CCO-Vale deal to secure long-term cargo flow

But earnings impact is minimal.

China COSCO (CCO), through its wholly-owned subsidiary China COSCO Bulk Shipping, has entered into a framework agreement with Vale SA to cooperate on seaborne cargo transportation and integrated logistics.

According to a research note from Maybank Kim Eng, they will enter into long-term (up to 25 years) contracts of affreightment in respect of transportation of ore.

CCO will build and operate 10 very large ore carriers (VLOCs) and purchase four existing VLOCs from Vale to facilitate ore transportation under the agreement.

Here’s more from Maybank Kim Eng:

Details of the deal are not yet finalised, and the transaction and agreements are pending approval from the boards of both companies.

We believe the agreements are positive to CCO in the long term given the closer co-operation with Vale.

The 25-year agreements also mean a steady and secured cargo flow for its vessels. As the consideration of the deals are not yet finalised, it is too early to quantify the impact.

Assuming a total capacity of 1.6m dwt for the four VLOCs to be acquired from Vale, this will increase CCO’s bulk fleet capacity by only 4.8%, so we see limited earnings impact.

Also, it will take time for the proposed 10 VLOC newbuildings to be delivered, so we believe their earnings contribution will be beyond FY16.

Assuming total consideration of USD450m for the VLOCs from Vale, we expect CCO’s gearing will reach 320% and stay high for the next two years.