Vale (NYSE:VALE) is facing a hard time in South America due to Brazil’s stiffened environmental permit laws, but is flying high in Africa with a new railroad project for coal transportation. Brazil’s future growth is expected to be subdued and its share in seaborne iron-ore market is projected to plummet to 27% by 2016 from the present 31%. Vale has significant operations and a sizable number of upcoming projects in Brazil. It has already postponed the $8 billion Carajas Serra Sul expansion aimed at adding nearly 90 million metric tons of ore in 2011 due to environmental clearance issues. 
To make up for the estimated dip in its South American business, it has increased focus on Africa and invested a sum of $4 billion in Mozambique to build a railroad.  In addition, it is also realigning its coal business by selling thermal coal assets and purchasing more stake in steel plants and retaining metallurgical (met) coal assets. According to recent rumors, Vale could bid for ThyssenKrupp-owned steel plants in Brazil. 
We have a $26 price estimate for Vale, which is around 40% ahead of the market price.
Thermal coal asset divestiture
Vale’s enhanced focus on met coal and diminishing interest in thermal coal is noteworthy as it sold its coal mines El Hatillo and Cerro Largo and its port terminal Sociedad Portuaria Rio Córdoba to Colombian Natural Resources for $407 million. It will also sell its stake in Ferrocarriles Del Norte de Colombia, which runs the rail facility between the mines and the terminal.  Vale bought these thermal coal assets for $306 million in 2008.
Vale is also expected to bid for ThyssenKrupp’s steel manufacturing plant in Brazil, which will be up for sale soon. Met coal, used for steel manufacturing, typically sells at a high premium to thermal coal owing to its higher quality. The sale of thermal coal assets may cause a revenue drop in the company’s coal division, but will simultaneously improve its margins as met coal has better margins compared to thermal coal. As it acquires or builds met coal mining facilities, it would likely forward integrate them with the steel plants (as and when it owns them) and enjoy better margins.
Railroad in Africa
Vale is planning to spend nearly $4 billion on developing a new railroad from its mine in Moatize to Nacala port in Mozambique, in partnership with a rail company, CFM. The rail would be used for coal transportation as well as passenger commuting. It is highlighted that the country’s transportation services are inadequate, in view of future demand. And this railroad will be a hallmark of Vale’s achievement, as it can be used presently by the company and later by third-party miners to transport coal. It will also help Vale’s own coal operations and strengthen its logistics services.Notes:
- Vale to lose market share to rivals as stricter mine laws bite, mineweb.com, May 21, 2012 [↩]
- Mozambique: Vale to Spend Four Billion On New Rail Route, allafrica.com, June 6, 2012 [↩]
- ThyssenKrupp In Talks With Potential Buyers For Brazil Steel Operations, foxbusiness.com, June 3, 2012 [↩]
- Vale sells Colombia coal mines to GS-led group, reuters.com, May 28, 2012 [↩]