Vale: Why Investors Can Expect a Better Performance

Iron ore miner Vale (VALE) is putting its best foot forward in order to combat low iron ore prices. The company had turned in a positively surprising performance last quarter, and given the pace at which it is focused on reducing costs, its financial performance could get better despite weak iron ore prices. Let’s take a look at the moves made by Vale to reduce costs.

Cost cutting is resulting in higher EBITDA

Vale reported $1.8 billion in EBITDA for the iron ore pellets segment in the last reported quarter.
This was approximately 44% higher than its EBITDA in the first quarter of 2015. More importantly, this increase in its iron ore EBITDA was despite a decrease in iron ore shipments. The higher EBITDA resulted from the higher average realized price for iron ore and its strong cost-cutting efforts.

The iron ore price on a dry metric basis was $61.50 per ton. This was approximately $2.09 per ton higher than $58.40 per ton plus 62% reference price for the same period. Vale managed to decrease its iron ore cash costs by $2.5 per ton that came in at $15.08 per ton for the quarter.

So, the company is doing right thing by strategically cutting its iron ore costs on one hand and at the same time, it is increasing iron ore production. It expects its iron ore production to increase 26% from 340 million tonnes in 2015 to 459 million tonnes in 2019.

Efficient capital deployment and divestments to reduce its debt

Vale is effectively deploying its capital into key projects. Its capital expenditure was $4.3 billion for the first half of fiscal 2015. This is approximately $700 million lower as compared to the first half of 2014. Also, the company is progressing well with its divestment program. In the second quarter, Vale executed the sale of four assets for $445 million.

These strategic efforts of cutting its capital expenditure and divesting its assets will help it reduce its debt. The company had approximately $31.29 billion at the end of the second quarter, which is huge and this is why it needs to continue divesting non-core assets in order to reduce the pressure on its balance sheet.

Conclusion

Vale looks well-positioned with its cost-cutting initiatives such as specialized cost saving plans, productivity enhancement schemes, growth projects, and enhanced operations at the N4WS mine. This should help the company enhance its top and bottom line performance in the future despite uncertainty in the end market. Also, its initiatives such as the efficient deployment of capital expenditure and divestment of its assets should help in reducing its debt. Thus, Vale seems to be making smart moves to combat the weakness in the end market, making it a good investment.

 
Published on Sep 26, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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