Event
On June 10, Companhia Vale do Rio Doce (Vale) announced that its management had approved and will submit to the Board of Direcotes a proposal of a public offering of common shares and preferred class A shares, with a maximum value of US$ 15 billion. The company also said that is the offering is completed, the net proceeds will be used for general corporate purposes, which include the finance of its organic growth program based on an investment plan of US$ 59 billion, strategic acquisitions and increased financial flexibility.
Company Profile
Companhia Vale do Rio Doce (Vale) is a diversified metals and mining company. The Company is a producer and exporter of iron ore and pellets and a producer of nickel. It also produces copper, manganese, ferroalloys, bauxite, precious metals, cobalt, kaolin, potash and other products. Directly and through affiliates and joint ventures, the Company has investments in the aluminum, coal, energy and steel businesses. Vale operates, among others, eight hydroelectric power plants in Brazil and two in Indonesia. The Company is headquartered in Rio de Janeiro, Brazil.
Click here to view previous coverage of Vale (RIO: NYSE) from May 9, 2008
Takeaways From The Event
Responding to the announcement from Vale, Citigroup analyst Alexander Hacking writes “Vale is seeking approval to issue $15bn of new equity, which seems destined for M&A. Vale’s shares are down 5% at time of writing. Yet, today’s announcement merely confirms what we already knew one month ago (i.e. more M&A is coming); we have no new information on targets.” Hacking sees M/A as the most likely use for the funds, given the company’s low debt ratios and that projected cap-ex spending is well below operating cash flows.
Hacking finds the $15 billion figure a little low, since a run at Freeport McMoran Copper and Gold, which is he thinks is Vale’s most likely target, would likely then require greater than $50 billion of debt to avoid a second public offering. Furthermore, Hacking does not see Xstrata as a target given relative shares prices. Hacking lists Vale’s stated preferences to be: coal, copper, aluminum (and nickel if allowed). In that regard, Hacking sees Freeport as the most likely pick, given Vale’s preference to add more copper to its portfolio. Hacking sees Alcoa as a less likely target given the nature of its assets. Fording Coal could be a possible target, but there complications arising from its relationship with Teck Cominco, which in itself is not for sale (in Hacking’s opinion).
Hacking writes that he was surprised Vale’s wasn’t more aggressive in pursuing Macarthur Coal or even Bumi.
Lastly, he writes that other potential M/A ideas could involve gold, potash or steel but “these all seem unlikely, and inadvisable, for a variety of reasons.”
Hacking maintains his Buy/Medium Risk recommendation and US$48 per share target for Vale.
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
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Last update : 11-06-2008 05:00
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