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The company has had a tough time in 2014, and now it needs to raise some cash. On the bright side, Chief Executive Murilo Ferreira remains positive on the future of iron ore.
BHP Billiton( ASX:BHP,NYSE:BHP,LSE:BLT) made headlines this past summer with the announcement that it plans to hone its focus on iron ore, copper, coal and petroleum by spinning off a number of its other businesses.
Now Brazil’s Vale (NYSE:VALE) looks to be heading in a similar direction. The Wall Street Journal reported Tuesday that the miner is considering selling a 30- to 40-percent stake in its base metals division via an initial public offering on the TSX this coming summer. The division, which some analysts have valued at between $28 and $35 billion, is mainly made up of nickel assets that the company gained through the purchase of Inco back in 2006.
Why sell?
Put simply, Vale is having a tough time this year. As Bloomberg states, it suffered from “strikes in Canada, plant faults in Brazil and an acid spill in New Caledonia” during 2014, and of course the poor iron ore price hasn’t helped. Vale is the world’s largest producer of the metal, and it’s seen steep losses this year, particularly in recent days. All in all, those factors have pushed the company’s share price down 43.77 percent year-to-date.
Thus, unlike BHP, which as mentioned is pursuing a spin off to narrow its focus, it seems Vale’s potential divestment was born of a need for cash. As Brenton Saunders of BT Investment Management told The Sydney Morning Herald, “(BHP’s) is more a portfolio consideration, whereas I suspect strongly the Vale one is a capital consideration. They want to be able to raise money and they might use this as a mechanism to raise money to be able to finish developing their iron ore expansion, so the motivations are very different, I suspect.” Similarly, according to The Wall Street Journal, some analysts believe that to finish its major projects Vale will have to “choose between reducing its dividends and taking on new debt” — unless of course it can raise money another way.
Not a sure thing
That said, Vale’s sale is by no means certain. The transaction hasn’t yet been brought to the company’s board, and Chief Executive Murilo Ferreira has said that it will only take place under the right circumstances. “We will not just sell at any price,” the Financial Times quotes him as saying. Furthermore, the company is looking at other ways to raise cash. The Herald notes that Vale is “considering a sale of preference shares, as well as divestments of $US5 billion to $US10 billion,” which could include its coal and fertilizer divisions.
However, given Ferreira’s positivity on iron ore — he sees a recovery coming as smaller producers in China fall victim to low prices — investors can be relatively certain that Vale’s focus on the metal won’t falter. The company has committed to spending US$6.35 billion on iron ore projects in 2015, and according to the Financial Times Ferreira has said, “[w]e are building a competitive company with high-quality assets. We are confident that after the adjustment period we will see a recovery.”
Certainly that statement is a ray of hope for investors tired of the carnage currently going on in the sector.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
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