Is Vale Gearing Up for an Acquisition?

On Tuesday, Brazilian mining giant Companhia Vale do Rio Doce (RIO) announced plans for a public offering worth up to $15-billion. So what will it do with all that cash? The company said it will be used for organic growth, strategic acquisitions and increased financial flexibility.

Vale went out of its way to state that it is not in any strategic acquisition talks right now. But BMO Capital Markets analyst Tony Robson figures that is the company's ultimate goal, regardless of what it says.

In a note to clients he wrote:

 

In BMO forecasts, [Vale] can easily fund its $59B capex program without external financing and concludes the raising is essentially an equity base for a major acquisition.

 

But what to buy? Mr. Robson noted that credit markets are much tighter now than they were when Vale held talks with Xstrata (XSRAF.PK) earlier this year, and more equity would be required to complete any deal. If the $15-billion is an equity base, he figures a deal could be worth up to $50-billion to $60-billion assuming a 75%-to-25% debt-to-equity ratio.

Mr. Robson wrote that Xstrata is still a possible target, but that would require even more debt, so it isn't likely. According to media reports out of Brazil, the potential targets include Anglo American PLC (AAUK), Freeport-McMoran Copper & Gold Inc. (FCX), and Alcoa Inc. (AA).

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The proposed $15-billion equity offering from Companhia Vale do Rio Doce continues to raise eyebrows, as investors wonder whether the company is gearing up for a giant acquisition.

According to UBS analyst Edmo Chagas, the offering almost certainly spells M&A, but at a significant cost. He considers the offering to be a negative, noting that Vale seems to be getting less disciplined in its efforts to get an acquisition done and that debt markets may be tough to access now, given that the company is willing to issue expensive equity to finance M&A. That could keep the share price depressed in the short term.

Mr. Chagas noted that Vale may raise the equity as it faces negative trends in its upcoming financial results, namely weak nickel prices and shortfalls on iron ore shipments because of infrastructure constraints.

In a note to clients he wrote:

 

While some of the constraints are temporary, and nickel prices seem to be supported by high-cost producers, we do not expect them to reverse before year-end.

 

Mr. Chagas still thinks the Vale story looks good in the longer-term given the company's aggressive growth plan and predicted strength in metal prices. He has a "buy" rating on the stock and a target of $38.00 a share.

Comments

[Texbuz:]

To:... MY WEBSITE. As to his comment: " no longer any hydro sites in The USA."

. Partly true however if the USA can obtain a "Right of Way" from Canada and by diverting a relatively small portion of the Alaskan Yukon river from dumping into the Bering Sea but rather moving the water southward down the Rocky Mountain Trench hydro power can be obtain equivalent to 75 Hoover Dams.

The water then could be moved into all of the Southwestern States and Northern Mexico creating 5,000,000 JOBS and an enormous amount of new acreage for FOOD & Ethanol.

2008 Jun 12 06:49 PM

[fe02:]

At the Las Vegas Moneyshow, the Vale representative hinted broadly at upcoming acquisitions without any specifics. He stated that Vale wanted to become a "one stop shopping" destination for clients interested in a broad range of commodities. He specifically mentioned copper.

2008 Jun 13 08:26 PM