Vale S.A. (VALE), Brazil’s largest mining company, has acquired a 51% stake in a Mozambique logistics firm, Sociedade de Desenvolvimento do Corredor do Norte SA (“SDCN”), for moving coal from its Moatize coal project in Mozambique, Africa.
 
The acquisition will help in the second phase of the coal project as the movement of coal for the first phase is already agreed with the Linha do Sena railway.
 
Vale expects to produce 11 million tons of coal in the first phase of the project expected to start in the first half of fiscal 2011. The project has a maximum annual capacity of 12.7 million tons of hard coking coal.
 
Vale produces metallurgical and thermal coal through Vale Australia Holdings (Vale Australia), which operates coal assets in Australia through wholly owned subsidiaries and unincorporated joint ventures. Vale has also bought a 51% stake in Belvedere coking coal project from Aquila Resources Ltd. in Queensland. Further, the company has minority interests in Chinese coal and coke producers.
 
Demand for coal is usually related to worldwide demand for steel, which is expected to climb 10.7% in 2010 and 5.2% in 2011. China’s steel consumption is also expected to increase 6.7% to 579 million tons in 2010. The increase in demand is expected to have a positive effect on the price of coal, which in turn will benefit the company.
 
However, a strong exposure to the international markets puts it at a disadvantage. The bulk of Vale’s total revenues (around 85%) comes from outside Brazil, exposing Vale to foreign currency risks. We reiterate our Neutral recommendation on the ADR. It currently retains a Zacks #3 Rank (short term “Hold” rating).
 
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