How Much Is Vale’s Deleveraging Program Expected To Add To Its EPS?

by Trefis Team
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Vale (NYSE: VALE) is expected to see a $2.5 billion reduction in its total debt over two years – 2019 and 2020. This would be in addition to the whopping decrease of $13.9 billion achieved over the previous two reported years – 2017 and 2018. Thus, the cumulative debt reduction between 2016 and 2020 is projected to be $16.3 billion. At this stage it would be interesting for the investors to know how much are they gaining out of the company’s focus on reducing debt.

Overview

  • To finance Vale’s hefty outlays for the ramp up of the S11D mine and accumulated losses of nearly $1.3 billion at the New Caledonia project, the company’s gross debt shot up to $29.3 billion in 2016.
  • However, the management has redirected its efforts to reducing the outstanding debt to boost margins, enhance shareholder returns, and have a sustainable balance sheet.
  • Trefis estimates that the projected decrease in debt could lead to additional net income of $275 million and an incremental EPS of $0.05, over the next 2 years, bringing the cumulative incremental EPS due to deleveraging to $0.16 per share between 2016 and 2020.

View the Trefis interactive dashboard – Impact Of Vale’s Debt Reduction Initiatives On Its EPS – for further details. You can also alter the key assumptions to arrive at your own estimates for the company’s debt, interest expense, and EPS.

Improving Cash Flow

  • Vale’s cash flow from operations has increased from $6.4 billion in 2016 to $12.9 billion in 2018, driven by a corresponding rise in revenue base and improving margins. It was $9.2 billion in the first nine months of 2019.
  • Operating cash flow is expected to improve further in the near term, as the company benefits from elevated iron ore prices and lower cost.
  • The company’s efforts at reducing cost have also been successful with it refinancing a portion of its high-interest debt instruments, at a lower interest rate.

Interest Savings

  • In the face of mounting debt in 2016, Vale unveiled its deleveraging program in 2017, under which it aimed to reduce net debt to below $10 billion by 2019, and increasing dividends with the help of money saved from lower interest.
  • Accordingly, Vale has successfully almost halved its debt from $29.3 billion in 2016 to $15.5 billion at the end of 2018, with the figure being $14.8 billion at the end of Q3 2019.
  • We expect debt to come further down to $14.2 billion at the end of 2019 and to $13 billion by 2020.
  • Vale’s interest expense saw a reduction of $583 million in 2 years between 2016 and 2018, whereas it is expected to further register a cumulative reduction of $275 million over 2019 and 2020. This reduction is, in turn, a direct addition to Vale’s Net Income.

Incremental EPS

  • An increase of $583 million in net income translated into incremental EPS of $0.11 between 2016 and 2018, whereas additional net income of $275 million is likely to contribute $0.05 in incremental EPS over 2019 and 2020.
  • Cumulative EPS addition since the launch of the deleveraging program amounts to $0.16 per share between 2016-2020.

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 $0.05 over 2019 and 2020, translating into cumulative incremental EPS of $0.16 between 2016 and 2020.
  • On the completion of the program, Vale has indicated that it will focus on other methods of rewarding its investors, probably through a higher dividend, which has been curtailed to ensure more resources are available for debt repayment.
  • A better balance sheet position, lower leverage, and enhanced shareholder returns are likely to help support the company’s stock price growth.

 

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