Vale Turning to Deals as Expansion Spending Thwarts Debt Fight

  • Brazilian miner expects to announce a transaction next week
  • CEO Ferreira is chasing $10 billion in core assets sales

Vale SA is escalating its war on debt after making only modest inroads into its whopping $27 billion-plus burden last quarter.

The biggest iron ore exporter -- and the most indebted miner in the world after Glencore Plc -- reduced net debt by less than 1 percent in the second quarter even after generating cash for the first time in two years. Completing the industry’s biggest new mine, slightly lower prices from a year ago and a lack of major asset sales have inhibited Vale’s ability to deleverage.

Now, spending on the $14 billion S11D project is coming to an end, iron-ore prices are back above $60 a metric ton and Chief Executive Murilo Ferreira said Thursday that the company has “one transaction to announce next week” and another two by year-end as it looks to bring down debt to $15 billion. 

“With more competitiveness, with the conclusion of the investment program, and with the management of the balance sheet, Vale believes it continues to be more and more well positioned,” Chief Financial Officer Luciano Siani said in a webcast presentation.

Strategy Shift

In February, Rio de Janeiro-based Vale signaled a major shift when it announced it was considering selling what it describes as “core assets,” such as a stake in S11D. The company previously said it would reduce debt via streamlining or the sale of non-core assets such as iron-ore carriers and a stake in a bauxite operation in northern Brazil. The three major ratings companies have had negative outlooks on Vale since the first quarter.

Ferreira is chasing as much as $5 billion in non-core assets by the end of this year and another $10 through next year in core assets.

Vale is holding discussions with Asian mining companies about a potential sale of a minority stake in its Brazilian iron-ore assets that could fetch as much as $7 billion, people familiar with the matter said last month. It also held early talks with bankers about selling all or part of its fertilizer business and partial stakes in its Brazilian copper operations, as well as putting more precious-metal streams on its mines, other people familiar with the matter said.

Price Relief

Commodity producers that have been pummeled by the biggest downturn in prices in a generation are getting some relief as concern over slowing Chinese demand eases. While iron ore prices in the second quarter were lower than a year ago on average, they’re up 39 percent this year, including a 3.5 percent gain Thursday.

Goldman Sachs Group Inc. this week increased its three-month price forecast to $50 a metric ton, citing low steel stockpiles in top producer China, and Sanford C. Bernstein analysts predict Chinese stimulus to buoy prices for another 12 months. Vale said Chinese steel production rose more than 9 percent from the previous quarter.

Still, Goldman analysts maintained a $35 long-term target amid a threat of new supply. That’s more than 40 percent below today’s price.

“Their big issue still is the leverage,” Andrew Keen, an analyst at Haitong Securities, said by telephone Thursday. “They’ve sold a few ships, but they still have the problem that they are sitting on a significant amount of net debt. The slight uptick in the iron ore market doesn’t seem to be translating to debt reductions.”

Disaster Spending

Another headwind in Vale’s debt fight is coming from the Samarco joint venture, where a dam collapse in November killed as many as 19 people and halted operations. Vale booked a more than $1 billion provision for potential losses from the disaster and intends to offer as much as $100 million in credit to the venture as hopes fade of a swift resumption of operations.

Vale’s second-quarter net income fell to $1.1 billion from $1.68 billion a year ago. Adjusted earnings before interest, taxes, depreciation and amortization of $2.38 billion exceeded the $2.24 billion average of 12 dollar-based estimates compiled by Bloomberg.

Sales of $6.63 billion beat the $6.59 billion average dollar estimate. Vale’s average sales price in the quarter was $48.30 a wet metric ton compared with $50.44 a year earlier. 

Vale, which draws most of its revenue from iron ore but is also one of the world’s biggest nickel producers, has outperformed rivals BHP and Rio Tinto Group in the stock market this year. Vale shares, which fell 0.9 percent at 11:55 a.m. in Sao Paulo Thursday, are up 46 percent this year, while BHP and Rio Tinto have gained 12 percent and 24 percent, respectively.

Vale’s strategy of reducing costs to be more competitive with its Australian rivals will take hold when S11D comes online. The volume of ore produced in the company’s northern system, where Carajas is located, has been steadily making up a greater percentage of the miner’s overall production in recent years. Siani said S11D was more than 90 percent complete and on track to start in the second half of 2016.

Lowering Projection

In its second-quarter production report, Vale hinted at a strategy shift by saying it was lowering expectations for 2017, predicting it would produce less than the 380 million to 400 million tons previously outlined.

In the past three months, analysts increased their annual earnings estimates for Vale more than any other major mining company, according to data compiled by Bloomberg.
Vale churned out 86.8 million tons of iron ore in the second quarter, missing out on a record because of interruptions caused by Samarco.

The company said it expects to hit the lower end of its annual target of between 340 and 350 million tons. Nickel and copper production were both up slightly for the period.

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