How Much Is Vale’s Recent Deleveraging Expected To Contribute To Its 2018 EPS?

by Trefis Team
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Vale S.A. (NYSE: VALE), which is expected to report its FY 2018 earnings in February 2019, is all set to achieve its target of reducing net debt to $10 billion by the end of 2018. Before the company announces its results for the year, it would be interesting for the investors to know how much have they gained out of this deleveraging program announced in 2017. The company reported debt of $16.8 billion as on September 30, 2018, a 25% reduction from $22.5 billion reported as on December 31, 2017. Assuming the same level of debt at the end of 2018, we project interest expense to be reduced by $762.4 million, which would be a direct addition to the company’s net income and increase its EPS by $0.15 for the year 2018.

You can view our interactive dashboard – Impact of Vale’s Recent Debt Reduction On Its EPS In FY2018 – and make changes to our assumptions to arrive at your own estimates of debt, interest and EPS for the company.

Higher prices of iron ore and copper, along with lower capital spending, led to higher cash flow for Vale in 2017 and 2018. Toward the end of 2017, Vale’s management decided that the increased cash flows would be used to reduce debt, which had reached alarming levels in 2016, and to reward shareholders in the form of higher dividend distributions. Vale has consistently been able to reduce debt every quarter in the last one year. Net Debt saw a reduction of almost 50% in a year, from $21.1 billion in 3Q 2017 to $10.7 billion at the end of 3Q 2018.

(Source: Vale’s Q3 2018 Earnings Presentation)


Gross debt as of September 2018 stood at $16.8 billion, much lower than $22.5 billion at the end of 2017. Interest expense of $3,019 million in 2017 was 13.4% of the total debt for the year. Even if we assume $16.8 billion to be the total debt at the end of 2018 (similar to Sept. 2018), at the same interest expense ratio (13.4%), FY 2018 is likely to see interest expense drop by 25%. Reduction of $762.4 million in interest would be a corresponding increase in the year’s net income. Outstanding shares at 5,126 million would translate this additional net income of $762.4 million into an incremental earnings per share of $0.15.

Conclusion: Our analysis shows that the success of this deleveraging program would provide Vale’s shareholders with better returns in the form of incremental EPS of $0.15. On the completion of the program, Vale has indicated that it will now focus on other methods of rewarding its investors, probably through a higher dividend, which is likely to help support the company’s stock price.


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