How Would The Sale Of Vale’s Fertilizer Division Impact Its Indebtedness?

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Vale, a diversified mining giant and the world’s largest iron ore producer, might sell off its fertilizer division to Mosaic, a Minnesota-based fertilizer company. [1] Though Vale has not yet decided on the sale, if it does go through, the company is likely to use the proceeds of the transaction to reduce its outstanding debt. [2] The company’s credit rating has suffered as a result of the downturn in commodity prices over the past few years. [3] As a result, debt reduction is a priority for the company, particularly amid the prevailing weakness in the prices of the major metals mined by the company. According to Reuters, a combination of the sale of the company’s fertilizer and phosphate assets to Mosaic and the sale of the remaining 25% of the Fertilizer division in a separate deal could generate proceeds totaling $4 billion. [1] If the company deploys the proceeds of these transactions solely towards debt reduction, it could improve Vale’s Net Debt/EBITDA by around 11%, as illustrated below.

Vale Debt Reduction

Note 1: Net Debt for 2016 refers to the figure at the end of Q2 2016, and consists of $44.44 billion worth of long term and short term debt, the underfunded portion of Vale’s pension obligations, dues under an income taxes settlement program, environmental obligations, and minority interest offset by cash totaling $4.31 billion. The calculation assumes that the transactions are completed towards the end of 2016 and no other changes are made to the company’s net debt position (that is, it meets its business expenditure from its operating cash flows).

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Note 2: EBITDA for 2017 assumes the sale of the Fertilizer division at the end of 2016, and thus excludes the Fertilizer division’s EBITDA.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Vale
Notes:
  1. Brazil’s Vale shares jump on talk of fertilizer unit sale, Reuters [] []
  2. Brazil’s Vale has not decided on sale of fertilizer unit – filing, Reuters []
  3. Moody’s downgrades Vale to Ba3; negative outlook, Moody’s Investor Services []