Ann: Entitlement Issue Closing Date Extended, page-8

Very hard to see them getting this deal over the line now - I wont be surprised if it doesnt trade again.


J Vale Loses Iron-Ore Production Race, Stock Falls
25/09/2014 03:41AM AEST
By Paul Kiernan

RIO DE JANEIRO--Brazilian mining company Vale SA lost a race against its rivals to scale up production of iron ore while demand was hot, and now its shareholders are paying the price.
The top iron-ore producer's stock has fallen 25% year-to-date and is trading near its lowest levels since the 2008 financial crisis. It has missed out on the bull market that other Brazilian shares have enjoyed in recent months. Hope that the coming presidential election would install a more market-friendly government in Brasilia has lured investors to oil company Petrobras and others.

Investors remained wary about Vale because demand for iron ore in China, the world's biggest market for the commodity, was slowing along with the country's overall economy. Meanwhile, iron-ore production was still rising fast as Vale's main competitors ramped up their mines in the western Australian desert after years of multibillion-dollar investments.
The result is a global iron-ore glut that sent prices for the commodity crashing to their lowest level in five years this week.

But Vale's stock is down far more than its rivals. Shares of Rio Tinto PLC and BHP Billiton PLC have only fallen 6.7% and 3.8% this year, respectively, even though they also rely on iron ore as their primary source of cash.

The lag is in part because of the great distance from Brazil to China, which means Vale faces higher shipping costs than its Australian counterparts. But the biggest factor, analysts say, is that Vale couldn't respond fast enough to strong prices. Now, it may be too late.
Stymied by Brazil's complex, slow-moving licensing process and other issues, Vale's expansion projects were set back five years or more. In 2007, the company set a target to grow its annual iron-ore production capacity by 50%, to 450 million metric tons, by the end of 2012.
Instead, Vale's output remained stagnant at around 300 million tons from 2007 through 2013. The so-called seaborne market for iron ore, meanwhile, grew 60% in that period to 1.27 billion tons, according to Wood Mackenzie, as mining companies around the world raced to supply China's booming steel industry.

"Vale has not been able to expand its production," says Greg Lesko, who manages about $350 million in emerging-market securities at Deltec Asset Management. "The other guys at least have that cushion of increased production."

Mr. Lesko sold Deltec's stake in Vale around midyear because he couldn't see a catalyst for iron-ore prices. While the company pays a "nice dividend," he can't foresee the stock doing well until iron-ore prices stabilize.

China's steel output this year has grown just 2.6%, compared with 8.7% in 2013. Vale has insisted in recent years that iron-ore prices below $110 per ton would be unsustainable, since they would force high-cost mining companies in China out of business and cause the market to shift from surplus to shortage.

But that theory is being tested now. Stephen Potter, Vale's director of strategic planning, told a mining conference in Australia this week that "everyone is nervous about the iron-ore price at the moment," according to The Sydney Morning Herald.
Vale declined to make an executive available to comment for this article.

Credit Suisse analyst Ivano Westin lowered his forecast this week for average iron-ore prices in 2015 to $85 per ton. At that level, he estimates, Vale will have to either reduce dividends, decrease its "cash position," take on more debt or cut its investments by a "sizable" amount.
Vale's iron-ore production is rising this year thanks to better weather and ramp-ups of new processing plants in Brazil. A long-awaited expansion of Vale's massive Carajás mining complex in the Amazon is on track, the company says, and will allow it to finally raise its production capacity to 450 million tons by 2018.

Vale also expects its base-metals division to start contributing more to its bottom line thanks to higher prices for nickel and higher production at its nickel and copper mines.
Bruno Menezes, head of research at Rio de Janeiro-based fund manager Pacífico Gestão de Recursos, said that he believes the company's forecasts and that management has done a good job cutting costs and reducing uncertainties by settling a massive tax dispute with the Brazilian government in 2013. But he still wouldn't buy Vale's shares unless they fell another 20% or so.

"There's no more good news expected and the company just became really dependent on iron-ore prices," Mr. Menezes said. "It lost."
Vale shares were up 1.8% at 24.48 reais in afternoon trading.
Write to Paul Kiernan at [email protected]