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Vale has bankers praying for Inco spinoff

This is probably wishful thinking, but a strategic shift into fertilizer at Vale SA has Canadian investment bankers hoping, even praying, that the Brazilian conglomerate may spin off its nickel mining assets.

This concept - and there's no sense that Vale is actively working on a spinout - comes on the heels of the Rio de Janeiro-based company's $3.8-billion (U.S.) purchase yesterday of phosphate mines in Brazil that were owned by Bunge Ltd., listed on the New York Stock Exchange.

In announcing the deal, its largest acquisition since the $18.2-billion takeover of Inco back in 2006, Vale chief executive officer Roger Angelli said: "This transaction is instrumental to the consolidation of Vale's strategy on focusing on Brazil as the main market for its production of phosphates."

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With those words, Mr. Angelli kicked off dreams that the Street should get ready for a screening of Inco, the Sequel. To get to this point, local mining types boiled down what Mr. Angelli said, right down to the words "focusing on Brazil."

Those three words were taken as a sign that Vale wants to concentrate its sprawling operations in its home market, where the former Crown corporation is also into iron ore, railways, copper, coal and power generation. This company is like Canadian Pacific, a generation back. And we all know what happened to CP.

And there was something larger at play here. What Mr. Agnelli said yesterday feeds into speculation that's been making the rounds for some time: that Vale is deeply disenchanted with its Canadian holdings, in large part owing to lousy labour relations at its mines, and the burden of owning commodity-based companies in the midst of a recession.

Here's what we do know: There are buyers in Canada if Vale is a seller of its nickel-mining assets - which include a massive but strike-bound mine in Sudbury and the Voisey's Bay project in Labrador.

That's the other side of Inco, the Sequel: Chatter on the Street has a number of Canadian money managers approaching Vale to say that if the company wants to sell its nickel operations, they would be glad to put up a substantial lead order. Domestic institutional investors have all kinds of expertise in valuing base metal miners, and are still looking to replace Inco and Falconbridge as core portfolio holdings.

Now, here's where the speculation falls apart: Vale has given absolutely no indication it wants out of the nickel business, according to Canadian financial advisers who work with the company.

If anything, the thesis of building a mining play that's a market leader in a number of commodities is stronger now than it was in 2006, when Inco was acquired.

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Look at the big dog in mining, BHP Billiton. That company is bulking up in fertilizer by developing potash mines in Saskatchewan, while continuing to add to its strength in a grab bag of other metals.

Mining nickel, then feeding the metal into Brazil's commodity-hungry economy and to any other industrial customer, makes all sorts of strategic sense for Vale, and there's no reason that company can't do that at the same time it makes fertilizer.

I'd love to see Inco reborn on Canadian markets, and a pure play on nickel would garner a premium price. But I can't see Vale parting with the prize it won in the great mining takeover contest of 2006.

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