Cosan and Shell move, slowly, closer to creating the third largest ethanol (and from sugar cane not corn) producer in the world
It’s taking quite a while to get this one done. But the joint venture announced in February between Royal Dutch Shell (RDS) and Brazilian sugar and ethanol giant Cosan (CZZ) has finally moved to the signing of binding agreements.
The deal, when completed, would create the third largest ethanol producer in the world with annual production of 440 million gallons and a sales network of 4,500 stations. Estimated annual sales revenue would come to $21 billion.
The deal seems a natural: Combine Brazil’s largest processor of sugar cane (Cosan will contribute its 23 sugar cane mills, all of its co-generation plants, 1,730 retail outlets, and other ethanol assets to the deal) with 2,740 retail stations operated by Europe’s largest oil company. Throw in Shell’s 50% stake in Canadian cellulosic ethanol producer Iogen Energy and its 15% stake in U.S biocatalyst developer Codexis (CDXS) so that the joint venture can stay on top of the next generation in biofuels and you’ve got quite a package.
So why is this taking so long? Money. (What else is new?)
Cosan is transferring $2.8 billion in debt to the joint venture. That’s about $300 million more than in the initial draft agreement announced in the winter. In exchange Cosan has added its cogeneration energy business to the joint venture.
The advantages for Shell are pretty clear. The company gets a huge presence in biofuels at one stroke. Even better that biofuels business uses sugar cane rather than corn so it’s more efficient at producing fuel and doesn’t face any of the obstacles that come with diverting a food crop such as corn to fuel production.
Update Lan Airlines (LFL)
This deal is a huge expansion for Lan Airlines (LFL) that will turn Chile’s national airline into a truly South American airline.
Lan will buy Brazil’s Tam (TAM) for $3.7 billion. Shareholders of Lan will own 70% of the combined company. (Tam will be delisted and the new shares for LATAM Airlines will trade in New York, Santiago, and Sao Paulo.)
The acquisition will make Lan, with strong routes and market share in Chile, Peru, Argentina, and Ecuador, a dominant player in the Brazilian market. (Tam had about 42% of the Brazilian domestic market as of the end of the second quarter of 2010.) Tam’s revenue last year of$4.9 billion was greater than Len’s revenue of $.37 billion.
Update Vale (VALE)
(I’m ratcheting up my vacation a notch next week for my annual summer recharge of my batteries and taking Jubak Picks completely dark for a week or so until August 24. I will resume my regular posting schedule when I return.)
What was most interesting about Vale’s (VALE) second quarter (July 29) earnings report wasn’t how much money the mining company made—although it made a metric ton—but what it’s doing with it.
For the quarter, net income surged to $3.71 billion or 70 cents a share from $790 million or 15 cents a share in the second quarter of 2009. That really wasn’t any surprise. Wall Street analysts had pegged earnings at 70 cents a share for the quarter on a doubling in iron ore prices from the second quarter of 2009 and an increase in production at the company. Vale sold 670 million tons of ore and ore pellets in the second quarter, a 29% increase from the second quarter of 2009. (Vale is the world’s largest producer of iron ore.)
In the last two years the iron ore industry (happily) and its customers (grudgingly) have moved away from a system of annual contracts with long-term guaranteed prices to one based on often rapidly fluctuating spot prices.
The future looks solid for Vale and its industry too. Global shipments of iron ore will rise 6% to a record 961 million tons in 2010, according to Clarkson, the world’s largest shipping broker.
So where’s Vale putting its profits?
First, into a fleet of ships and new distribution centers that will enable Vale to close some of the cost gap with Australian rival BHP Billiton (BHP) in shipping ore to China. BHP Billiton and Rio Tinto (RTP) have picked up share in the market for seaborne ore because of reduced demand in Europe and the shorter distances from Australian mines to China’s steel mills.
Update Ambev (ABV)
(I am on vacation until August 24. During that period JubakPicks.Com will operate on a reduced posting schedule of one or at most two posts a day.)
The noose got a little tighter around Mexican brewer Grupo Modelo, Mexico’s largest beer maker.
On July 12 the company lost in arbitration with Anheuser-Busch InBev, the world’s biggest brewer. Grupo Modelo had sought to void the transfer to Anheuser-Busch InBev of the 50% stake of Modelo that Anheuser-Busch owned before the merger with InBev that created the beer giant.
The ruling clears the way for Anheuser-Busch InBev to eventually acquire the rest of Grupo Modelo.
AmBev (ABV), the Brazilian brewer and Pepsi distributor that’s controlled by Anheuser-Busch InBev, isn’t a direct party to any of this arbitration or negotiation. But I think this outcome works in AmBev’s favor.
Brazil is winning its inflation battle faster than expected
Surprise!
Brazil’s central bank, Banco Central do Brasil, raised its benchmark Selic interest rate by only 0.5 percentage points yesterday to 10.75%. Expectations had been for a 0.75 point increase.
The consensus is that the smaller than expected increase in rates is a signal from the bank that the bank will stop raising interest rates earlier than expected and short of the 12% rate previously forecast.
The surprise is a result of a surprisingly fast drop in Brazil’s inflation rate in response to higher domestic interest rates—and to slower growth in the European economies as a result of the euro debt crisis. In the 30 days that ended in mid-July consumer prices fell to 0.09%. The drop small as it was, was the first drop in inflation in four years.
Investors who have been waiting for an end to Brazil’s round of interest rate increases have, as of 3 p.m. ET, bid Brazil’s Bovespa stock index to its biggest gain in six weeks.
