3 de diciembre de 2014 / 19:14 / en 3 años

Investors wary of valuation for Vale's metals unit spinoff

RIO DE JANEIRO, Dec 3 (Reuters) - Brazil’s Vale will face a hard task convincing skeptical investors that rising nickel prices and a better performance justify a high valuation for its long-troubled base-metals division.

Vale SA, the world’s largest producer of iron ore, told investors in New York on Tuesday it was considering an initial public offering of 30 to 40 percent of its base-metals division as the unit was undervalued by the market.

Vale said the unit is worth $30 billion to $35 billion, or 80 percent of the entire company’s market value, even though the base metals unit generates only about 15 percent of total revenue and has mostly lost money in recent years.

Analysts say demand in Canada, where Vale is thinking of listing the new company, could be strong because stock market investors have few base metal plays to choose from.

The potential sale comes as Vale scrambles to raise cash for investments and dividends as iron ore prices hover around five year lows.

Analysts, however, are wary of selling off assets that will generate future value.

Valuations for the division also vary. Brazilian bank Itau said it is worth $35 billion, Vale’s top estimate, while Morgan Stanley suggests $14.9 billion.

The difference depends on whether value is based on current or future profits, and how analysts view the outlook for nickel, the base metals unit’s main product.

The view on nickel is not as pessimistic as it is for iron ore. A ban on exporting nickel ore by major producer Indonesia has raised expectation that nickel prices will rise, at least until Indonesian smelters are built to process the metal.

The base metals division also seems to be in better shape after years of lackluster performance.

Vale estimates the unit’s earnings before interest, tax, depreciation and amortization will be as much as $5 billion next year, or 40 percent of total EBITDA.

However, Vale will need to convince investors that this is not a just one-off result.

Barclays analysts said in a note that it is “difficult to see a strong rationale” for selling the “family silver” if the outlook is so positive.

Some investors say Vale’s estimate should be viewed with caution.

“I generally assume a company will overstate their own valuation on assets they are trying to sell by 1/3 to 1/2,” said one mining-focused fund manager in Canada, who asked not to be named because of his firm’s policy of not commenting publicly on such matters. (Reporting by Stephen Eisenhammer; Editing by Jeb Blount and Andre Grenon)

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