Vale Weighing Nickel Means Iron Focus: Corporate Brazil

Vale SA Chief Executive Officer Murilo Ferreira
Vale SA Chief Executive Officer Murilo Ferreira told analysts, “Base metals still has to deliver the results not presented in the past.” Photographer: Renzo Gostoli/Bloomberg

Vale SA forecasts it will miss base-metals output targets for a second year, fueling calls from analysts for the company to sell at least part of the business plagued by strikes and sinking prices.

Chief Executive Officer Murilo Ferreira, who led Vale’s $18.2 billion takeover of Canadian nickel producer Inco Ltd. in 2006 as head of base metals, said last month the Rio de Janeiro-based miner is studying options for the unit. Vale, the world’s second-largest mining company, is refocusing on its more profitable iron-ore business, said Rogerio Zarpao, an analyst at Banco J Safra SA.

“Vale will become a company with contained growth in those business areas,” Zarpao said in a telephone interview from Sao Paulo. “The diversification will continue, but is not the priority that it used to be.”

Vale’s base metals assets may be worth as much as $30 billion, Bank of America Corp. estimates. The unit contributed less than 5 percent to second-quarter adjusted earnings before interest, taxes, depreciation and amortization. Ferreira said the unit isn’t for sale on a July 26 earnings conference call.

“Divesting base metals could generate significant value for Vale,” Bank of America analysts led by Felipe Hirai in Sao Paulo said in a July 26 note to clients. “We believe these assets are not currently up for sale, but we think continued weak results could prompt management to revisit this strategy.”

The analysts declined to comment further through Bank of America’s press office in New York.

Strategic Review

“Vale is challenged to present a better value for the business and, because of that, we are doing a strategic review,” the company’s press office said in a statement yesterday.

Vale, whose profit missed analysts’ estimates in four of the past five quarters, dropped 0.3 percent to 37.45 reais at 12:17 p.m. in Sao Paulo trading, extending its decline in the past 12 months to 2.8 percent. It trades at 5.97 times estimated earnings for this year, compared with 11.02 times for BHP Billiton Ltd., the world’s largest mining company, and 8.17 times for Rio Tinto Group, the third-largest, as of yesterday, according to data compiled by Bloomberg.

Vale’s profit will drop to $15.2 billion this year from $22.9 billion in 2011, according to the average of 19 estimates compiled by Bloomberg.

Ferreira took over from Roger Agnelli in May 2011 saying the company is interested in “any asset” in the iron-ore, fertilizer, nickel, coal and copper markets. On the July 26 call, Ferreira said Vale is unlikely to invest in new base-metals projects.

‘Strong Priority’

“We have a very strong priority in iron ore, coal and fertilizers,” Ferreira told analysts. “Base metals still has to deliver the results not presented in the past.”

Nickel prices have declined by about 50 percent from an average of $31,200 per ton in November 2006, when Vale acquired Inco. Nickel for delivery in three months fell 1.5 percent to $15,500 a ton in London yesterday, extending this year’s decline to 17 percent. Nickel is a key element for the production of stainless steel.

Vale, the world’s second-largest nickel producer, this year halted operations at two of its base metals projects following production ramp-up incidents.

Vale declared force majeure in its VNC New Caledonia nickel operations after a plant accident, according to a May 10 statement. The plant, which in the first half of 2012 produced 4,000 metric tons out of a 60,000-ton capacity, is expected by the company to resume operations in the fourth quarter.

Onca Puma

In northern Brazil, Vale’s Onca Puma nickel plant stopped producing in the second quarter after furnace problems and will probably be out of operation for a few months, according to a July 18 company statement. Onca Puma, which the company said has an estimated capacity of 58,000 metric tons, had output of 6,000 metric tons of nickel in the first six months, according Vale.

As a result, Vale produced 124,000 metric tons of nickel in the first half of 2012, 41 percent of its annual target, prompting the company’s executive officer of base metals, Peter Poppinga, to say on July 26 the annual goal won’t be met. Vale will also miss its copper output target this year, he said, after completing 42 percent of this year’s objective.

“The numbers will be reviewed for a lower” target, Poppinga said on a conference call with reporters. “We are living a challenging moment now,” he said, without providing new targets or a timetable.

Nickel, Copper

Vale sold its nickel at an average $17,761.90 a metric ton in the second quarter, 30 percent less than last year and the lowest realized prices in three years. The average selling price for copper declined 15 percent in the period to $7,566 per ton, Vale said.

Production of the metal used to prevent corrosion in stainless steel reached 242,000 metric tons last year, missing the company’s 2011 target by 18 percent and still below the annual record of 275,000 tons in 2008.

Vale missed the targets due to delays in the VNC and Onca Puma ramp-up, together with operational problems in its Indonesia mines and difficulties in resuming production in Canada after the strike, the company said in yesterday’s statement to Bloomberg News.

“Our expectation is that the production recovery will occur in the next 18 months to take full advantage of our nickel operations,” Vale said.

Lower profit and margins in the nickel unit are prompting the company to increase focus on iron ore and fertilizer units, where it has higher returns and lower execution risks, Safra’s Zarpao said.

Inco Acquisition

Vale snapped up the Canadian miner Inco in 2006 to build a global nickel business from Toronto after a takeover battle. About six months after Ferreira left the Canadian company in 2008, about 3,000 steelworkers at Vale’s Canadian nickel operations in Sudbury and Port Colborne went on strike.

The industrial dispute, which reduced output at Sudbury to zero in the first quarter of 2010 from 22,400 metric tons a year earlier, lasted more than a year until July 2010.

While former CEO Agnelli said in 2010 Vale would become the world’s largest nickel producer the following year, the company says now overtaking OAO GMK Norilsk Nickel is not likely to happen until at least 2014.

Vale is unlikely to exit the base metals business and may eventually decide to sell a specific asset as it did earlier this year with a thermal coal mine, Zarpao said.

“What is under Vale’s control would be a reduction in the investment levels in this area and may be an isolated disinvestment,” he said. “There is a revision to have a more focused strategy in a more adverse global context. It’s a new global dynamic.”

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