Goldman Signs Deal with VALE - Analyst Blog


According to Reuters , a unit of Colombian Natural Resources, the mining company managed by The Goldman Sachs Group Inc. ( GS ), has entered into an agreement with Brazil-based Vale S.A. ( VALE ). Through this deal, Goldman will purchase thermal coal assets worth $407 million from Vale in Colombia.

As per terms of the agreement, Vale has agreed to conduct the sale in cash. Moreover, 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, an 8.4% stake in the railway, which links the port with the mines, will be sold. The transaction awaits regulatory approval from the Colombian government.

Benefits Associated with the Deal

With the completion of the deal, Goldman's existing coal operation in Colombia will expand and become stronger. Previously, Goldman had also acquired a coal miner in Colombia as well as metals warehousing group-Metro International in 2010. Apart from its banking operations, such dealings will also augment 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 metals 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 assets were purchased by Vale for approximately $306 million.

In the current unsettled environment, the completion of the deal will provide some liquid cash to Vale. Therefore, after selling thermal assets, Vale would be able to concentrate more on its core business of providing coal for steel production and focus on completing various projects already undertaken.

After-Deal Effects

In 2011, production at Vale's mines climbed 19.4% to 3.57 million metric tons, while Colombian Natural Resources increased its production by 58% to 2.39 million metric tonnes. Therefore, following the completion of this agreement, with increased accessibility between port and railway for Colombian Natural Resources' existing mines, Goldman's coal mining capacity will get enhanced.

Through its asset management arm, Goldman is also planning to foray into Japan's property market.Last week, 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 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.


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.

GOLDMAN SACHS (GS): Free Stock Analysis Report
VALE SA (VALE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: GS , VALE

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