VLI plans to invest U.S. $4.44 billion by 2017

Vale has developed the mining business supported by a concept of integrated logistics formed by mine, railroad and port. This model is strategic for the exploration of iron ore. Now Vale is adapting the same concept to the general freight transport, service that the company already provided but that is reinforcing through Valor da Logística Integrada (VLI).

Founded in 2011, VLI plans to invest $4.44 billion in ports and railroads between 2013 and 2017.

However, the concept of VLI replaced the “link” mine from the logistical tripod mine, railroad and port of mining by building a network of integrator terminals with ability to receive and carry products such as grain, fertilizer and steel. These terminals will be located in the area of influence of five logistic corridors defined by Vale (corridors North, Northeast, Southeast, Minas-Rio and Anápolis-Santos). The terminals will be connected directly to railroads and ports that comprise the company portfolio or with which VLI has operating agreements.

The new company has three terminals of this type in Pirapora and Araguari, in the state of Minas Gerais, and Palmeirante, state of Tocantins, and plans to build five more. One for moving steel products in Belo Horizonte, one for grains and fertilizers in the region of Triângulo Mineiro, one for sugar in the interior of São Paulo and two for grains in the region of Uruaçu (state of Goiás) and Palmeirante (state of Tocantins).

Headquartered in São Paulo, VLI will also expand capacity at railways and ports, projects that justify its ambitious investment plan. For now, this plan is a proposal subject to the approval of the shareholders of the company. Currently, Vale has 100% ownership of the company, but hired the banks BTG Pactual and Merrill Lynch to advise it in seeking partners for the new company.

When this capitalization process is completed, the business plan will be submitted for the approval of the shareholders of VLI. The plan foresees a 57% increase in general freight handling in the company’s ports, from 25.7 million tons in 2013 to 40.3 million tons in 2017. The railroads would increase the freight volume by almost 70%, from 32.3 million tons per useful kilometer (TKU) in 2013 to 54.3 million TKU in 2017. The IPO of the company is not discarded, but will only be defined in a second phase.

We have five investors heavily interested [in VLI], Humberto Freitas said, executive director of logistics, mineral exploration and technology of Vale. The values of the operation are kept confidential. The banks were in charge of economic and financial appraisals of the company, while stakeholders are doing their own accounts. Freitas said that all stakeholders are financial investors with profile to remain in long term on the infrastructure projects of the company.

The entry of the new partners will be important to VLI deal with its business plan. The idea is that the $4.4 billion are invested as follows over five years: $1.43 billion in 2013, $1.18 billion in 2014, $815.5 million in 2015, $593.1 million in 2016 and $415.18 million in 2017. For now, VLI has approved an investment budget of $525.9 million for 2013, of which $331.15 million in expansion, $168.05 million in maintenance and $26.69 million in projects.

Investments in expansion for the coming year include the purchase of 37 locomotives and 1,200 cars, besides spending in terminals and land purchase.  Another important project is the expansion of the private fertilizer terminal in Santos, the old Ultrafértil’s terminal. The current terminal capacity of 2.5 million tons per year will be multiplied by five to achieve the annual volume of 12.5 million tons, including grains and sugar.

Vale may sell to the partners 50% or more of the capital of VLI. That’s because investors’ appetite for the deal was so great that the mining company were willing to reduce its participation, admitting even to have a minority stake. “But we will never have less than 30% [in VLI] because we are connected to the company,” Freitas said. Vale will also have the role of strategic partner because of its knowledge on the general bulk freight segment. Freitas said the idea is to have a definition about strong proposals of purchase of VLI by the new partners until the first quarter of 2013.

The mining company is linked to VLI through assets or concessions of railroads and ports that it transferred to the new company, including Ferrovia Centro-Atlântica (FCA), the North-South Railroad (FNS), the private fertilizer terminal at Santos, a berth for grain at the port of Itaqui, in the state of Maranhão, and the three existing terrestrial terminals in the states of Minas Gerais and Tocantins.

Besides incorporating the assets that were from the mining company, VLI made contracts with Vale to operate third-party freight in assets that remain under the control of the mining company. VLI can offer the market overcapacity of freight on the Vitória to Minas Railroad (EFVM) and Carajás Railroad (EFC), both railroads that transport iron ore to the ports of Tubarão, in Vitória (state of Espírito Santo), and Ponta da Madeira, in São Luís (state of Maranhão), respectively.

VLI has access to other Vale’s assets via contracts, such as the case of the Ponta da Madeira Terminal (TPM), in Vitória (state of Espírito Santo), for coal handling, and the two terminals for various products that drain corn, soybeans, fertilizer and general freight, also located in Vitória. Freitas said that these contracts were approved by Vale, at first, and then the company decided to submit them for approval by the National Land Transport Agency (ANTT – Agência Nacional de Transportes Terrestres).