Vale SA (VALE5), the worst performer of the world’s three top mining companies this year, is poised to undertake the largest spending cuts since 2009 as iron-ore markets signal prices are set to drop for almost three years.
The biggest iron-ore producer will probably announce next week a $15.3 billion business plan for 2013, according to nine analysts’ estimates compiled by Bloomberg. A similar survey in September put the program at $16.8 billion. The reduction from $21.4 billion in spending budgeted for 2012 would be the first since 2009, when Vale announced a 36 percent mid-year reduction in capital expenditure to about $9 billion.
Chief Executive Officer Murilo Ferreira is selling assets, looking for partners and writing off unprofitable projects after Vale shares slumped to the lowest in almost three years in September on slowing demand from China. The Rio de Janeiro-based company’s leaner budget will probably help bolster investor confidence that his plan will improve profit margins, Renaissance Capital’s Rene Kleyweg said.
“The CEO is starting to make the right decisions in terms of cost cuts and capital discipline,” Kleyweg, an equity analyst at Renaissance, said in a telephone interview from Johannesburg on Nov. 27. “Vale is a better company than it was two years ago.”
Vale lost 11.8 percent for investors in dollar terms including dividends this year through yesterday, compared with a 4.8 percent return for Melbourne-based BHP Billiton Ltd. (BHP), the biggest mining company, and 0.2 percent for London-based Rio Tinto Group. The shares gained 0.3 percent to 36.70 reais in Sao Paulo after falling 3.2 percent this year before today, more than the 1.1 slide for Rio and the 0.6 percent drop for BHP.
Vale trades at 6.5 times earnings estimates for the next year, compared with 13.6 at BHP and 8.6 at Rio.
December iron-ore swaps declined 1.5 percent to $111.96 a dry metric on Nov. 28, according to data from SGX AsiaClear, the largest clearer of the swaps. October 2015 contracts traded at $99 a ton, the data show.
Ferreira, who succeeded Roger Agnelli in May 2011 amid government criticism that Vale wasn’t investing enough, this year cut output of premium pellet products, suspended projects and sold assets for about $1.2 billion as demand wanes in China and Europe, the company’s two biggest markets. China’s economic growth probably will slow to 7.7 percent this year from 9.3 percent last year, according to the average of 56 economists’ estimates compiled by Bloomberg. The asset sales included a thermal-coal project in Colombia.
The company, which is analyzing bids for its oil and gas assets, hired Banco BTG Pactual SA and Bank of America Corp.’s Merrill Lynch to sell a stake in its logistics unit for about $1 billion, two people with direct knowledge of the plan said earlier this month.
Ferreira is also seeking to sell stakes in fertilizer and non-iron ore units including its $5.9 billion potash project in Argentina. Partners for core projects are also being considered, Chief Financial Officer Luciano Siani said on an Oct. 25 conference call.
“The decision has been made but we are still exploring the market to see what’s the possibility to realize value,” Siani said about the possible stake sales. “We have many possibilities but we will manage those very carefully.”
A Vale press official in Rio said the company won’t comment before its investment program is released.
The company’s share price still doesn’t reflect the efforts to cut costs and spending, JPMorgan Chase & Co equity analyst Rodolfo De Angele said.
“We believe the shares are not pricing in the implementation of changes and a more cautious approach towards growth marked by higher discipline and lower capex,” De Angele wrote in a Nov. 26 note to clients. “Looking ahead, we expect iron-ore prices to stabilize and capital allocation to continue to improve.”
Vale’s net income excluding some items will slump to $10.7 billion this year and $10.6 billion in 2013 from $22.9 billion in 2011, according to the average of six estimates compiled by Bloomberg in the past 28 days. That would be the lowest since the $5.35 billion reported in 2009.
While Vale has taken steps to reduce capital expenditures, it would still need to spend about $40 billion to finish its expansion projects between 2013 and 2017, implying investments of at least $13 billion a year, Alexander Hacking, a New York- based equity analyst at Citigroup Inc., said.
“Many investors are hoping Vale could reduce capex to $12 billion to balance its budget, but this appears unlikely looking at the current stage of key projects,” he wrote in a research note on Nov. 13. “The trend towards lower iron-ore prices in future years is a key risk.”
Iron-ore delivered to China’s Tianjin port, a benchmark for Asia, sank to a three-year low of $86.70 per metric ton on Sept. 5. after plummeting 55 percent from a record $191.9 in February 2011. The price has since rebounded 33 percent through today.
“We are getting some positive momentum in terms of operational issues and management recognizing the mistakes of the past,” he said. “This is a stock that is fundamentally attractive now.”