Vale’s Spat With Aquila Could Hurt Diversification Efforts
Over the last few years, Brazilian miner Vale (NYSE:VALE) and Australian miner Aquila have seen their relationship turn sour as a result of disputes related to joint ventures. Recently Vale faced a setback when the Australian Court of Appeal declined to overturn a verdict which dismissed Vale’s claim that RBC Capital Markets overvalued Aquila’s stake in the companies’ Belvedere joint venture. [1] A few weeks ago, the companies finally settled their dispute over coal shipments from the Isaac Plains mine project. [2] Vale is the world’s largest iron ore mining company and competes internationally with mining giants like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).
We have a $26 price estimate for Vale, which is about 15% ahead of the market price.
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One dispute settled, another continues
In 2010, Vale increased its stake in the Belvedere project to 75.5%, paying $92 million for AMCI’s 24.5% interest. Vale subsequently exercised an option to acquire Aquila’s remaining 24.5% interest in the project, and both parties hired investment banks to value the stake. Citigroup, Vale’s banker, estimated the value at $117 million while RBC, hired by Aquila, valued it at $330 million. [1] Vale, naturally, disagreed with that valuation given that it paid $92 million in 2010 for an equivalent stake. Vale filed a claim stating that RBC’s valuation was unreasonably high, which was dismissed. Its appeal was rejected on March 30, and the court ordered the company to pay Aquila for litigation and other costs, which could be significant. Now the companies will have to rely on a third-party valuation to determine the purchase price.
Recently, the companies reached an agreement regarding their dispute over coal shipments from the Isaac Plains mine, a joint venture in Queensland. Vale attempted to prevent Aquila from shipping coal separately from the mine last year, claiming that their agreement did not allow for separate shipments, and even threatened to end the venture. [2] Aquila, however, sold its stake to Japanese company Sumitomo afterwards. [3]
Ongoing troubles could hurt future ventures
Such issues could be detrimental to Vale’s efforts at diversifying its mining portfolio to safeguard its profits and revenues. The company currently derives more than 50% of its value from ferrous minerals such as iron ore, manganese, and pig iron. Iron ore is at risk of becoming an oversupplied mineral as China, the world’s largest iron ore consumer, plans to build its own iron ore resources. This could have a substantial impact on Vale’s margins going forward.
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Notes:- Aquila has a victory in its dispute with Vale, The Australian, April 02 2012 [↩] [↩]
- Brazil’s Vale, Aquila end coal sales row, Reuters, March 25 2012 [↩] [↩]
- Aquila Unwraps Surprise With Coal Mine Sale to Japan, WSJ, April 02 2012 [↩]