Vale’s massive $4.2 bn write-down on Onca Puma and Norsk Hydro stake

After selling a majority stake of its bauxite and aluminum assets to Norsk Hydro 22 months ago, Vale is now taking a $4.2 billion write-down on its Hydro shares and its Onca Puma ferronickel ops.

Vale has decided to take a US$4.2 billion write-down on its Onça Puma ferronickel operation, along with the company’s aluminum assets, increasing its fourth-quarter write-downs to US$4.65 billion.

Issues with Onça  Puma’s two smelters halted operations since June 2012. After analysis, Vale decided to rebuild one of the furnaces at an estimated cost of US$188 million in 2013 with start-up planned for the fourth quarter of 2013.

“Given this event and in the face of the current market environment for ferronickel, the valuation of Onça  Puma determined the need to recognize an impairment charge before tax of $2.848 billion,” the company said Thursday in a news release. “The book value of Onça  Puma was US$3.778 billion as of September 30, 2012.”

Meanwhile, Vale observed, “The downward volatility of aluminum prices and the macroeconomic uncertainties about the European economy have contributed to reduce the market value of our 22% stake in Norsk Hydro ASA, a Norwegian aluminum producer, to a level below the book value of our investment.” Norsk Hydro ASA is an aluminum and renewable energy company headquartered in Oslo, Norway.

The fourth largest aluminum company globally, Norsk Hydro ASA operates in 40 countries. The government of Norway still remains a substantial stake in Norsk Hydro ASA. Two days ago, Hydro replaced its CFO Jørgen C. Arentz Rostrup with longtime employee Eivind Kallevik.

Rostrup played a leading role in the company’s $4.9 billion cash-and-share deal to acquire Vale’s bauxite and alumina business in February 2011. The transaction gave Vale a 22% stake in Hydro through a private placement.

The deal gave Hydro full control and ownership of Paragominas, one of the largest bauxite mines in the world, 91% ownership in the world’s largest alumina refinery Alunorte, a 51% stake in the Albras aluminum plant and 81% ownership in the CAP alumina refinery project. The transaction also included additional bauxite licenses and a volume off-take agreement for Vale’s 40% stake in the MRN bauxite mine.

The Vale-Hydro deal was one of the largest transactions ever recorded by a Norwegian company.

Based on Hydro share prices as of September 30, 2012, Vale said it is recognizing an impairment charge before tax of US$1.3 billion, which will also impact Vale’s fourth-quarter 2012 earnings.

“Despite these charges, we remain confident on the long-term market fundamentals of the global nickel market,” said Vale. “At the same time we believe on the potential of Hydro’s assets to create significant shareholder value as a consequence of a unique combination of a rich endowment of natural resources and technological leadership in aluminum.”


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