On Monday, Reuters reported that a unit of Colombian Natural Resources - the mining company managed by The Goldman Sachs Group Inc. (GS) - has closed the deal with Brazil-based Vale S.A. (VALE). The cash deal, which Goldman entered in May, allowed it purchase thermal coal assets worth $407 million from Vale in Colombia.
The deal includes selling of Vale’s El Hatillo coal mine, the Cerro Largo deposit and a port terminal on the Atlantic coast of Colombia. Additionally, its 8.4% stake in the railway, which links the port with the mines, has been sold.
Benefits Associated with the Deal
Following the closure of the deal, Goldman’s existing coal operation in Colombia has expanded even more and become stronger. Back in 2010, Goldman had acquired a coal miner in Colombia along with the metals warehousing group - Metro International. Apart from its banking operations, such dealings will further enhance Goldman’s trading in physical commodities.
On the other hand, Vale’s aim to sell thermal assets indicates its plan to concentrate on its core metal business. Precisely, Vale plans to focus on its main operations in coking coals that are used by steel mills, instead of thermal coals that are used for generating electricity. In 2008, these thermal assets were purchased by Vale for approximately $306 million.
In the current unsettled environment, the completion of the deal provided some liquidity to Vale. Now, it will concentrate more on its core business of providing coal for steel production and focus on completing various projects that are already undertaken.
In 2011, production at Vale's mines climbed 19.4% to 3.57 million metric tonnes, while Colombian Natural Resources increased its production by 58% to 2.39 million metric tonnes. As the deal has been closed, increased accessibility between port and railway for Colombian Natural Resources’ existing mines will enhance Goldman’s coal mining capacity.
Through its asset management arm, Goldman is also planning to foray into Japan’s property market. Last month, Bloomberg reported that the U.S. investment bank is strategizing to initiate a private real estate investment trust (:REIT) on the Japanese soil with a capital investment of approximately 50 billion yen ($628 million).
Goldman expects a turnaround to occur in the Japanese real estate market; hence, it has decided to make such a huge investment in it. At the current level, investing in Japanese properties would yield higher returns over the long period once the Japanese economy stabilizes and government’s policies come into effect extensively.
As the banking sector is undergoing a radical structural change, it will witness headwinds in the near to mid term. However, entering the new capital regime and refining exiting operations will ensure stability and security in the industry over the long term.
Goldman currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain our long-term ‘Neutral’ recommendation on the stock.
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