Vale reviews Argentina potash project
A delay or exit from the project could significantly hurt Vale's fertilizers business.
The project is currently under review, and we are closely watching the outcome, which is expected anytime soon. Vale's trepidation may be arising from the high inflation in the country and the government's recent move to nationalize a major oil company. In recent times, mining companies, including Vale and Freeport McMoRan (FCX), have been increasingly facing political risks resulting in the under-performance of their stocks.
We have a $34 price estimate for Vale, which is around 40% ahead of the market price.
Below we take a look at how the outcome could impact the company's value.
Agriculture, a sector that is largely immune to recessions, presents a promising future for Vale as it tries to reduce its dependence on iron ore. To tap the growth potential, the company has been spending billions on its fertilizers business. The project in Argentina, expected to be ready by mid 2014, would cost approximately $5.9 billion while enabling Vale to produce 4.3 million metric tons of potash. The company has already completed 30% of the project's work with an estimated cost of $1.1 billion.
However, the current conditions in Argentina have forced Vale to review its plans. The unofficial inflation data clocked 23% last year and is expected to increase to 25% this year. Further, the country is leaving no stone unturned to control its widening current deficit. Last month, it nationalized oil major YPF SA to boost oil production.
If Vale decides to delay or completely exit the project, it could significantly hurt its fertilizers business, which, according to our analysis, contributes close to 9% to our current price estimate of $34. We expect the company to double its revenues in this segment by the end of our forecast period.
Vale intends to invest around 10% of its $21 billion planned capital expenditure on fertilizers in 2012. Recently, it increased its stake in its own fertilizer production company, Vale Fertilizantes SA.
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