Vale signs MOU for hydroelectric power plant public auction

Vale S.A. officially informed the market yesterday evening that it has signed a memorandum of understanding (MOU) with Andrade Gutierrez Participações S.A., Neoenergia Investimentos S.A. and Votorantim Energia Ltda., to form a consortium to participate in the public auction and bidding process of the hydroelectric power plant of Belo Monte, located in the Brazilian state of Pará.

According to the MOU, Vale and its partners intend to develop studies to determine the attractiveness of the project, assess the conditions for participation in the process, and after these steps, formalize definitive legal instruments that allow their joint entry in the auction. Vale PNA shed 1.57% and ON shares 1.92% on the news.

With an installed capacity of 11,233 megawatts (MW), the Belo Monte power plant will be the second largest hydroelectric plant in Brazil, behind Itaipu Binacional (and the third largest in the world). To date, only one group, made up of Camargo Corrêa and Odebrecht, had shown any interest in the auction. The government is said to be trying to set up a third consortium possibly using Eletrobrás and the BNDES.

It is widely expected that Eletrobrás subsidiaries will be members of all the consortiums that plan to take part in the auction, via Furnas, Eletronorte or Chesf. It has also been speculated that Alcoa, the Aluminum manufacturer, may join forces with Camargo Corrêa and Odebrecht.

Both CSN and Gerdau — just as Vale, Votorantim and Alcoa, are large consumers of energy — and are also studying an investment in this project. Even GDF Suez, which is already a member of the consortium bidding to build the Jirau plant in Rondônia, has shown an interest in Belo Monte.

The main players in what look set to be a competitive auction are already defined – with the two largest construction companies in Brazil, Odebrecht and Camargo Corrêa, on the one hand, and Andrade Gutierrez, Vale and Votorantim (who all need energy to produce their minerals and reduce their dependence on the market) on the other.

The federal government is considering taking part in a third consortium. According to a spokesperson for Minister of Mines and Energy, Edison Lobão, one option would be to use the funds earmarked for the BNDES to finance the sector, with the Eletrobrás group as the main private partner, with a 49% stake in the plant through its subsidiaries, but Eletrobras’ exact role in this project has not been revealed yet.

According to the same spokesperson for Minister Lobão, this information should motivate the market and lead to new groups bidding at the auction, which it obviously wants to be as competitive as possible.

Another card up the government’s sleeve is the state pension funds — Previ, Banco do Brasil, and Funcef, Caixa Econômica Federal —, which have already stated they intend to take part in the undertaking. Funcef is negotiating a partnership with Odebrecht and has R$600 million available for the project.

Lobão admitted that the government is reviewing the calculations as to the estimated value of the project, of R$16 billion according to The Energetic Research Company – Pesquisa Energética (EPE), as this amount is not considered feasible by the consortiums wanting to take part in the auction, who believe that the work will cost closer to R$30 billion and the tariff ceiling has been established at R$68 per megawatt/hour (MW/h).