income of US$22bn. Underpinning Vale´s success has been its capacity for transformation. The Vale journey continues: its vision is now to be the best global natural resources company in long-term value creation. The company continues to invest, with capital expenditure (capex) globally allocated at US$110bn in the next five years.
A cornerstone of this strategy is the pipeline of new projects in Latin America and Africa. Indeed, Vale is set to invest a further US$15bn in Latin America in 2012 and US$2bn in Africa.
To help support this global expansion, Vale has set out to transform its treasury to support its global growth plans. This interview describes how a major emerging market champion faces the challenges of building a global treasury and how banks like Citi have supported Vale with its strategy of creating long term value in these important emerging market geographies.
Q (gtnews): With your mission to develop a best-in-class treasury management organisation, what aspects did you find most important to achieve your goal? What advice do you have for other emerging market companies with similar interests?
A (Marcelo Habibe, head of treasury and finance, Brazil, Vale): Treasury management complexity increases as a company’s operations expand into new countries, but it is also dependent on the maturity of treasury processes, size of the company, specific industry, etc. Therefore, of primary importance is the need to understand the strategy and business model of the company, the environment it works in and the constraints presented by different factors. In practice, this understanding cannot be automatically replicated in another company, even to another mining company. It is important to come up with the best fit for your company’s specific operations by delving deep into the business and its market. It is only then that it is possible to establish aggressive goals for treasury.
A (Peter Langshaw, global head of energy, power, chemicals and metals and mining, Citi Transaction Services): Emerging market companies demand and deserve best-in-class global treasury management. However, these companies often face a different set of challenges. In particular, the tax and regulatory environments are usually more complex and demanding and therefore they cannot simply adopt best-in-class structures that are often applied to companies parented in OECD [Organisation for Economic Co-operation and Development] markets. In Brazil, for instance, tax laws are complex and their impact on treasury activities needs to be fully understood.
Citi has found that spending time understanding the nature of the trading flows, the local regulations and the whole commercial ecosystem (which includes the flows of suppliers and customers as well as the end-to end financial and commercial processes) is an important first step in the treasury consultative and benchmarking process. In addition, introducing best in class local industry value propositions helps create further value. As Habibe mentioned, this deep dive is essential and is exactly how we have worked together to tailor the solution and achieve best in class for Vale. Indeed, it is best practice for other emerging market champions going global.
Q (gtnews): What were the first steps on this journey?
A (Habibe): The first step was to undergo a thorough benchmarking exercise of our existing treasury operations so we could determine the current status and then focus on where we needed to improve. To achieve this we used some tools. One of them was Citi’s Treasury Diagnostics tool which gave us a clear demonstration of our strengths and weaknesses and a foundation from which to work on to best achieve our goals.
Figure 1: Vale Getting Started on the Journey Through Global Benchmarking
Source: Citi Treasury Diagnostics 2010
Q (gtnews): What pain points in your organisation prompted you to improve your treasury management structure, and what have you learned so far through this transformation?
A (Habibe): As an emerging markets company headquartered in Brazil, we ran into some specific challenges. First, we had discrepancies across the enterprise, in terms of tax, legal landscapes and technology. While we have operations in developed markets like North America and Europe, we also have operations in Africa and Latin America, where there is limited or no access to internet banking, for example. As a result, trying to design a single solution to implement across the whole enterprise proved to be an impossible task. The treasury team had to decide what its objectives were and then adapt what it wanted according to a specific geographical area.
The second challenge that Vale faced was its own complex hierarchy.Although one company, Vale is made up of many subsidiaries that operate disparately. Treasury needed to involve many partners in this journey, including legal, bank teams, IT, shared service centre (SSC) staff, and local teams. It is the treasurer’s job to get the whole organisation behind this transformation.
Q (gtnews): As one of the first emerging market companies in Latin America to develop global best practices for treasury management, what has been most rewarding and most difficult task in creating a global structure by integrating your processes and technology?
A (Habibe): Vale had developed into a global company at a very fast pace. As its assets grew, so did the number of bank accounts, and today cash is scattered across the world in different currencies. Subsidiaries use different processes and each has different levels of maturity in treasury. The first step was to consolidate information in order to perform cash flow forecasting. At the end of 2010, treasury decided that it was time to clean up its processes because the company’s growth trajectory was unlikely to slow down. We established plans to rationalise and simplify, in order to make treasury more efficient and agile. An important lesson that the team learned during the process is that simplicity is often the best solution.
The most rewarding task in developing global best practices for treasury management is constructing a plan. It is with that conviction that we have become a global benchmarking pioneer in some treasury initiatives. It is important to take into account cultural difference and level of maturity of the market. We quickly realised that a global treasury that is striving for excellence cannot be developed through the operating prism of Brazil. Sometimes it is possible to design a plan in Latin America, for example, but encounter technology, tax or legal constraints of a banking product or bureaucracy, which prevents implementation in other regions.
Although we are moving towards a centralised treasury structure, it remains important to understand local peculiarities. As many mining companies operate a decentralised treasury, the transformation from a decentralised structure to one that is centralised was challenging. Today, we have two SSC hubs in Brazil and Malaysia. Our goal is to centralise all executions in these two SSCs. However, this is not a reality as treasury staff continue to execute transaction tasks in their locality. Local knowledge is also crucial in this operating environment.
