Stay Away From Vale
Vale (VALE) recently reported mediocre financial numbers for its third quarter 2015 performance. Its gross operating revenues for the three months ended 30th Sep, 2015 were down 6.6% to $6.6 billion from $7 billion in the second quarter. The lower realized prices of the various commodities sold by the company remained the reason behind this erosion in operating revenue.
Vale will see more weakness in the future as 53.6% of its total gross revenue is derived from Asia, out of which China represents more than 70%.
Vale has tried to keep control over the costs and expenses this year. Costs and Expenses combined were down from $5.925 billion to $5.671 billion sequentially. The highlight within this head was a quarter-over-quarter $146 million reduction in COGS despite higher sales of iron ore fines, nickel and fertilizers.
Especially, the successful cost reduction efforts in the ferrous material segment have saved the company from reporting a very ugly overall result this time. After considering depreciation, the COGS were $4.2 billion. Before taking the effect of depreciation, the expenses of the company also decreased from $739 million to $631 million over the third quarter. After depreciation, it was $470 million.
A few positives
Due to higher sales volumes and lower costs, Vale’s adjusted EBITDA for the Ferrous Minerals business was only $159 million lower than that in the second quarter despite lower realized price in the third quarter. Also, an improvement in product quality from 63.2% to 63.5% was seen in the third quarter which has had a significant positive impact.
In the Base Metals business, the adjusted EBITDA was $ 193 million, down by $ 213 million compared to from that reported for the second quarter due to lower nickel prices as well as negative impact of copper price adjustments. EBITDA for the Coal segment decreased due to higher costs and lower prices.
To address the logistic bottlenecks in the coal segment in the Mozambique region, the company is continuing the work of eliminating such issues. In this regard, Moatize II has reached 96% physical progress while Nacala has reached Corridor has reached 94%. Therefore, at least the costs are not going to have as much upside in the current quarter.
The adjusted EBITDA from the Fertilizer business continued to improve as it reached $200 million in the last quarter. The higher sales volume and lower costs had their positive impact on the earnings from this segment. However, the sheer weight of the Ferrous Minerals in the company’s portfolio resulted in a 15 % lower adjusted EBITDA compared to that in the second quarter.
The balance sheet of Vale still carries a net debt of $24.2 billion after a decrease of $2.3 billion in the third quarter. The average debt maturity is 8 years or more. However, that debt has appreciated in Brazilian Real terms as the currency has lost strength by 30% over the same three-month period. The company has a cash balance of only $4.5 billion against this debt. Thus it is necessary for Vale to create sustainable sources of cash flow other than divestments like MBR and Valemax. At the moment its balance sheet can’t be called investor grade at all.
Outlook and conclusion
There are only few positives to look at for Vale. A record production of iron ore with improved quality was one of them. Further, the increased production has also led to a lower cost to produce the high quality ore which sells at premium. The weak Real has also helped to keep the costs down but the same has increased the cost of serving debt. Therefore, Vale has worked well with internal operating matters.
Now, Vale investors must be hoping for an improvement in commodity prices especially iron ore. However, iron ore is continuing the downtrend due to oversupply and hitting record production is only going to make things worse for companies like Vale. There is no indication of an increase in demand from China even as the government is trying to stimulate growth by rate cuts. Hence, although Vale is still in a relatively healthy state, it is not operating in a very kind environment, making it a bad investment.