Why Vale SA may sell a stake in crown jewel Carajas iron ore mine

Vale calls itself a diversified mining company, but the vast majority of its profits come from iron ore

Vale SA may need to do the “unthinkable” and sell a stake in its crown jewels as declining iron ore prices pressure the company’s balance sheet.

Deutsche Bank believes Vale should think about bringing in someone at its Northern System operations, which includes Carajas, the world’s largest iron ore mine.

The larger and faster-than-anticipated dip in iron ore prices has contributed to a 30% pullback in Vale shares to date in 2015, and a nearly 60% decline previously year.

Calling the Brazil-based diversified mining giant’s balance sheet “precarious” and noting that dire times require more drastic measures, Deutsche Bank analyst Wilfredo Ortiz estimates its funding gap could climb to US$10-billion under a distressed pricing scenario for iron ore of US$45 per ton through the end of 2017.

“We don\’t view additional debt beyond current facilities like a sensible option, leaving disposals as [the] main option,” he said in a note to clients. “But under current market conditions, just the most prized assets can be sold without destroying value.”

Mr. Ortiz suggested selling a stake as large as 20% in Carajas would cover the shortfall and allow Value to “regain control of its destiny.”

He estimates a 15% to 20% stake could fetch US$8-billion to US$10-billion, which may be enough to pay for most of the outstanding capital investment for Carajas’ expansion. The analyst also said this could shore in the balance sheet “to weather virtually any storm within the iron ore market.”

“Peers have minorities in key iron ore assets and in the Japanese Vale has potential partners it is comfortable with. So why not?”

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