Vale Enhances Liquidity

Vale S.A. (VALE), the Brazilian miner, disposed of its $1.75 billion of global bonds due 2039 at 110.87% for a yield to maturity of 6.07%, and priced its $1 billion 10-year debt issue at 99.03% of face value for a yield to maturity of 4.748%. The proceeds from the above are to be used for general corporate purposes.

The transaction would help increase cash and near-cash assets for the immediate quarter, which dropped to $6,235 million in the second quarter of fiscal 2010 from $11,136 million in the previous quarter on account of various small acquisitions. This might indirectly decrease $17.7 billion of debt the company had at the end of the second quarter of fiscal 2010.

Vale will also be able to undertake various small acquisitions, which is its key growth strategy. Recently, it acquired the Corumbá iron ore mining operations from Rio Tinto (RTP) for $750 million in cash, and mines at Simandou, site of a large underdeveloped high quality iron ore deposit at low cost. Through Simandou, Vale is expected to produce 450 million tons of iron ore by 2014.

Vale acquired potash projects in Argentina and Canada, and two assets in Brazil, the Bunge phosphates operations for $1.7 billion and 72.6% of Fosfertil, the largest producer of fertilizer nutrients, for $3.0 billion. These acquisitions are likely to benefit the company in the long term.

The company has also signed agreements with Companhia Siderurgica do Pecem, the state government of Ceara, and Korean steelmaker Dongkuk, to build a steel mill in Brazil’s northeastern state of Ceara and with Norsk Hydro (NHY) to sell its aluminum business for $4.9 billion.

The steel mill is expected to produce 6 million tons of steel slabs per year, which will require a huge amount of iron ore. Thus, Vale will rely less on market demand and more on in-house consumption.

However, we are concerned about the instability in the Chinese market, the largest iron ore importer, with regard to carbon emissions, which are almost, double that of the U.S. and triple that of Europe. On the other hand, we believe that once the inventory in the Chinese market exhausts, the demand for iron ore will rebound.

Further, we expect a recovery in global steel demand in 2010 and beyond. However, a strong exposure to the international markets puts it in a disadvantageous position in terms of exchange rate fluctuations. Thus, we reiterate our Neutral recommendation and the stock currently retains its Zacks #3 Rank (short term “Hold” rating).

VALE RIO DO-ADR (VALE): Free Stock Analysis Report

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