Vale’s $6 Billion Potash Project Is The Latest Casualty Of Its Financial Woes

by Trefis Team
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Vale (NYSE:VALE) has announced an indefinite suspension of its $6 billion Rio Colorado potash project in Argentina. Work has not resumed at the facility after the December holiday break for workers and yesterday the company confirmed indefinite suspension.

The Rio Colorado project includes the developing of a mine in Mendoza, the renovation of 440 kilometers of railroad tracks and the construction of a 350 kilometer-long railroad line to transport the potash to a terminal in the port of Bahia Blanca for export. Production was earlier expected to begin in the second half of 2014 but now that target seems ambitious. The annual production capacity is initially expected to be 2.4 million tonnes and go up to 4.3 million tonnes eventually. [1]

In a presentation given in December, the company informed that 42% of the work at the project site was complete but the pace of further execution would be slowed down owing to a company-wide austerity drive. The budget for the project has been slashed from $1.08 billion to $611 million for 2013. Approximately $1.8 billion had already been spent by October last year. Vale is now looking for a partner for the project to reduce its own cost burden. [2]

The suspension of Rio Colorado is the latest casualty of Vale’s slashed investment spending target for 2013, which is at the lowest level in three years. The company aims to slash investments by $1.2 billion this year, as it struggles with a slowdown in demand for iron ore. Furthermore, it announced that it will book a $4.2 billion fourth-quarter pretax charge after lowering the valuation of a nickel mine and its stake in aluminum producer Norsk Hydro ASA.

See Full Analysis of Vale Here

Vale’s Financial Woes

Vale plans to invest $16.3 billion in 2013, down from the $21.4 billion budgeted for 2012. Almost 47% of the spending will be on iron ore. Approximately $10.1 billion will be spent on new projects, $1.1 billion on research and development and $5.1 billion on maintenance of existing mines and plants. Apart from the Simandou iron ore project, other projects scrapped from the spending plan include the Lubambe copper mine in Zambia and the Samarco IV pellet plant in Brazil. The reduction in spending is driven primarily by expectations of a slower expansion in demand next year. The company has been forced to contract its capital expenditure plans for next year and announce sale of non-core assets in order to reduce costs and improve efficiency. [3]

Last month, Vale also announced that it will book a $4.2 billion fourth-quarter pretax charge after lowering the valuation of a nickel mine and its stake in aluminum producer Norsk Hydro ASA. In addition, the company announced tax losses of nearly $483 million relating to cases in Brazil and Switzerland. Of this, $451 million will be booked in the balance sheet for Q4 and the rest of the amount will be adjusted in the next financial year. Vale is thus set to report a very low profit figure in our opinion. [4]

It All Hinges On Iron Ore

Weak iron ore prices and a slump in demand have been attributed to a slowdown in China, the world’s biggest consumer of iron ore. Vale is the world’s largest producer and exporter of iron ore, and accounts for more than a quarter of the world’s seaborne iron ore exports. While it is also a major producer of nickel, copper and fertilizers, about 90% of its profits come from iron ore. It is thus natural that if its biggest customer sneezes, Vale will catch a cold.

Although iron ore prices have risen rapidly to $140/tonne in the last three months, it has been attributed to restocking of inventory by Chinese steel mills and seasonal factors like cyclones in western Australia where Rio Tinto’s Pilbara iron ore mines are located. China’s coldest winter in 28 years reduced the domestic production of iron ore as well. Prices are expected to come down to more sustainable levels as new supply comes on stream. [5]

If the iron ore business does well next year, projects like Rio Colorado may see a higher capital outlay and faster execution. Although Vale has ruled out outright project cancellation at this stage, we see it as a possibility if things don’t start looking up next year.

Vale’s iron ore sales outlook for 2013 is down by 1.9% to 306 million tonnes from its original 2012 estimate of 312 million tonnes.

You can project your own iron ore shipment figures for Vale by using our interactive graph below:

Vale’s iron ore business constitutes about 65% of its Trefis price estimate.

We have a Trefis price estimate for Vale of $20 which will be revised after the fourth quarter earnings results.

Understand How a Company’s Products Impact its Stock at Trefis

Notes:
  1. Vale Argentine Potash Project Suspended Indefinitely, Bloomberg []
  2. Brazil’s Vale: Work on Rio Colorado Potash Project Remains Suspended, Fox Business []
  3. Is There No End To Vale’s Woes?, Trefis []
  4. Vale to Book $4.2 Billion Charge for Nickel, Aluminum Assets, Bloomberg []
  5. Iron Ore’s ‘Unsustainable’ Rally Seen Ending as Supply Gains, Bloomberg []
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