Vale SA (VALE5), the world’s biggest iron-ore producer, agreed to pay 22.3 billion reais ($9.6 billion) to settle a decade-long tax dispute with Brazil over profits of its foreign units, ahead of a deadline tomorrow.
Vale will pay 5.97 billion reais at the end of this month and 16.4 billion reais in 179 monthly installments, plus interest, after its board decided to join a settlement program offered by the government, the Rio de Janeiro-based company said in a filing late yesterday. Shares jumped.
Brazil’s biggest exporters including Vale, brewer Cia. de Bebidas das Americas and steelmaker Gerdau SA (GGBR4) have been fighting a combined 75 billion reais in tax claims on profit of their foreign subsidiaries, according to the country’s tax agency. The net present value of Vale’s liabilities is $6.6 billion, below the $10 billion that was being anticipated by investors, according to JPMorgan Chase & Co. estimates.
“We view this announcement as positive for Vale,” JPMorgan analysts including Rodolfo Angele wrote in a note to clients. “We now can turn the page on the uncertainties surrounding this legal imbroglio to focus on industry and company fundamentals.”
Exporters were offered a chance to settle out of court in September when Congress passed legislation that scraps fines, interest and legal charges if companies opt to pay their claims in one tranche, or reduces taxes and interest if they pay the debt in installments. The deadline to join the settlement program, known as Refis in Portuguese, is tomorrow.
Vale was taking too much risk by continuing the legal fight without certainty of victory and the settlement may help its share price to recover, said Rafael Weber, who helps manage about 5.5 billion reais in stocks at Geracao Futuro Corretora.
“While nobody wants to pay, Vale managed to reduce the claim significantly and extend the period of time for payments, giving investors predictability on the case,” he said by telephone from Porto Alegre, Brazil. “This was an issue that was bothering the company’s valuation.”
The tax dispute has weighed on Vale’s shares, which have underperformed its main rivals this year. The stock is down 23 percent through yesterday while BHP Billiton Ltd. (BHP), the world’s largest mining company, advanced 0.5 percent and Rio Tinto Group, the second-biggest, fell 2 percent in Sydney over the period.
Vale’s shares surged 2.8 percent to 32.29 reais at 3:22 p.m. in Sao Paulo, which would be the steepest gain on a closing basis since Oct. 14.
The company estimated its total tax liability from the case at 45 billion reais for the 2003-2012 period, including penalties, interests and fees.
In the event that other companies win favorable court rulings on their tax liabilities, Vale could still benefit from those decisions, irrespective of its settlement with the government, Chief Executive Officer Murilo Ferreira said on a conference call yesterday after the announcement.
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