Potash collapse signals buy not build for Vale

August 27, 2013 05:23 AM

Turmoil in the global potash market is creating an opportunity for Vale SA to buy assets at a discount as the mining company leads Brazil’s bid to become self-sufficient in crop nutrients.

Vale, whose output at Brazil’s only potash mine dropped for the past three years, should abandon plans for greenfield projects and consider instead purchasing existing producers or their assets, according to Stifel Nicolaus & Co. Potash companies are trading at a “great discount,” making acquisitions a cheaper option for Vale than starting from scratch, said Terence Ortslan, managing director of research firm TSO & Associates.

Vale suspended two potash projects in Argentina and Canada worth $8.9 billion in the past year as cost increases made the ventures unfeasible. Fertilizer producer shares have slumped 14% on average since July 30 when OAO Uralkali ended output restrictions through a venture with Belaruskali, triggering speculation prices would tumble. Their average price-to-book ratio fell to 1.69 yesterday from 2.55 at the end of last year.

“It’s tough to justify the economics of a new project at today’s pricing,” Stifel Nicolaus analyst Paul Massoud said by telephone from Washington. “Looking at more established producers, if they can get the balance sheet to work, is the right way to go.”

Fertilizer Losses

Vale isn’t changing its strategy of seeking low-cost potash projects and maintains the business among its five main areas of focus, Chief Executive Officer Murilo Ferreira said during a conference call Aug. 8. While taking a cautious approach, the company is actively looking at potash growth options, head of fertilizers and coal Roger Downey said on the same call. Roberto Moretzsohn, commercial director for fertilizers, echoed those comments in Sao Paulo yesterday.

Fertilizers generated a net loss for the Rio de Janeiro- based company in the three quarters through June 30, according to data compiled by Bloomberg. Vale produced 233,000 metric tons of potash from its Taquari-Vassouras mine in northeastern Brazil in the first half of the year, 5.3% less than the previous year. It’s targeting 550,000 tons this year, similar to last year and 23% below a 2009 record.

Shares of Vale dropped 21% this year, underperforming rivals BHP Billiton Ltd., the world’s biggest miner, Rio Tinto Group and Anglo American Plc. An even steeper slide by potash producers makes an acquisition a more attractive option than spending years on new projects, TSO’s Ortslan said.

Import Dependent

“I would go with buying an existing producer,” he said by telephone. “I am sure it would be a serious consultation in any major company because you have seen a major drop in the market cap of the companies.”

Vale’s press department in Rio declined to comment further on potash expansion plans.

Brazil, the world’s largest producer of coffee and sugar, has said that boosting potash output is a priority to help reduce its dependence on imported nutrients. Amid record crops, Brazil boosted imports of potassium chloride to $1.65 billion in the first half, 20% more than a year earlier, according to the Development, Industry and Trade Ministry.

Brazil spent $8.58 billion in fertilizer purchases last year, its sixth-most imported item. Latin America’s largest economy imports more than 90% of its potash needs and 75% of its nitrogen-based fertilizers supplies, according to industry association ANDA.

Brazil Discount

“No potash project in Brazil is competitive now, and things tend to get even more difficult after Uralkali’s decision,” Mario Barbosa, who headed Vale’s fertilizers businesses until 2011, told reporters in Sao Paulo yesterday. “Potash prices have slumped and will continue dropping.”

Soc. Quimica & Minera de Chile SA, Latin America’s biggest fertilizer producer, is in talks to sell potash in Brazil for as much as a 10% discount on July prices, said two people with direct knowledge of the process. Plant Bem Fertilizantes SA, based in the southern farming state of Parana, may pay SQM $375 to $380 a ton for a 15,000-ton shipment, from $400 to $415 last month, said one of the people, who asked not to be identified because the talks are private.

Vale should focus on delivering the heavy investments needed to expand its iron-ore business rather than making additional acquisitions, Oliver Leyland, who helps manage Brazilian stocks including Vale shares at Mirae Asset Global Investments, said by phone from Sao Paulo.

“Nobody incorporates any expectation of increasing valuation in potash in the fair value of Vale shares,” he said.

‘Reassess Strategy’

Moretzsohn told an event in Sao Paulo yesterday that Vale will press on with its potash projects as it assesses the impact of Uralkali’s decision. The company should rethink that strategy as average annual prices are headed for another 11% drop next year, Stifel Nicolaus’ Massoud said.

“If they are serious about their claim of wanting to become a big, major fertilizers producer, they are going to have to do something about potash,” he said. “I just don’t think that building is the way to do it.”


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