Vale: Is Time Running Out?

Vale (VALE) has continued to improve its fundamentals, which allowed it to partially offset this decline in the commodity market. For instance, during the quarter the company reduced its costs and expenses to US$ 5.671 billion, a drop of 4.2% as compared to total costs and expenses of US$ 5.925 billion in the second-quarter of 2015. In fact, the company has lowered these costs and expenses by more than 24% year-on-year. This is a significant effort that should allow the company to remain competitive even in this price environment.

Making good progress

More importantly, Vale has made significant progress on the unit cash costs and expenses for iron ore fines.
Its unit cash costs for iron ore fines decreased 18% to US$32 per ton in the third-quarter of 2015 as compared to US$39.1 per ton in the second-quarter of 2015. Also, its unit freight costs for the quarter came in at US$16.4 per metric ton against US$16.8 per metric ton of iron ore in the second-quarter of 2015.

The combined savings from reducing its costs and expenses came in at US$1.2 billion this year. This is a big amount that should certainly improve its bottom line performance this year. Also, it should help the company remain competitive during this soft commodity price environment, while generating significant value for its investors in the long-run.

Divestment of non-core assets is enabling the company to reduce its net debt

Vale continues to increase cash from divestment of its non-core assets, which is allowing the company to reduce its net debt significantly. For instance, its cash proceeds from divestments during the quarter totaled approximately US$1.537 billion as Vale sold approximately 36.4% of MBR preferred shares that contributed nearly $1.08 billion. Also, Vale has raised nearly US$448 million as it sold four of its large ore carriers to China Merchant Energy shipping company.

These divestments helped Vale to reduce its net debt by 9% to $24.13 billion at the end of the third-quarter 2015 from $26.5 billion in the second-quarter of 2015. This reduction in net debt has certainly strengthened the balance sheet of Vale. Further, Vale has around 80% of its debt settlement occurring after 2018 and only a minimal debt to pay in the next two years. This will help the company survive this weak commodity period efficiently.

Conclusion

The iron ore market is expected to remain sluggish in 2016 due to the slowdown in Chinese economy as well as growing exports related problems in the home country. These are negatively impacting iron ore demand and prices. As per a report by Bloomberg, the prices of iron ore will decline nearly 19% in 2016. Vale expects the iron ore prices to average $41.30 a metric ton in 2016 as compared to $51.40 a metric ton in 2015.

The significant progress by Vale on the operational side is laudable and may help the company survive this downturn. The company has reduced its costs and lowered its net debt significantly that makes its attractive at this dip. But the timing of a trend reversal will not be soon since it’s all tied to iron ore prices which are south bound at this moment.
Published on Feb 2, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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