Why is the equity partnership with Mitsui strategically important?
Positioning Vale SA in the lower prices and lower costs scenario (Part 8 of 10)
Stake sale
On December 9, Vale (VALE) announced that it entered into an agreement with Mitsui & Co. According to the agreement, it will sell Mitsui 15% of its 95% stake in the Moatize mine. It will also sell Mitsui 50% of its 70% stake in the Nacala Logistics Corridor, or NLC. To learn more about Vale’s coal operations, please read Vale SA coal mining operations.
After the transaction is complete, Vale will indirectly own 81% of the Moatize mine. It will own ~35% of the NLC. It will share its control with Mitsui.
Moatize mine
The value attributed to Mitsui’s 15% stake in Vale Mozambique, or VM, is $450 million. Mitsui will also be responsible for funding future capex to complete the Moatize mine expansion. This will be pro-rata to its equity participation of 15%—estimated at $188 million. As a result of earnout and clawback clauses, the final value attributed to VM’s 15% stake could range from $330–$480 million. The transaction amounts will be used to fund the capex of the Moatize mine expansion.
NLC
Mitsui will make an upfront payment of $313 million for 50% of Vale’s 70% stake in the NLC. In addition, Vale and Mitsui are negotiating for up to $2.7 billion in non-recourse project financing that will be used to fund future capex. It will also be used to repay about $1 billion in shareholder loans to Vale. It will be used to repay Vale’s spending on the project from the end of 2Q14 to the close of the deal.
Strategic importance
With these transactions, Vale avoided a total cash outflow of $3.6 billion. The transaction is essential to continue its investment in Mozambique and Malawi. It provides the funding to complete the Moatize project. It also provides funding for the NLC. It supports Vale’s strategy of operating world class assets. It improves Vale’s balance sheet and eliminates future funding needs. It also reduces Vale’s exposure to the project risk.
Other iron ore companies—including BHP Billiton (BHP), Rio Tinto (RIO), and Cliffs Natural Resources (CLF)—are also going for stake sale or complete divestments. The companies want to improve their free cash flow profile and operate effectively in this low commodity price environment.
Investors can also consider the SPDR S&P Metals and Mining ETF (XME) to get exposure to this sector.
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