OPERATOR SERIES: Vale's asset sales and debt

Wednesday, November 30, 2016

In an unexpected turnaround, Brazil's mining behemoth Vale said that core iron ore asset divestments are no longer a priority.

But the company added that the Mozambique coal deal is expected to be finalized by end-1Q17, while Vale's fertilizer asset sales remain in the pipeline.

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"Vale's US$13bn in non-core asset sales since 2011 have allowed the company to put a larger focus on maintaining its world class core assets," CEO Murilo Ferreira (pictured) said Tuesday during the company's annual Vale Day meeting with investors in New York.

Ferreira reiterated that Vale's target for 2017 is to reduce its net debt from US$25.6bn at end-Q3.

"Net debt of US$15-17bn can be achieved by free cash flow generation, with divestments being a strategic option," he said.

In a report presented during the meeting, the miner confirmed it plans to reach a sound financial position through cash generation and divestments to reduce debt. 

On Wednesday, UBS said in a note to clients that Vale's management remains focused on non-core asset sales to achieve the debt target, but the timing of the much-discussed coal and fertilizer asset sales remains unclear. 

"It is important that asset sales remain a key focus for management, in our view, given our relatively bearish iron ore price assumptions," the Swiss bank said. 

UBS sees no material change to management's overall strategy, with Vale's focus on reducing costs and keeping capex intact.


UBS estimates iron ore prices will be in the US$50-52/t range over the next 24 months, versus US$77/t on Tuesday.

On Wednesday, iron ore prices saw their biggest decline since March, extending a retreat from a two-year high, as China's exchanges lowered the daily trading limit and raised margin requirements in a bid to clamp down on speculation.

The benchmark iron ore 62%-Fe delivered to China's port of Qingdao fell 6.8% to US$72.1/t after hitting US$80.8/t on Monday, the highest since October 2014 and culminating a 65% year-to-date surge.

Vale's management has planned in advance to deal with various iron ore price scenarios in the coming years, from US$45/t to US$60/t. If prices remain above the US$60/t mark in 2017-19, Vale will need zero divestment to reach its net debt target, the company said in the report.

SOURCE: Vale's November 29 2016 presentation

When iron ore prices recently fell to US$40/t, none of Vale's iron ore mines was loss-making, it said, adding that iron ore will be a strong cash generator irrespective of market prices, with the company's Ebitda potentially reaching US$18bn in 2020.


Vale expects capital expenditures to decline from US$5.6bn this year to US$4-4.5bn in 2017-19, followed by US$3bn/y in 2020-21.

"Management guides US$2.2bn of positive free cash flows in 2017 based on consensus estimates, not including material asset sales, and possibly US$3-5bn in 2018-20 at US$50/t iron ore," UBS said.

The company has been constantly reducing its capex from the US$18bn peak in 2011.