Brazilian mining giant, Vale S.A. (VALE) has increased its stake in Vale Fertilizantes SA, Vale’s fertilizer unit, from 58.63% to 78.9% for $1.03 billion.
Vale recently authorized the buy-back of 64.8 million common shares and 98.4 million preferred shares for a total amount of $2 billion until March 2011. The company also proposed a total dividend of $2.75 billion with $1.25 billion as minimum payment, $500 million as additional dividend, and $1.0 billion as extraordinary dividend. The company is trying to raise shareholders’ wealth in the present sluggish environment.
A sudden increase in spending power might be based on three reasons. Firstly, the proceeds from disposing its $1.75 billion of global bonds due 2039 at 110.87% at a yield to maturity of 6.07%, and pricing of its $1 billion 10-year debt issue at 99.03% of face value at a yield to maturity of 4.75%.
The transaction would help increase cash and near-cash assets for the immediate quarter, which dropped to $6,235 million in the second quarter of fiscal 2010 from $11,136 million in the previous quarter on account of various small acquisitions. This might indirectly decrease $17.7 billion of debt the company had at the end of the second quarter of fiscal 2010.
Secondly, Vale’s proposed borrowing of approximately $1 billion from Export Development of Canada, and $1.23 billion from Chinese lenders namely, Bank of China and the Export-Import Bank of China (China Eximbank) can be another reason.
Last but not least, the gradual market improvements have increased the overall demand for steel. The global steel demand is also expected to climb 10.7% in 2010 and 5.2% in 2011. Further, the recovery in the emerging markets is faster than in the developed economies of the world, which is encouraging. Steel consumption in China, the biggest iron ore importer in the world, is also expected to increase 6.7% to 579 million tons in 2010.
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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