Vale SA, the world’s biggest iron-ore producer, agreed to pay 22.3 billion reais ($9.6 billion) to settle a decade-long tax dispute with Brazil over profits of its foreign units, ahead of a deadline tomorrow.
Vale will pay 5.97 billion reais at the end of this month and 16.4 billion reais in 179 monthly installments, plus interest, after its board decided to join a settlement program offered by the government, the Rio de Janeiro-based company said in a filing late yesterday. Shares jumped.
Brazil’s biggest exporters including Vale, brewer Cia. de Bebidas das Americas and steelmaker Gerdau SA (GGBR4) have been fighting a combined 75 billion reais in tax claims on profit of their foreign subsidiaries, according to the country’s tax agency. The net present value of Vale’s liabilities is $6.6 billion, below the $10 billion that was being anticipated by investors, according to JPMorgan Chase & Co. estimates.
“We view this announcement as positive for Vale,” JPMorgan analysts including Rodolfo Angele wrote in a note to clients. “We now can turn the page on the uncertainties surrounding this legal imbroglio to focus on industry and company fundamentals.”
Exporters were offered a chance to settle out of court in September when Congress passed legislation that scraps fines, interest and legal charges if companies opt to pay their claims in one tranche, or reduces taxes and interest if they pay the debt in installments. The deadline to join the settlement program, known as Refis in Portuguese, is tomorrow.
Vale was taking too much risk by continuing the legal fight without certainty of victory and the settlement may help its share price to recover, said Rafael Weber, who helps manage about 5.5 billion reais in stocks at Geracao Futuro Corretora.
“While nobody wants to pay, Vale managed to reduce the claim significantly and extend the period of time for payments, giving investors predictability on the case,” he said by telephone from Porto Alegre, Brazil. “This was an issue that was bothering the company’s valuation.”
The tax dispute has weighed on Vale’s shares, which have underperformed its main rivals this year. The stock is down 23 percent through yesterday while BHP Billiton Ltd. (BHP), the world’s largest mining company, advanced 0.5 percent and Rio Tinto Group, the second-biggest, fell 2 percent in Sydney over the period.
Vale’s shares added 2.7 percent to 32.30 reais at the close in Sao Paulo today, the steepest gain on a closing basis since Oct. 14.
The company estimated its total tax liability from the case at 45 billion reais for the 2003-2012 period, including penalties, interests and fees.
In the event that other companies win favorable court rulings on their tax liabilities, Vale could still benefit from those decisions, irrespective of its settlement with the government, Chief Executive Officer Murilo Ferreira said on a conference call yesterday after the announcement.
“In case we have a decision of the Supreme Court regarding the merits of the litigation, for sure this decision should be applicable to all the taxpayers including Vale,” he said.
AmBev, as the Brazilian unit of brewer Anheuser-Busch InBev NV (ABI) is known, declined to comment in an e-mailed statement today on whether it would follow Vale into the settlement program. Gerdau CEO Andre Gerdau Johannpeter told reporters in Rio yesterday that the company still hadn’t decided on the option, echoing comments made last month.
Petroleo Brasileiro SA, which according to its last 20-F form filed to the U.S. Securities & Exchange Commission has $1.66 billion at stake in a similar dispute, also declined to comment, as did Cia. Siderurgica Nacional SA, Brazil’s third-largest steelmaker. CSN has 1.97 billion reais in tax claims for profits earned by its foreign subsidiaries, according to its 20-F document filed April 30.
Vale’s settlement follows the suspension of its appeal against the claim in Brazil’s Superior Court on Nov. 26. The company was waiting on the ruling before deciding on the government’s settlement offer, a person with knowledge of the case told Bloomberg News last month.
Brazil’s Finance ministry declined to comment on Vale’s tax payment decision.
After the settlement announcement, Standard & Poor’s lowered its outlook on Vale’s debt to negative from stable, citing the new liabilities. Fitch Ratings said today that the company’s ratings remain unaffected by the tax agreement.
“The tax payment will be funded by our operating cash flow, not requiring additional indebtedness, and not causing significant changes in our financial planning,” Ferreira said in yesterday’s statement.
Since his appointment in 2011, Ferreira has been seeking to resolve tax claims and legal disputes. On Dec 19. the company agreed to pay the equivalent of $553 million to settle Swiss and Brazilian tax disputes.
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