IB Net Payout Yields Model

Vale Proposes Doubling Capital Spending in 2011

Incredible news from Vale (VALE) the leading iron ore producer in the world located in Brazil. VALE plans to double capital  spending int 2011 to $24B in order to diversify away from iron ore and into pricier metals and fertilizers. This is nearly a doubling from the $12.9B planned for 2010. Who will benefit from the increased spending?

Naturally companies like Joy Global (JOYG), Bucyrus (BUCY), and Caterpillar (CAT) could see improved orders. Terex (TEX) could see some orders for its new port crane business as well.

What's interesting is that a large portion of the increase will go towards logistics building of expanding rail capacity and ports. Maybe that explains why CAT recently expanded its rail engine exposure.

One of the major focuses of the spending will be on fertilizers. Goals include doubling phosphate rock output and quadrupling potash production by 2015. Coal production will also nearly quadruple with just about every area nearly doubling.

As far as VALE, its now becoming a concerning investment. It appears that the government is placing pressure on them to expand at all risks very similar to the other Brazilian giant Petrobras (PBR). PBR recently raised an incredible $70B to expand oil production. Something that places Brazil and its government into a greater focus in the world, but not something that generated profits for shareholders. This aggressive plan is likely to pressure the stock price especially if it requires any dilution financing like on PBR. PBR continues to trade near a 1 year low while the markets continue soar especially in Brazil.

VALE has been a core holding in the Net Payout Yields Portfolio for the 3 years its been tracked, but this news lead us to sell half the position today. Depending on the stock action, the remaining position might be sold as well. Government intervention seems all most certain providing a bad backdrop for investors.

Via Reuters:

  • Brazilian mining company Vale, the world's top iron ore producer, will invest a record $24 billion in 2011 as it diversifies toward pricier metals and profitable fertilizers.
  • Vale's eagerly awaited capital spending budget is nearly double this year's planned $12.9 billion outlays and will lay the groundwork for the company to vastly boost output of key products amid soaring demand for minerals from emerging markets such as China.
  • The company, which has spent nearly $6 billion this year alone on fertilizer acquisitions, expects to double phosphate rock output and more than quadruple potash production between 2011 and 2015.
  • The company will dedicate about 20 percent of 2011 investments to logistics projects, including expanding the rail system linked to the massive Carajas iron mine and increasing the capacity of the Ponta da Madeira port terminal.
  • The government still holds considerable sway over Vale, a former state-run company that was privatized in the 1990s. State-linked pension funds and the government's development bank BNDES are still key shareholders.
  • Analysts believe Vale's strong cash position, which has allowed it to give shareholders billions of dollars in dividends, will spur politicians in the coming months to push for higher mineral royalties to tap into rising prices.

via VALE:


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