Paranapanema seeks sale of fertilizer unity

By Luciana Magalhaes April, 21
RIO DE JANEIRO (MarketWatch) -- Paranapanema S.A. , leader in the production of refined copper in Brazil, has hired Banco Alfa and consulting group Stratus to arrange the sale of its fertilizers company, Cibrafertil.
According to Chief Executive Luiz Antonio Ferraz Jr., the groups will send letters to potential buyers by the end of the month. "We want to sell the whole company... at the right time for the right price," Ferraz told Dow Jones Newswires.
Cibrafertil is part of the fertilizer division of Paranapanema, which holds 99.84% of its total capital.
According to Ferraz, Paranapanema has already had talks with possible buyers, but he declined to name them. "This is an asset that could be strategic for other groups," he added.
Paranapanema hopes to take advantage of the wave of global consolidation in the fertilizer industry, with mining and agricultural groups racing to snap up fertilizer concerns as global demand grows apace for crop nutrients to boost food output.
For Paranapanema, however, fertilizers is no longer a strategic investment area, as the company wants to focus on the metal businesses, Ferraz said.
The proposed sale of the fertilizers unit is linked to new government rules which limit investments in stock by pension funds, including Banco do Brasil SA's (BDORY, BBAS3.BR) Previ, which is Paranapanema's largest shareholder, according to a Banco do Brasil officer who declined to be named. The new laws aim to boost pension funds' investments in real estate, considered safer investments.
Pedro Galdi, analyst with SLW Brokerage in Sao Paulo, says Cibrafertil would be an interesting asset if sold in combination with copper assets. Alone, it would be a more difficult asset to sell, he said.
Cibrafertil, which produces superphosphates, gets sulphuric acid, a key raw material, by pipeline directly from Paranapanema's Caraiba Metais copper smelter, located alongside the fertilizers unit in Bahia state, northeast Brazil. That suggests direct synergy between the two plants. Sulphuric acid is a by-product of copper smelting.
According to Ferraz, none of the copper assets will be involved in the sale. However, an agreement could be struck between Paranapanema and the buyer regarding the sale of the sulphuric acid, he said.
Cibrafertil is a relatively small company, producing some 300,000 metric tons a year of fertilizer products. Last year, it had net revenue of BRL 65.5 million ($41.2 million), up 15.7% from 2009.
In 2008, Brazilian mining company Vale SA (VALE, VALE5.BR) considered buying some of Parapanema's assets, including Cibrafertil. Last year, Vale also made an unsuccessful public tender offer to acquire up to 100% of Paranapanema's shares.
Vale declined to comment on whether it would be interested in buying the fertilizer assets alone.
Cibrafertil was founded in 1994 to supply single superphosphate to the fertilizer industry. Nowadays, it also produces more-complex fertilizers, such as NPK.
Proceeds from the sale would be used to reinforce Paranapanema's strategic plan to focus on copper and also to establish a new plant for precious metals. In early 2011, Paranapanema approved a plan to invest BRL702 million in the 2011-2013 period.
"It is a new phase for the company. Since 1996, we have basically invested in maintaining the plants," Ferraz said. "We have also invested in tin, but the tin assets were sold in 2008."
Of the total planned investment, BRL290 million will be devoted to expansion and renovation of the Bahia copper smelting facilities. The capacity of the plant will be raised to 280,000 tons a year from 230,000 tons.
The company will also build a plant to refine precious metals--such as gold and silver--that are also byproducts of the copper processing.
Since 1996, the company has been controlled by state pension funds including Previ and Petros, and by the holding company of the Brazilian Development Bank, BNDESPar.
Ferraz says Paranapanema does not have plans to go to the capital markets to finance its expansion.
Besides its own cash flow, the company intends to seek financing from BNDES and Banco do Nordeste do Brasil SA (BNBR4.BR).
Paranapanema is also focusing heavily on the domestic market in Brazil, where it sees demand for copper growing 7.5% this year, as more copper is used in electricity cabling and the construction sector.
"Nowadays, 70% of our primary copper is sold in the domestic market," Ferraz said.
To expand its sales, the company is also firming up agreements with smaller copper-producing companies in Brazil. The idea is to have a small share in these companies, helping them grow and buying the copper they produce.
A few non-disclosure agreements with small companies have already been reached, he said.