A Closer Look at Vale’s Debt Reduction Strategy

December 21st, 2017 by Trefis Team
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Vale (NYSE:VALE) was hard hit by a slump in commodity prices in 2015 which led the company to prioritize on reducing its huge level of debt. Vale’s effort to ramp up its production in anticipation of huge demand for iron ore from China had resulted in the company accumulating large quantities of debt. However, the global supply glut in the commodities market led to a fall in iron ore prices and thus had a major impact on Vale’s balance sheet.

The company through its debt reduction approach has been able to significantly reduce its level of debt since 2015 as depicted by the graph below. We expect the company’s Debt/EBITDA to fall to .89 by 2021.

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You can view our base case for Vale here and create different scenarios using our interactive platform.

Company’s Planned Sell-Off Of Its Non-Core Operations

Vale, in its effort to reduce its level of debt, has been selling off its non-core operations and has used the cash generated from such sales to retire its debt. The company had sold part of its fertilizer business for $2.5 billion last year [1] which represented the company’s increasing focus on its core mining operations.

Additionally, the company recently announced its intention to sell a net of $1.5 billion of its non-core assets by 2020. This would involve divestment of its holdings in Brazilian bauxite producer Mineração Rio do Norte, Australian coal project Eagle Downs, and steel firm California Steel Industries Inc. ((Vale cuts nickel output but is positive on long-term demand, Reuters))

Higher Iron Ore Prices Have Improved the Company’s Cash Flow Position

Vale’s ability to charge a premium for its iron ore, due to its competitive advantage of it being of higher quality, has enabled the company to maintain its large cash flow position. Morgan Stanley expects Vale to improve its cash flow to $31 billion in 2018-2021. [2] The company plans to retire a large proportion of its debt by using this cash flow. Vale plans to reduce its debt to $10 billion by 2019. [3] and use the excess balance to pay back its shareholders.

An improving balance sheet position for Vale has led major rating companies such as Moody’s and Fitch to upgrade Vale’s credit position to stable. [4] This would enable the company to operate with greater flexibility in the upcoming years.

We have $10 price estimate for Vale, which is currently below the market.

Have more questions about Vale? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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. Vale announces the sale of fertilizers assets and the acquisition of a minority interest in Mosaic, Vale News Release [↩]
  2. Goodbye Debt, Hello Dividend: Can Vale Top Rio?, Barrons [↩]
  3. UPDATE 1-Brazil’s Vale says to slash debt to $10 bln by 2019, Reuters [↩]
  4. Moody’s upgrades Vale’s ratings to Ba1; stable outlook, Moody’s [↩]