UBS cut its rating on Brazilian mining giant Vale to Neutral from Outperform after incorporation disappointing fourth quarter results and the US$1-billion purchase of a bigger stake in Fosfertil into estimates. Its price target (for Vale ADRs) was also reduced from US$34.38 to US$32.70.
“With Vale acknowledging that Q4 09 results were disappointing, investor attention quickly turned to the company’s comment that it is embracing the spot market as a reference point for contract prices,” UBS said. “However, in our view, the sustained cost impacts seen in Q4 09 are likely to oupside surprises in iron ore.”
Its analysts believe the acquisition of Fosferil, Brazil’s leading producer of fertilizers, from Mosaic is rational in strategic trems and secures an end market for Vale’s phosphate rock out of Peru.
The growth opportunities in Brazilian agriculture are also compelling, UBS noted. However, given concerns regarding medium-term phosphate prices, its analysts find it difficult to see significant returns above the company’s weighted average cost of capital and “the US$5.7-billion ticket limits the ability to affect the US$150-billion-plus market cap.”