Vale’s Sale Of Stake In MBR Reflects Impact Of Weak Iron Ore Prices

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Vale (NYSE:VALE) has announced the completion of the sale of a minority stake in Minerações Brasileiras Reunidas S.A. (MBR) for roughly $1.08 billion, as it continues to grapple with weak iron ore prices. [1] MBR is a Vale subsidiary which represents a part of the company’s ownership in its Southern System of integrated iron ore production, transportation, and port shipment networks. The assets represented by MBR accounted for 65 million tons, or around 20%, of Vale’s consolidated iron ore production in 2014. [1] What is noteworthy about the MBR stake sale is the fact that it represents a stake sale in Vale’s iron ore business, which is the cornerstone of the business of the world’s largest iron ore producer. The sale of a stake in Vale’s core business is a reflection of the dire straits of the iron ore market.

Iron Ore Prices

Iron ore is the chief raw material for the steel industry. Thus, demand for iron ore by the steel industry largely determines iron ore prices. Benchmark international iron ore prices are largely determined by Chinese demand, since Chinese steel mills purchase nearly two-thirds of the world’s seaborne iron ore supply. [2] Due to an economic slowdown in China, Chinese steel demand growth is expected to decline by 0.5% in 2015, following on from a 3.3% decline in 2014. [3] Weak demand for steel has indirectly resulted in weak demand for iron ore.

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On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. [4] The worldwide surplus of seaborne iron ore supply is expected to rise to 437 million tons in 2018, from an expected surplus of 184 million tons in 2015. [5] As a result of this oversupply situation, the weakness in iron ore prices is likely to persist in the near term. The following chart illustrates the downward trajectory of iron ore prices over the last twelve months.

Iron Ore Prices, Source: Y Charts

Vale’s Response

As a result of the weakness in iron ore prices, Vale has sold off a number of non-core assets in the past in order to lower its debt burden and fund the capital and operating expenses of its core iron ore mining business. The company raised $6 billion through the sale of non-core assets, including proceeds from a streaming agreement with Silver Wheaton, in 2013. [6] Vale raised another $5 billion through stake sales in non-core businesses and another streaming agreement in 2015, before the stake sale in MBR. [6] However, the sale of a minority stake in Vale’s core iron ore mining business is an indication of how dire the situation in the iron ore market is. In addition, given the weak pricing environment impacting all the commodities produced by Vale, the company’s credit rating remains under scrutiny. [7] It would be interesting to hear the company management’s thoughts on the road ahead for Vale in its next conference call, specifically if more stake sales in the company’s iron ore business are on the horizon. Though improbable, given the unfavorable prevailing business environment, such a scenario cannot be entirely ruled out.

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Notes:
  1. Vale concludes the sale of a minority stake of MBR, Vale News Release [] []
  2. China Plans Iron Ore Subsidy for Miners Amid Rout, News Says, Bloomberg []
  3. Short Range Outlook 2015-2016, World Steel Association []
  4. BHP, Rio Gamble with Stacked Iron Ore Deck, Mineweb []
  5. Iron Ore Majors Boosting Supply as Glut, China Sink Prices, Bloomberg []
  6. Bank of America/Merrill Lynch-Global Metals, Mining and Steels CEO Conference Presentation, Vale Website [] []
  7. S&P cuts metals price forecasts, to review miners’ ratings, The Economic Times []