Brazil’s largest miner, Vale S.A. (VALE), lost its bid at $6.75 per share to acquire the majority stake in Brazilian base metals and fertilizers holding company Paranapanema (PMAM3) on account of invalid tender. At R$6.75, Vale was able to attract only 38% of the shares, when it was supposed to pull 51% shares in order to make it valid.
 
However, Vale has been benefiting from a chain of small acquisitions. Recently, it acquired Corumbá iron ore mining operations from Rio Tinto for $750 million in cash, and mines at Simandou, site of a large underdeveloped high quality iron ore deposit at low cost. Through Simandou, Vale is expected to produce 450 million tons of iron ore by 2014.
 
It acquired potash projects in Argentina and Canada, and two assets in Brazil , the Bunge phosphates operations for $1.7 billion and 72.6% of Fosfertil, the largest producer of fertilizer nutrients, for $3.0 billion.
 
The company has also signed agreements with Companhia Siderurgica do Pecem, the state government of Ceara, and Korean steelmaker Dongkuk, to build a steel mill in Brazil ‘s northeastern state of Ceara and with Norsk Hydro ASA (NHY) to sell its aluminum business for $4.9 billion.
 
The steel mill is expected to produce 6 million tons of steel slabs per year, which will require a huge amount of iron ore. Thus, Vale will depend less on market demand due to in-house consumption.
 
However, we are concerned about the instability in the Chinese market, the largest iron ore importer, with regard to carbon emissions, which are almost, double that of the U.S. and triple that of Europe. On the other hand, we believe that once the inventory in the Chinese market exhausts, the demand for iron ore will rebound.
 
Further, we expect a recovery in global steel demand in 2010 and beyond. However, a strong exposure to the international markets puts it in a disadvantageous position in terms of exchange rate fluctuations. Thus, we reiterate our Neutral recommendation and the stock currently retains its Zacks #3 Rank (short term “Hold” rating).
 
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