Vale to Make ‘Opportunistic’ Deals, Keep Discipline Amid Record Earnings
Vale to Make Only ‘Opportunistic’ Deals
Renzo Gostoli/Bloomberg
Murilo Ferreira, chief executive officer of Vale SA, speaks during an interview in Rio de Janeiro on July 19, 2011.
Murilo Ferreira, chief executive officer of Vale SA, speaks during an interview in Rio de Janeiro on July 19, 2011. Photographer: Renzo Gostoli/Bloomberg
Vale SA (VALE3), the world’s largest iron- ore producer, will only make “opportunistic” acquisitions as it seeks to control expenditures amid record profit, Chief Executive Officer Murilo Ferreira said.
The company will be disciplined in pursuing acquisitions, Ferreira said yesterday in an interview at Vale’s headquarters in Rio de Janeiro, a week after he decided against entering into a bidding war for South African copper producer Metorex Ltd. (MTX) Vale has an “aggressive” organic growth strategy, he said.
Ferreira, 58, replaced Roger Agnelli as CEO of Vale on May 22 after the Brazilian government criticized the company in the past two years for not spending more on domestic steel projects and for buying ships in China when the country was setting up its own yards. Since taking over, Ferreira scrapped a plan to sell shares of Vale’s fertilizers business in an initial public offering, cut its long-term iron-ore output forecast by 10 percent and announced a share buyback of as much as $3 billion.
“We have discipline in the capital allocation,” Ferreira said. “I want to do good deals that generate return for shareholders.”
Vale on July 11 dropped out of bidding for Johannesburg- based Metorex after China’s Jinchuan Group Co. trumped its $1.13 billion offer with a $1.36 billion bid. Last year, Vale produced about 207,000 tons of copper.
Missing Target
The company won’t make its target to produce 1 million metric tons of copper by 2015, Jose Carlos Martins, Vale’s director for marketing and sales, said late yesterday.
“We won’t be able to reach it,” Martins said at an event in Sao Paulo. “We would have to make acquisitions or new discoveries. The 1 million metric tons still exists, but it’s difficult to reach it by 2015.”
Vale said June 27 that it expects to produce 469 million metric tons a year of iron ore by 2015, compared with an Oct. 28 forecast of 522 million tons. Delays in the development of some projects and securing environmental licenses explains the reduction, CEO Ferreira said yesterday.
“The last thing that investors want to see is Vale going out and paying any price and overpaying just because they can,” Jonathan Brandt, an HSBC Holdings Plc equity analyst in New York, said in a telephone interview. “They are being cautious with the capital and certainly returning a lot more capital than some of their peers.”
Stock Buybacks
Brandt said he expects Vale to announce as much as $3 billion in additional special dividends later in the year, based on HSBC’s net income forecast for the company. Vale is scheduled to pay at least $5 billion in dividends this year, two-thirds more than the amount distributed last year.
The company said June 30 that it will also spend as much as $3 billion to repurchase stock, joining BHP Billiton Ltd., the world’s biggest mining company, and Rio Tinto Group in returning capital to shareholders.
Vale, which will invest a record $24 billion this year, embarked on a plan to expand its iron-ore production capacity about 50 percent by 2015 and diversify into other markets, including base metals and potash, to take advantage of increasing demand from emerging markets.
Vale fell 11 centavos, or 0.2 percent, to 46.04 reais in Sao Paulo trading at 11:20 a.m. New York time. Before today, the stock dropped about 4.9 percent this year, compared with a 15 percent decline in the benchmark Bovespa Index. Melbourne-based BHP declined 5.3 percent in so far this year.
African Expansion
Vale is interested in “any asset” in the iron-ore, fertilizer, nickel, coal and copper markets as long as it creates growth and return for its shareholders, Ferreira said. Energy assets aren’t “on its radar,” even as BHP has made such acquisitions, he said.
Africa is the “priority” for efforts to expand in copper output, he said.
Vale scrapped a planned IPO of its fertilizers unit because it has low debt levels and doesn’t need additional resources to develop the assets, Ferreira said. Selling shares now would lead to discounts of as much as 45 percent in the value of the assets, he said.
China is nearing the end of the monetary policy tightening cycle and conditions are set to improve as of the fourth quarter, Ferreira said.
“We will start to see from next month a change in the direction of inflation,” he said.
Chinese Demand
Vale sees no slowdown in demand from China as the country seeks to build 36 million low-income houses in the next five years, Chief Financial Officer Guilherme Cavalcanti said in an interview July 5. Vale shipped about 41 percent of its total iron-ore and pellets sales to China in the first quarter.
Vale, which is due to report second-quarter earnings on July 28, expects to finish an internal project review in the next 60 days, Ferreira said. The company will have “more clarity” on its long-term nickel and copper output forecasts after the review, he said.
Vale may report a record second-quarter profit before interest, taxes, depreciation and amortization of $10.1 billion because of higher iron-ore prices and increased sales volumes, Leonardo Correa, an equity analyst at Barclays Capital in Sao Paulo, said in a note to clients July 18. Profit may rise further during the third quarter “as iron-ore volumes should increase and prices remain at very high levels,” he said.
To contact the reporter on this story: Juan Pablo Spinetto in Rio De Janeiro at jspinetto@bloomberg.net
To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net
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