Vale's New Plant in Chile - Analyst Blog

Brazilian mining giant Vale S.A. (VALE) introduced a copper plant, Tres Valles, in Chile, which has an annual production capacity of 18.5 kilo tons of copper cathodes. The project, whose construction began in 2005, has cost around $140 million to Vale.

The Tres Valles plant has an open-pit mine and an underground mine named Don Gabriel and Papomono, respectively.

Considerable improvement in the economic conditions and the all-time high metal prices encourages Vale to boost its investment so as to increase its production. Recently, Vale increased its capital investment budget for fiscal 2011 to $24 billion from just $10.7 billion 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. The company is also going to emphasize on rail and port expansion, coupled with an increase in coal production.

Vale also 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. Hence, Vale is trying to raise shareholders' wealth based on the market improvement.

Demand for iron ore is usually related to the worldwide demand for steel, which is also 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 and is anticipated to remain the largest consumer of metals in the coming years.

Hence, the medium-term outlook for metal commodities remains encouraging, which is expected to have a positive impact on iron-ore companies like Vale, Rio Tinto plc. (RIO) and BHP Billiton Ltd. (BHP).

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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