Vale Opts for the Sure Thing

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A bird in the hand is worth two in the bush. That's apparently the thinking of the world's largest iron ore miner Vale (NYSE: VALE  ) , which decided to take the Brazilian government's tax amnesty offer rather than roll the dice and hope the country's courts would finally rule in its favor.

The miner has been battling the government over a 30.5 billion reais, or $15.8 billion, tax bill on earnings related to the the sale of foreign subsidiaries between 1996 to 2008. It says that it's already paid all due taxes in accordance with the law, but the government, facing a looming budget deficit amid the need to help finance World Cup and Summer Olympics capital expenditures, is trying to rake in as much cash as it can from whatever sources it can, and it disputes Vale's position.

So far, the courts have upheld the Brazilian government's arguments, but the matter was sitting before a five-judge appeals court. With one judge having to recuse himself from the case, and two others split in their rulings, the case was adjourned until Monday after one of the remaining two judges requested more information from each side in the case.

That was curiously timed, because the government unveiled its amnesty program, and gave tax delinquents until Nov. 29 to decide whether or not to accept the offer. It put Vale between a rock and a hard place.

On the one hand, accepting the deal would cut its bill nearly in half as long as it paid 20% of the resulting total immediately, with the balance paid back over 15 years. On the other hand, it would be subjecting its earnings to double taxation, something it's been loathe to do, even though it's been in a pell-mell rush to sell off assets in a bid to raise cash.

With the deadline almost upon it, however, Vale ultimately decided to go with the sure thing, and accepted the government's amnesty offer, agreeing to pay 22.3 billion reais, or $9.6 billion, with almost 6 billion reais, or 27% of the total due this month, representing the taxes due for 2003, 2004, and 2006. The remaining 16.4 billion reais will be made in 179 monthly payments over the next 15 years, representing the principal, penalties, and interest for the years 2005, and 2007 to 2012.

Despite the hit it will take to its cash balances from the move, the iron ore miner said it still  has enough profit accumulated over the years that its dividend won't be affected.

Going with the sure thing brings a level of surety to the miner's situation, and may allow its stock to be revalued along the lines of its peers; but having to choose between the lesser of two evils still means it was ultimately forced to pick evil.

A taxing decision
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9/30/2016 4:01 PM
VALE $5.50 Down -0.03 -0.54%
Companhia Vale CAPS Rating: ****