On Monday, Reuters reported that a unit of Colombian Natural
Resources - the mining company managed by
The Goldman Sachs Group Inc.
(
GS
) - has closed the deal with Brazil-based
Vale S.A.
(
VALE
). The cash deal, which Goldman entered in May, allowed it purchase
thermal coal assets worth $407 million from Vale in Colombia.
The deal includes selling of Vale's El Hatillo coal mine, the Cerro
Largo deposit and a port terminal on the Atlantic coast of
Colombia. Additionally, its 8.4% stake in the railway, which links
the port with the mines, has been sold.
Benefits Associated with the Deal
Following the closure of the deal, Goldman's existing coal
operation in Colombia has expanded even more and become stronger.
Back in 2010, Goldman had acquired a coal miner in Colombia along
with the metals warehousing group - Metro International. Apart from
its banking operations, such dealings will further enhance
Goldman's trading in physical commodities.
On the other hand, Vale's aim to sell thermal assets indicates its
plan to concentrate on its core metal business. Precisely, Vale
plans to focus on its main operations in coking coals that are used
by steel mills, instead of thermal coals that are used for
generating electricity. In 2008, these thermal assets were
purchased by Vale for approximately $306 million.
In the current unsettled environment, the completion of the deal
provided some liquidity to Vale. Now, it will concentrate more on
its core business of providing coal for steel production and focus
on completing various projects that are already undertaken.
The After-Effects
In 2011, production at Vale's mines climbed 19.4% to 3.57 million
metric tonnes, while Colombian Natural Resources increased its
production by 58% to 2.39 million metric tonnes. As the deal has
been closed, increased accessibility between port and railway for
Colombian Natural Resources' existing mines will enhance Goldman's
coal mining capacity.
Through its asset management arm, Goldman is also planning to foray
into Japan's property market. Last month, Bloomberg reported that
the U.S. investment bank is strategizing to initiate a private real
estate investment trust (REIT) on the Japanese soil with a capital
investment of approximately 50 billion yen ($628 million).
Goldman expects a turnaround to occur in the Japanese real estate
market; hence, it has decided to make such a huge investment in
it. At the current level, investing in Japanese properties
would yield higher returns over the long period once the Japanese
economy stabilizes and government's policies come into effect
extensively.
Conclusion
As the banking sector is undergoing a radical structural change, it
will witness headwinds in the near to mid term. However, entering
the new capital regime and refining exiting operations will ensure
stability and security in the industry over the long term.
Goldman currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain our long-term 'Neutral' recommendation on the stock.
GOLDMAN SACHS (GS): Free Stock Analysis Report
VALE SA (VALE): Free Stock Analysis Report
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