Brazil’s antitrust regulator has approved a deal between Vale (NYSE:VALE) and Petrobras, giving a boost the former’s plan to play a larger role in fertilizers. The deal will enable Vale to develop a new Carnalita mine in Sergipe state of Brazil, which could produce 1.2 million tons per year (mtpy) of potash with many expecting the region to add as much as 2.2 mtpy of potash due to other probable reserves in the same area.
Vale will invest nearly $4 billion on these projects.  In addition, Vale will be able to continue potash production at Petrobras’s Taquari-Vassouras mine, currently the only potash mine in Brazil. The mine produces about 600,000 metric tons of potash even as it has a capacity of 750,000 metric tons per year. But, it has a productive life of just nine years. 
We have a $26 price estimate for Vale, which is around 25% ahead of the market price.
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Agriculture, a sector that is largely immune to recessions, presents a promising future for Vale . To tap the growth potential, the company has been spending billions on its fertilizers business and will shell out around 10% of its $21 billion planned capital expenditure on this division in 2012. Recently, it took its own fertilizer production company, Vale Fertilizantes SA, private. According to our analysis, fertilizer contributes close to 9% to our current price estimate of $26. We expect the fertilizer revenues to increase by 50% by the end of our forecast period.
However, one will have to closely watch the progress at its $5.9 billion project in Argentina, which is currently under review. Expected to commence production in 2014, the project would add 4.3 million metric tons of potash to current production. The company has already completed 30% of the project’s work with an estimated cost of $1.1 billion. If Vale decides to delay or completely exit the project, it could significantly hurt its fertilizers business and consequently, our price estimate.
Further, many are casting doubts if all proposed potash projects around the globe go online, the price may slump close to 9% percent by 2015. This could lead to a sharp drop in revenues as well as EBITDA margins as opposed to an increase that we originally anticipate. Notes:
- Brazil Antitrust Body Approves Vale-Petrobras Accord On Potash Production, Fox Business, July 4 2012 [↩]
- Brazil’s Vale to lease petrobras potash mine, MarketWatch, Feb 9 2012 [↩]
- Uralkali Plots Potash Growth As BHP Delayed: Commodities, Bloomberg, July 4 2012 [↩]