Company Returns Assured by Government in [Brazil] Rail Expansion – by Christiana Sciaudone – ( – January 11, 2013)

Brazil’s $45 billion railroad expansion is targeting ALL America Latina Logistica SA (ALLL3) and Vale SA (VALE)’s duopoly by guaranteeing returns for companies that create train lines and transport cargo.

Highway operator TPI-Triunfo Participacoes & Investimentos (TPIS3) SA and logistics group JSL SA (JSLG3) have said they may take part in the April auction for the rights to operate lines or handle cargo on 10,000 kilometers (6,200 miles) of new railways. The government says the nation’s biggest rail expansion since the 1930s will lure 91 billion reais ($45 billion) of investments.

President Dilma Rousseff, seeking to stimulate the economy and upgrade infrastructure after a decade without investment, will auction off ports, airports and roads to ease bottlenecks in Brazil, the world’s largest exporter of iron ore, orange juice and sugar. The government ran the 28,000 kilometers of railways until it privatized the lines in 2007. ALL and Vale now control 84 percent of the network.

“There is a lot of space for this sector to grow,” Roger Oey, an analyst at Bes Securities, said by telephone from Sao Paulo. “If there is any uncertainty, the government will try to diminish this for the projects to be successful, especially in the beginning.”

As part of the plan announced Aug. 15, the government vowed to sign contracts for all of the new capacity, Transportation Minister Paulo Sergio Passos said. Companies will either operate the rail lines or transport cargo, but not both. Additional terms will be released in March.

‘Minimum’ Guarantee

“If the government guarantees a minimum volume, I think the risk is minimized,” Fernando Simoes, chief executive officer at JSL, the largest logistics company in Brazil by revenue, said in a Jan. 7 telephone interview.

JSL probably will require a minimum return of 15 percent, equal to existing operations, said Oey, the analyst. The Mogi das Cruzes, Brazil-based company is expected to report that 2012 revenue rose 28 percent to 2.94 billion reais, the median of five analysts in a Bloomberg survey.

JSL and Triunfo beat the Bovespa index’s 3.1 percent gain in the 12 months that ended yesterday. JSL surged 69 percent, and Triunfo jumped 43 percent. ALL fell 7.9 percent in that span, while Vale rose 2.7 percent.

Vale fell 1.9 percent to 39.79 reais at 11 a.m., while ALL was little changed at 8.89 reais.

In a bid to make Brazilian companies more competitive, Rousseff sought to cut interest rates and lower electricity costs last year. Brazil ranks 130th of 185 nations in the World Bank Group’s 2013 “Ease of Doing Business” survey, which rates countries based on attributes such as inland transportation. That’s down two places from 2012.

‘Big Steps’

“If we want to take big steps toward growth, we need to have an interconnected transportation network,” said Henrique Kleine, an analyst at brokerage firm Magliano (MAGLIAO) SA, which holds 191,400 shares of toll-road operator CCR SA. Companies able to diversify from construction of ports to operation of airports “will have infinite advantages over others.”

ALL depends on railroads for most of its revenue, while Vale Chief Executive Officer Murilo Ferreira said last month the miner may sell a controlling stake in its general cargo unit. Domestic rail operations represented 93 percent of ALL’s 996 million reais in revenue in the third quarter, while railroads accounted for just 2.8 percent of Vale’s sales.

In Brazil, Vale controls about 10,000 kilometers of track, including the Carajas railway serving the world’s largest iron- ore mine.

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