A (Langshaw): The emerging markets are challenging yet fascinating, where there are currently higher growth opportunities it can be rewarding. However, the emerging markets cannot be seen as being homogenous. Each country has its own specific nuances and not knowing these nuances can create enormous difficulties. The changing regulatory, tax and political environment adds even more complexity. Thus, it is therefore essential to have people on the ground, as Habibe says. Having this local presence, which can also be achieved through working with a bank with an on-the-ground presence, gives a company the ability to respond rapidly to changes in the operating environment and can provide an early warning system, so that companies are not blind-sided by unforeseen developments. The difficulty or challenge is choosing a bank that can provide standardised and fully integrated solutions across these geographies, while taking advantage of local knowledge and nuances.
Q (gtnews): As the second largest mining company in the world, liquidity and risk management are central themes to your organisation. What techniques have your team adopted to optimise cash from your various locations around the world?
A (Habibe): Vale has a dedicated risk management team looking at sovereign, bank and counterparty risk. We operate a conservative cash investment policy that restricts the amount of cash in one place and keeps cash in large and low-risk banks. It has an exposure limit in terms of percentage and amount per counterparty.
Vale has significant operations in generating cash in some regions; in other regions projects are just beginning. Therefore, treasury’s big challenge is how to balance the cash-poor and cash-rich companies. Our treasury vision is to keep financial resources at predetermined appropriate levels and allocate them efficiently. We have a dedicated team which works with cash forecasting for short-, medium- and long-term. It works with dynamic models, running different scenarios for pricing, foreign exchange (FX), capex curve, etc. We also have a dedicated fund monitoring team, watching the market and analysing debt assurance and the best time to issue a debt.
Fundamentally, treasury must ensure the liquidity to fund the company’s capex and current operation – it has an aggressive capex plan of US$110bn over the next five years. The cash needs to be in the right place at the right time in the right currency. Some projects are in cash-poor countries or subsidiaries, and therefore treasury needs to inject cash for a project. If, for example, US$100m were needed for disbursement, we would not release the full amount on the first day of the month, but instead make regular payments throughout the month, particularly in Africa or other regions where the risk is considered to be high.
Q (gtnews): With Latin America and Africa having strict regulatory environments around treasury management, how are you able to achieve success while operating in those markets?
A (Habibe): Vale has a clearly defined cash management approach: every week operations will ask for money from the parent company, and we will release cash in relation to product outflow. We do not keep idle cash in countries where there is high risk. This advanced cash forecasting and cash planning means the company has a low risk in terms of having idle cash or excess cash in risky countries. In addition, we try to use US dollars when executing payments or renewing contracts, no matter if that is in Africa, Latin America, or elsewhere. We have offshore accounts in the US and UK, both relatively low-risk countries. In practice, treasury adjusts the company’s cash flow so as not to be exposed to currency or sovereign risk.
Vale also has a minimal cash policy: for each country or subsidiary there is a limit to how much cash is in each place and excess funds are immediately moved to the Parent Company. The company works with its subsidiaries to provide solutions at a local level to help them be more efficient as well. For example, we are implementing a pooling system that means that the cash is automatically swept to a central account. However, this is not allowed in many countries in Africa and Latin America, so instead we try to limit the amount of deposits in the local banks.
Q (gtnews): How has Vale’s treasury organisation supported the overall goals laid out by chief executive officer (CEO) Murilo Ferriera?
A (Habibe): Treasury’s role at Vale is very clear: it is there to support operational areas and products. It is not a bank and the primary objective is to ensure the liquidity necessary for the execution of projects and ongoing operations. It must ensure that financial resources in the appropriate amount are in the right place at the right time to fund projects. That is the way to ensure the success of the company’s long-terms goals, as established by the CEO.
Q (gtnews): What key areas of innovation and differentiation do you look for in a banking partner for treasury services?
A (Habibe): Banking products are relatively similar bank-to-bank, so it is more important to evaluate each bank on the level and quality of its services. A bank should be always innovating, following the market, and really providing solutions before the company even knows that it needs them. In other words, banks need to be proactive. Large companies like Vale demand world-class solutions and they will not settle for anything other than the best of the best.
A (Langshaw): I agree, innovation is key, particularly as the emerging market countries are constantly changing. Banks have to be able to successfully transfer global solutions which are world class and adapted to the local markets. For example, as Vale requested, Citi is providing a mobile payments (m-payments) solution for their miners’ salaries in Africa. Another key differentiator is how a financial partner can help automate and standardise end-to-end processes to drive operational efficiency, regionally and globally. Within the emerging markets, banks therefore have to be more innovative. An example of this is providing liquidity solutions to help gain greater visibility of their cash and solutions for cash that may be ´trapped´ in different geographies worldwide.
Q: What made you decide to work with Citi across Latin America and Africa for your cash management services?
A (Habibe): Citi’s strength is that although it is a global bank, it can also act as a local bank anywhere. In this respect, its banking professionals are of highest quality, its technology is first class, and the range of products on offer is very good. We use Citi to support our largest projects, for example a US$5.9bn three-year project in Argentina. In Africa it is the same; we are using Citi for our big projects because we are confident in the bank’s quality, experience and professional capabilities.
Q (gtnews): Looking ahead, what do you think are the main themes for the mining industry?
A (Habibe): I think that three closely linked trends – rising costs, higher capital expenditure and increased equity capital markets activity – will dominate the industry and drive the actions of its major players. Looking beyond mining specifically, what stands out is the huge increase in the flows between emerging markets; these investments and trading corridors are becoming increasingly important.
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