Vale Joins Freeport in Opening Up Crown Jewels for Debt Fighting

  • CEO says company is now considering the sale of core assets
  • On a net basis, losses widened to $8.57b from $1.85b

The biggest iron miner just got serious about taming debt.

Vale SA Chief Executive Officer Murilo Ferreira said Thursday that he’s now game for more dramatic action in a bid to cut $10 billion of debt, including the possible sale of some of the company’s crown jewels. Until now, Vale’s streamlining efforts centered on cost cutting, moving to higher-quality deposits and selling less-important assets.

Vale is joining other large miners such as Freeport-McMoRan Inc. and Glencore Plc in stepping up debt-fighting efforts as deteriorating metrics push up credit costs and further erode earnings. For Vale, the awakening was a whopping $8.57 billion quarterly loss, capping its first annual loss since a 1997 privatization.

“We view this as a potentially positive milestone towards the company’s balance sheet and equity story de-risking, although timing and valuation are key components of the equation,” Bank of America Merrill Lynch analysts including Thiago Lofiego wrote in a note to clients.

Minority Stakes

Vale may look to sell a stake of about 20 percent to 30 percent in its Carajas iron-ore operations that may be worth as much as $50 billion, the BofAML analysts wrote. There’s also potential for divesting a majority stake in its fertilizer assets, they wrote.

The Rio de Janeiro-based company doesn’t rule out selling stakes in large mines, although it wouldn’t relinquish control, Chief Financial Officer Luciano Siani Pires told reporters Thursday.

Vale’s debt-fighting efforts have been thwarted by its $14 billion S11D project that’s scheduled to begin in the second half of this year. As it completes those investments, the company reached agreements with creditors to increase the upper limit of the gross debt to adjusted Ebitda covenant from 4.5 to 5.5, it said in an earnings statement Thursday.

Vale’s shares fell 5.2 percent in Sao Paulo Thursday, extending a decline this year to 20 percent. Last year, it tumbled 47 percent.

Quarterly net losses swelled to a record $8.57 billion on impairments from lower nickel, coal and iron ore prices and a dam rupture at a joint venture. Vale reported net debt of $25.2 billion, up from $24.7 billion at the end of 2014.

Fourth-quarter adjusted earnings before interest, taxes, depreciation and amortization fell 36 percent from a year earlier to $1.39 billion, the company said Thursday, compared with the $1.37 billion average of 12 dollar-based estimates compiled by Bloomberg.

The benchmark iron ore price have been trading below $60 a metric ton since mid last year and is down more than 70 percent from a 2011 peak after the three dominant iron-ore players -- Vale, BHP Billiton Ltd. and Rio Tinto Group -- opted to plow on with expansions and displace higher costs producers.

Bleak Outlook

Iron ore fell 3.7 percent to $49.75 on Thursday, after rallying from a low of $38.30 in December. The Brazilian miner’s average sales price was $37.2 a wet metric ton, down from $46.5 in the third quarter.

The iron-ore outlook in the coming years is grim as Chinese steel demand continues to weaken, according to David Wang, a Chicago-based analyst with Morningstar Investment Services Inc. Morgan Stanley projects a global glut will endure to at least 2020.

Still, Vale is poised to weather low prices better than most as it prepares to start S11D.

“What we really see across the mining space is cost cutting by everybody,” Wang said. “Vale’s in somewhat of a special situation because its new project should be lower in average cost than its existing capacity, which would help bring costs down more than average.”

Vale reduced its cash cost to $11.9 a ton in the quarter, “the lowest mark in the iron ore industry,” helped by currency depreciation, it said.

Before it's here, it's on the Bloomberg Terminal.