VLI is in the final stages of the early renewal process of the concession for the Centro-Atlântica Railway (FCA) — a turning point for the financial rebalance of an asset that has been in deficit for decades.
Early renewal is also a key factor in increasing the value of VLI – whose largest shareholders are Brookfield and Vale – before an IPO in the next market window.
VLI has been operating the FCA concession since 2011 – when the company was created from a spinoff of Vale – and has invested over R$ 11 billion in the concession since then.
The railway has accumulated over R$ 3 billion in losses on the balance sheet. Last year, it generated a net revenue of R$ 3.5 billion, an operational loss of R$ 600 million, and a net loss of R$ 900 million.
“At values updated by the Selic rate, we have paid R$ 17 billion in concession fees to the Government since the beginning of the concession, 28 years ago,” VLI CEO Fábio Marchiori told Brazil Journal. “Additionally, we have expenses for the depreciation and maintenance of sections where no cargo passes through. These two factors have resulted in the operation being in deficit for a long time.”
According to Marchiori, of the 7 thousand kilometers of railway lines of FCA, 2.1 thousand km are unused sections, where no cargo passes through (due to reasons beyond the company’s control, such as the closure of a customer’s activity in a particular region or the opening of a new port).
In the early concession renewal, VLI is proposing to return these sections to the Public Authority in exchange for a compensation of R$ 3.5 billion by the company.
The concession fees would also be much lower than in the previous cycle, at R$ 1.5 billion for the next 30 years.
In return, the company would commit to investing R$ 24 billion in improving the network and acquiring more wagons — half of this amount in the first 10 years.
“This would be an investment that would generate an increase in the country’s productivity, with an increase in the volume transported on our network — different from what we were doing before,” the CEO said.
VLI’s projection is that the investments will result in a 46% increase in the volume transported on the company’s networks, which operate with two corridors.
The Southeast corridor — starting in Goiás, passing through the Triângulo Mineiro, crossing São Paulo, and reaching the Baixada Santista — has a strong focus on agribusiness, transporting mainly sugar, but also grains and fertilizers.
On the other hand, the East corridor starts in Araguari, crosses Minas Gerais, connects with the Vitória-Minas Railway, and goes up to the ports of Espírito Santo. This corridor mainly serves paper and pulp manufacturers and steel mills, transporting wood, iron, and steel.
The VLI CEO’s prediction is that the FCA operation will only return to profit five years or more after the renewal, even with all the improvements in the contract.
“With the renewal, we will already have to make a very large investment, because half of the R$ 24 billion capex is focused in the first 10 years. This is why it takes a bit longer to turn the balance sheet,” Marchiori said.
The early renewal process for the FCA is in its final stages. Public hearings began this week and will continue until the 29th. Once they are completed, ANTT will gather the contributions and prepare a new version to be submitted to TCU.
After this process, VLI will have to reconsider whether it accepts the final proposed terms. According to Marchiori, the company is willing to accept some adjustments, but there is little room to improve the current proposal in terms of investment volume.
The early renewal of the FCA is part of a broader effort that began in 2017, during the Temer Government. The first concession to undergo early renewal was that of the Rumo railways, back in 2018. Following that, the Vale and MRS railways also went through the process.
In the last two years, however, the Government started to question the terms of these renewals, negotiating contractual addendums with these three companies. Rumo has already signed an agreement; MRS has a preliminary agreement announced, but the decision has not been finalized yet; and Vale is still defining the terms of its preliminary agreement.
A source from one of these companies involved in the discussions told Brazil Journal that the talks have been “constructive.”
“What is being discussed is for the companies to provide more concession resources, and in return, some parts of the contract will be changed,” the source said.
The Government’s intention with this agreement is to have more resources to invest in the railways — which would be positive for the GDP and the country.
In addition to FCA, VLI has other significant assets in its portfolio. It owns the Norte-Sul Railway, whose concession expires only in 2037; has contracts to operate logistics for six ports; and owns a port terminal in Santos, Tiplan, which handles over 15 million tons per year.
Another asset, less relevant in terms of revenue, is Trato, a tool for logistics integration to make the integration of railways with trucks smoother.
Despite FCA being in the red, VLI is highly profitable.
The holding company is expected to report an EBITDA of R$ 5 billion this year, with almost 100% EBITDA to cash conversion. The holding’s leverage is 1.5x EBITDA, and the company has board authorization to increase it up to 3x.
Marchiori said that VLI is looking at other growth opportunities and is preparing for an IPO as soon as a window opens. Obviously, early renewal would be crucial for that. “Going public without renewal would drain capital from the company, because the valuation would certainly be much lower,” he said.
Currently, the largest shareholder of VLI is Brookfield, with 36.5% of the capital; followed by Vale, with 29.6%; FI-FGTS, with 15.9%; Mitsui with 10%; and BNDES with 8%.
Brookfield recently increased its stake in the company, acquiring 10% of Mitsui – certainly betting on the success of the early renewal.
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
