Potash Collapse Signals Buy Not Build for Vale: Corporate Brazil – by Juan Pablo Spinetto (Bloomberg News – August 26, 2013)


Turmoil in the global potash market is creating an opportunity for Vale SA to buy assets at a discount as the mining company leads Brazil’s bid to become self-sufficient in crop nutrients.

Vale, whose output at Brazil’s only potash mine dropped for the past three years, should abandon plans for greenfield projects and consider instead purchasing existing producers or their assets, according to Stifel Nicolaus & Co. Potash companies are trading at a “great discount,” making acquisitions a cheaper option for Vale than starting from scratch, said Terence Ortslan, managing director of research firm TSO & Associates.

Vale suspended two potash projects in Argentina and Canada worth $8.9 billion in the past year as cost increases made the ventures unfeasible. Fertilizer producer shares have slumped 14 percent on average since July 30 when OAO Uralkali ended output restrictions through a venture with Belaruskali, triggering speculation prices would tumble. Their average price-to-book ratio fell to 1.69 yesterday from 2.55 at the end of last year.

“It’s tough to justify the economics of a new project at today’s pricing,” Stifel Nicolaus analyst Paul Massoud said by telephone from Washington. “Looking at more established producers, if they can get the balance sheet to work, is the right way to go.”

Fertilizer Losses

Vale isn’t changing its strategy of seeking low-cost potash projects and maintains the business among its five main areas of focus, Chief Executive Officer Murilo Ferreira said during a conference call Aug. 8. While taking a cautious approach, the company is actively looking at potash growth options, head of fertilizers and coal Roger Downey said on the same call. Roberto Moretzsohn, commercial director for fertilizers, echoed those comments in Sao Paulo yesterday.

Fertilizers generated a net loss for the Rio de Janeiro-based company in the three quarters through June 30, according to data compiled by Bloomberg. Vale produced 233,000 metric tons of potash from its Taquari-Vassouras mine in northeastern Brazil in the first half of the year, 5.3 percent less than the previous year. It’s targeting 550,000 tons this year, similar to last year and 23 percent below a 2009 record.

Shares of Vale dropped 21 percent this year, underperforming rivals BHP Billiton Ltd. (BHP), the world’s biggest miner, Rio Tinto Group and Anglo American Plc. (AAL) An even steeper slide by potash producers makes an acquisition a more attractive option than spending years on new projects, TSO’s Ortslan said.

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