Vale's Secondary Public Offer - Analyst Blog

Subsidiary of Brazilian mining giant, Vale S.A. (VALE), Mineração Naque S.A., declared the secondary public offer to acquire the balance 21.1% stake in Vale Fertilizantes S.A., Vale's fertilizer unit, for US$3.3 million. Vale recently acquired 20.27% in Vale Fertilizantes S.A. for $1.03 billion.

Currently, Vale is on a spending binge with a capital investment budget of $24 billion for fiscal 2011, more than double of $10.7 billion invested in the year ended September 30, 2010.

The increased investment is expected to support 15 new approved projects, projects in queue and existing operations. Vale will focus more on organic growth and, therefore, 81.3% of the total budget will be spent on Research & Development (R&D) as well as Greenfield and Brownfield projects. Vale is also going to emphasize rail and port expansion, coupled with an increase in coal production.

Vale recently authorized the buy-back of 64.8 million common shares and 98.4 million preferred shares for a total amount of $2 billion until March 2011. The company also proposed a total dividend of $2.75 billion with $1.25 billion as minimum payment, $500 million as additional dividend, and $1.0 billion as extraordinary dividend. Vale is trying to raise shareholders' wealth in the present sluggish environment.

The increase in production will be supported by the recent improvement in market demand. During the third quarter of fiscal 2010, net earnings increased to $6,038 million from $1,677 million in the corresponding quarter of fiscal 2009 and $3,705 million during the previous quarter, due to the increase in demand for minerals and metals based on the global economic recovery.

Demand for iron ore is usually related to the worldwide demand for steel, which is expected to climb 5.3% in 2011. China, the biggest iron ore importer in the world, is expected to increase its steel consumption by 3.5% in 2011. China is also expected to remain the largest consumer of metals in the years to come. Hence, the medium-term outlook for metal commodities remains encouraging, which is going to have a positive effect on iron-ore companies like Vale, Rio Tinto plc. (RIO), and BHP Billiton Ltd. (BHP).

The increase in demand for minerals and metals has forced up metal prices to their all-time high. We believe that Vale's risk/reward profile is balanced and we see limited upside from the current level. We remain Neutral on the ADS. In the shorter term, Vale currently retains its “Hold” rating, which equates to a Zacks #3 Rank.

 
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