Vale Rallies as Iron Rebound Helps Asset Sales: Corporate Brazil

Vale SA Chief Executive Officer Murilo Ferreira
Vale SA Chief Executive Officer Murilo Ferreira said this month the company will announce the sale of oil and gas blocks in coming weeks and a cargo-unit stake by February. Photographer: Renzo Gostoli/Bloomberg

Vale SA, the world’s third-biggest miner by market value, is staging the biggest rally in more than a year on speculation rebounding commodities will boost profit and help it get a better deal for unwanted assets.

Vale sold Dec. 18 a fertilizer plant to state-run Petroleo Brasileiro SA, bringing the amount raised through asset sales this year to $1.43 billion, data compiled by Bloomberg show. Vale, based in Rio de Janeiro, will unveil the sale of oil and gas blocks in coming weeks and a cargo-unit stake by February, Chief Executive Officer Murilo Ferreira said this month.

The mining company -- after a global expansion that included nickel projects in Canada and a fleet of ships for China -- is retreating to its core iron-ore business in a bid to halt six straight declines in quarterly profit. A 56 percent surge in the price of iron ore gives Vale some breathing room to shop around the assets and negotiate the best price, said Jonathan Brandt, an equity analyst at HSBC Holdings Plc.

“Vale wants to sell its low-return assets sooner rather than later but at the highest possible price,” he said by telephone from New York. “The better external scenario should help them slightly in their asset sales strategy.”

The stock has rallied 18 percent since mid-November, the best four-week winning streak since September 2011, and touched a seven-month high on Dec. 18. Vale is trading at 7.28 times its estimated 2013 earnings, according to data compiled by Bloomberg. BHP Billiton Ltd., the world’s largest mining company by market value, trades at 12.6 times estimated earnings and No. 2 miner Rio Tinto Group has a ratio of 9.89 times.

Investment Cut

Vale pared some of its gains yesterday, falling 1.2 percent to 40.51 reais in Sao Paulo, after settling tax disputes with Switzerland and Brazil’s Minas Gerais state. Vale agreed to pay $233 million in the first case and $320 million in the second.

The stock gained 0.7 percent to 40.81 reais at the close in Sao Paulo today.

Vale, the world’s largest iron-ore producer, said Dec. 3 that it will reduce investments next year by 6.9 percent to the lowest since 2010. The company this year won’t reach a $21.4 billion investment target included in its annual budget, the second straight year that spending fell short. Vale’s press office in Rio declined to comment for this story.

The mining company has said it’s looking for partners in projects including a potash mine in Argentina and a logistics venture in Mozambique. It will also consider selling a 22 percent stake in Norsk Hydro ASA, Europe’s third-largest aluminum producer.

Vale should sell low-return assets including a stake in Oslo-based Norsk Hydro even if it can’t get the best possible deal at the moment, said Rene Kleyweg, a London-based equity analyst at Renaissance Capital.

‘Capital Discipline’

“They should not be worrying about the best time to sell as they could be waiting a long time for that,” he said in an e-mailed response to questions. “This is one of a series of opportunities over the next six months to show capital discipline. They should sell it and either use the proceeds elsewhere, pay it out in dividends or reduce debt.”

Norsk Hydro has a market value of about 57.6 billion kroner ($10.4 billion), valuing Vale’s 21.6 percent stake at $2.24 billion, according to Bloomberg data

Vale said Dec. 18 that it agreed to sell its Araucaria nitrogen operation in Brazil to Petrobras, as Brazil’s state-controlled oil producer is known, for $234 million as it seeks to raise capital to invest in projects with higher returns. Vale will save about $50 million a year in operational costs for the unit, it said in a regulatory filing.

Oil Sales

The deal follows four other divestments this year, including the sale and agreement to lease back 10 ships for $600 million from South Korea’s Polaris Shipping Co. Vale also sold a thermal-coal project in Colombia for $407 million, its ferromanganese alloy operations in Europe for $160 million and kaolin mineral business in Brazil for $30.1 million.

Vale expects to announce the sale of some of its oil and gas assets in the coming weeks, CEO Ferreira told reporters in London after an investors’ presentation on Dec. 6.

The assets are worth between $500 million and $1 billion, Banco Itau BBA SA estimated in a June 30 report.

The company probably will announce the sale of a stake in its general cargo VLI unit in the first two months of 2013, Ferreira said. Vale, which initially considered divesting a third of VLI, may end up selling as much as 70 percent of the unit, he said.

Vale, which also started to write down assets bought in its biggest-ever acquisition, needs to scrap unprofitable ventures, according to Rafael Weber, who helps manage the equivalent of $2.56 billion including Vale shares at Geracao Futuro Corretora.

‘Consistent Message’

“It doesn’t make much sense to have all these assets at this point in the cycle,” he said in a telephone interview from Porto Alegre, Brazil. “The returns of these projects aren’t compatible with the capital they require.”

The Standard & Poor’s GSCI Spot Index of 24 raw materials has climbed 15 percent since reaching a two-year low on June 21.

Vale’s “focus in selling non-core assets like oil and gas or non-iron ore logistics is clear,” HSBC’s Brandt said. “There are a couple of things working in Vale’s favor currently, including higher iron prices, a weaker real that helps reduce costs in dollars and a very consistent message to create value by selling assets and reduce investments.”

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