Brazilian mining company Vale do Rio Doce may have paid too much for its purchase of iron-ore and potash assets from Rio Tinto Group, according to JPMorgan Chase & Co. and Banco Santander SA.
Vale, the world's biggest iron-ore producer, agreed last week to buy Rio's Corumbá ore mine in western Brazil for US$ 750 million. That's the equivalent of US$ 229 a metric ton for Corumbá's iron ore and near "peak valuations" of US$ 249 a ton, JPMorgan said, calling the deal better for Rio than Vale.
"We expected to see Vale being able to purchase assets at bargain prices. This doesn't seem to be the case," JPMorgan analyst Rodolfo De Angles wrote in a research note dated January 30. "Any acquisition in iron ore would only make sense at very low valuations."
The Corumbá project, in the heartland of South America, would mean shipping iron ore in barges along the Paraguay and Paraná rivers to the Uruguayan coast, where a specific port was to be built for the transfer of the cargo to sea going vessels.
The sale comes as the world economic slump has caused commodities demand to collapse, forcing mining companies to cut workers and shed assets. Vale do Rio Doce, based in Rio de Janeiro, already has "more competitive" assets in Brazil than the one in Corumbá, Santander analysts wrote this week.
"Vale is buying an asset that it does not really need and one that is not strategic, and is paying top dollar for it," analysts led by Felipe Reis wrote. "This is negative news".
The timing of the deal may also hurt Vale given its recent job losses, Santander said. On December 3, Vale said it fired 1.300 of its 62.000 employees and sent 5.500 more on temporary paid leave, as it cut iron-ore and nickel output. Some of the employees are now returning to their posts or are being transferred, Vale spokesman Fernando Thompson said January 22.
"The political timing of this acquisition is not good," Santander wrote. "The company is laying off people at other mines in Brazil and at the same time spending money on acquisitions, which may create negative sentiment from union leaders and politicians alike."
Vale also is paying 850 million USD for Rio's Potasio Rio Colorado potash project under development in Argentina announced London- based Rio last January 30.