Vale’s Moatize Project Boosted By Mitsui’s Equity Participation

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Vale (NYSE:VALE) has announced that it has entered into an agreement with Mitsui & Co. Ltd. to sell 15% of its stake in Vale Moçambique and half of its 70% equity stake in the Nacala Logistic Corridor. [1] Vale Moçambique is a Vale subsidiary through which the company owns a 95% stake in the Moatize coal mine in Mozambique. [2] The transaction, valued at $450 million, is expected to close in 2015. [1]

The announcement of these stake sales is a part of Vale’s ongoing response to poor market conditions for both iron ore and coal. The company would welcome additional equity infusions into its projects in Mozambique, as it looks to cut back on capital spending in order to operate competitively in a subdued commodity pricing environment.

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The Moatize Mine and the Nacala Logistic Corridor

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The Moatize coal mine accounts for around 94% of the company’s 1.53 billion tons of proven and probable coal reserves. [2] The Moatize mine produced 2.37 million tons of metallurgical coal and 1.44 million tons of thermal coal, accounting for around 35% and 77% of Vale’s consolidated metallurgical and thermal coal production, respectively, in 2013. [2] The Nacala Logistic Corridor is the railway and port infrastructure that connects the Moatize mine to the Nacala-à-Velha maritime terminal, located in Nacala, Mozambique. [2]

Moatize currently has a nominal production capacity of 11 million tons per year (Mtpy). Vale is currently in the process of expanding the mine’s nominal production capacity to 22 Mtpy. [2] The project achieved 70% physical progress by the end of Q3. [3] The expansion of Moatize’s production capacity will be completed in the second half of 2015. The port and railway infrastructure expansion of the Nacala Corridor achieved 85% and 71% physical progress, respectively, by the end of Q3. [3]

Benefits of Mitsui’s Equity Infusion

Mitsui’s equity infusion into Vale’s projects in Mozambique will reduce the company’s capital expenditure outlay for these projects. Mitsui’s contribution towards the total capital expenditure for these projects will be proportionate to its equity stake. Vale will avoid $3.65 billion in cash outflows pertaining to these projects. [1]

The savings in capital expenditure from Mitsui’s equity infusion fits in well with Vale’s overall efforts to reduce capital spending. The company recently announced a reduced capital expenditure budget for 2015, which stands at $10.2 billion. [4] This is sharply lower as compared to Vale’s capital expenditure in 2014, which is expected to total approximately $13.8 billion. [5] The company has been reducing its capital expenditure as part of its efforts to reduce costs and expenses in the prevailing subdued iron ore and coal pricing environment.

Iron Ore and Coal Prices

Iron ore and metallurgical coal are important raw materials for the steel industry. Thus, demand for these raw materials by the steel industry plays a major role in determining their prices. International iron ore prices are largely determined by Chinese demand, since China is the largest consumer of both steel and iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. [6] However, weak demand for steel in China has translated into weak demand for both iron ore and metallurgical coal. Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. [7]

On the supply side, expansion in production by majors such as Rio Tinto and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in lower iron ore prices in the near term. [8] Iron ore prices stood at $74 per dry metric ton (dmt) at the end of November, around 46% lower than at the same corresponding point of time last year. [9] Weak demand coupled with an oversupply situation, due to expansion in production by major mining companies, is also responsible for plummeting coal prices. [10]

In addition to reducing Vale’s capital expenditure outlay, Mitsui’s equity participation in the company’s projects will reduce the company’s exposure to the Moatize coal mining project. Given that the subdued coal pricing environment is set to persist in the near term, Vale will welcome Mitsui’s equity participation in its Moatize project.

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Notes:
  1. Moatize and the Nacala Logistic Corridor welcome New Investor, Vale News Release [] [] []
  2. Vale’s 2013 20-F, SEC [] [] [] [] []
  3. Vale’s Q3 2014 Earnings Report, SEC [] []
  4. Vale: Capital Expenditure Budget For 2015, Vale News Release []
  5. BofAML 2014 Global Metals Mining And Steels Conference, Vale Company Presentation []
  6. China Ore Stockpiles Rise to Record on Financing Deals, Bloomberg []
  7. Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association []
  8. BHP, Rio Gamble with Stacked Iron ore Deck, Mineweb []
  9. Iron Ore Spot Prices, Y Charts []
  10. Coking coal price crashes through $100, Mining.com []