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Dec 20, 2016

S3 BLACKLIGHT: Short Interest Drops on Mosaic-Vale Chemical Fertilizer Sale

Vale SA ADR (VALE US) succeeded in reducing a quarter of its $10 billion debt reduction target by agreeing to sell most of its chemical fertilizer business to The Mosaic Co. (MOS US) for $2.5 billion ($1.25 billion in cash and 43.3 million shares of MOS common stock). The announcement pushed both stock prices down, with MOS down 6.1% and Vale down 3.8% since Friday.
This deal continues a string of large agricultural and chemical deals including Bayer AG acquiring Monsanto, Agrium Inc merging with Potash Co and Dow Chemical merging with DuPont Co.
Mosaic short interest had been steadily climbing for most of 2016, rising from $530 million in January to $1.28 billion by the end of August. After hitting a then year to date high of $30.35/share on August 30th, Mosaic short sellers have been gradually trimming their positions and locking in profits. Short interest fell $220 million, or 17%, by the end of November and at $899 million today, it has fallen below $900 million for the first time since May. With S&P cutting its rating from BBB to BBB- and the chance that it will be forced to cut its dividend to help finance this acquisition in a depressed fertilizer market, Mosaic’s short interest may reverse its recent trend and test its $1.28 billion historical highs.
Vale ADR short interest is now at $809 million, down $147 million, or 15%, from its year to date high of $956 million in October, but up $162 million, or 25%, year to date. With Vale’s stock price up 139% on the year, short sellers have continued to hold onto most of their short exposure in the stock even as they incur unrealized losses. The last time Vale’s stock price was over $7/share, short interest was at Vale’s historical high of $1.9 billion. If Vale does not succeed in reducing its debt load significantly by continuing to sell off its non-core businesses, short sellers may jump back into the stock. One major factor keeping short sellers at bay is the recent surge in iron ore prices. December’s $80/metric ton price is over 40% higher than its year to date average. With Vale’s operating costs set to drop from almost $33/metric ton to $25/metric ton with the completion of its Serra Sul S11D project, Vale’s cash flows will finally be able to take a significant bite out of its $26 billion of debt. Of course, if the Chinese government continues with its plan to cut over 100 million tons of steel capacity by 2020 there would be a worldwide glut of iron ore which would greatly diminish Vale’s attempt of eliminating most of its mountainous debt load in the next 5 years. An increase in Vale short interest would be an indication of decreased worldwide iron ore demand and pricing, but at the moment short sellers are seeing a more profitable future in Vale’s remaining businesses.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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