Vale: Positive move
We see this as a positive move given the growth expectations of the fertilizer business in Brazil (and the world), the high profitability of the business and the stage of the pricing cycle.
However, we need to see final valuation to have a stronger view on the implications of the deal.
Strategic sense
Vale is seeking to acquire all of Bunge's phosphate mining assets and processing plants in Brazil, plus its stake in Fosfertil.
This deal is in line with Vale's strategy to become a leading global producer in the fertilizer industry. The company has a very constructive outlook for fertilizer over the coming years on
the back of increasing demand for proteins in EM and biofuels.
The distribution business is not included in the negotiations, which are well advanced.
Not a new business for Vale
Vale currently operates the Taquari-Vassouras potash deposit in Brazil producing ~600,000 metric tons per year. The company is evaluating potash projects in Brazil (Carnalita) and Argentina (Neuquén), and it is developing the Bayóvar phosphate project in Peru, expected to come on stream in 2H10, with an estimated capacity of 3.9 Mtpy. In January of 2009, Vale acquired two early exploration projects from Rio Tinto (The Rio Colorado project in Argentina, and the Regina
project in Canada) for US$850M.
Deal structure and some valuation references
Other than stating the transaction should not exceed US$3.8B, Vale did not mention anything else in terms of valuation and they still don’t know the final structure of the potentially new
acquired company. According to the company, if the 4 Fertilizers transaction takes place, it would likely be financed 100% in cash. As of 3Q09, Vale had a cash balance of US$13B and a
net debt/EBITDA of 0.86x, making funding not a concern, in our view.
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