Vale (NYSE:VALE) has been in talks with various suitors including Chinese coal miner Yanzhou Coal Mining to divest its 61% stake in the Integra coal mine in Australia in a bid to trim assets amid declining profits. The deal could fetch Vale about $500 million. Some of the other stakeholders in the project are steel giants Nippon Steel and Posco (NYSE:PKX).  Below, we take a look at how it could impact the world’s largest iron ore miner, which competes internationally with mining giants like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).
Our current price estimate for Vale stands at $26, implying a premium of about 25% to the current market price.
In Australia, the company owns many other coal assets in addition to the Integra mine, an open-pit and underground mine. However the company has faced several issues in running joint ventures in the country. Recently, it reached an agreement with Aquila over their dispute over coal shipments from the Isaac Plains mine, a joint venture in Queensland.
While the deal will bring cash to the company in the near term, it will also increase the company’s reliance upon iron ore, which currently contributes more than 50% of its value according to Trefis estimates. Iron ore prices have slumped of late, primarily as a result of a slowdown in Chinese demand. Furthermore, iron ore is on the verge of becoming an oversupplied mineral as China, the world’s largest consumer of iron ore, plans to build its own iron ore resources, which in turn could hurt the company’s margins going forward.Notes: