Vale Looking To Sell Stakes In Coal, Fertilizer And Steel Businesses


Vale ( VALE ) is planning to sell partial stakes in its coal, fertilizer and steel businesses to reduce its own costs and decrease capital spending in the years ahead. The company is planning to sell a 15-25% stake in its coal business that includes operations in Australia and Mozambique. It is looking to bring in partners at the holding level for its fertilizer division, as opposed to its previous efforts to get partners for individual fertilizer production projects. Finally, Vale is also planning to sell its minority stake in the ailing Brazilian steel plant CSA which is majority-owned by ThyssenKrupp.

These decisions have come in view of the company deciding to focus on its core iron ore business. It recently unveiled its capital expenditure plans for 2014 and most of the amount  budgeted for project execution has been dedicated to this business. Also, the quantum of targeted spending has been scaled down. This can be achieved only by scaling down spending commitments for non-core businesses.

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The Coal Business

In 2012, Vale produced more than 5 million tonnes of metallurgical coal and almost 2 million tonnes of thermal coal. The coal business accounts for around 2.3% of the company's revenues. It has been facing challenging times due to low prices and revenue from the division has declined even as production has increased.

Its assets include the mines at Moatize in Mozambique and mines in Australia. The assets in Australia include a majority stake in the underground Carborough Downs mine, a 50% stake in Isaac Plains which is a joint venture with Sumitomo, a 61% stake in the Integra mine in New South Wales' Hunter Valley and undeveloped projects including the Belvedere project in Queensland. The value of the assets that comprise coal operations is around $4 billion, most of which is accounted for by the Mozambican assets. Therefore a 25% stake sale could raise as much as $1 billion for Vale.

Vale expects to invest around $2.83 billion in the coal business next year, mostly to expand operations at Moatize and complete the construction of major railway and port infrastructure in the Nacala corridor of Mozambique. It is targeting users and buyers of coal as joint venture partners and also hopes to sell about half of its 70% stake in the Nacala project which will cost it $4.4 billion otherwise. Bringing in buyers and users of coal as partners will not only allow Vale to get funding and cut its own capital commitments but also mitigate risks.

The Fertilizer Business

Vale's fertilizer business accounts for around 7% of its revenues and includes operations in Brazil and Peru as well as projects in Canada and Mozambique. The company also had a $6 billion potash project in Argentina which it was forced to suspend due to rising project costs, rampant inflation and depreciating currency in Argentina. Vale has set aside just $52 million for investing in new fertilizer projects next year.

Despite challenging conditions in the coal and fertilizers businesses, the company is not targeting them for divestment and sees them as part of its long term core.

The Steel Business

The CSA plant, in which Vale owns a 26.9% stake, was built by the company along with ThyssenKrupp for $7 billion. Vale's investment amounted to $2 billion. The plant has an annual production capacity of 5 million tonnes and started operating in 2010 but hasn't turned profitable yet due to cost overruns and technical difficulties. The rising labor costs and strengthening Brazilian currency have made the plant unprofitable. ThyssenKrupp has already announced its intention to exit the venture. While Vale has announced its intention to sell its stake in the plant, it didn't specify the conditions under which it would do so. It is likely that the company will first wait for steel prices to recover.

Vale has announced a capital expenditure budget of $14.8 billion for 2014 and intends to focus on regaining lost ground in the iron ore business. This business accounts for nearly two-third of the company revenues. Vale has been losing share in the iron ore market and as opposed to a share of of 32% in 2007. It now accounts only for 25% of the total.

To achieve its goal, Vale intends to expand its iron ore production capacity from 306 million tonnes in 2013 to 450 million tonnes in 2018. The key to reaching this target is its Serra Sul project in Brazil which has a price tag of $19.5 billion. At the same time, with prices of commodities falling across the board, Vale's cash flows are likely to be constrained. Therefore, in order to finance such mega projects, cuts have to be made elsewhere and some non-core businesses need to be hived off to generate additional funds.

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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 , Investing Ideas , Stocks , US Markets

Referenced Stocks: CLF , FCX , MT , RIO , VALE



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