Vale Reports Weak 1Q15: Are Lower Iron Ore Prices to Blame? (Part 5 of 5)
(Continued from Part 4)
Balance sheet position is weak
Vale S.A.’s (VALE) gross debt decreased by $320 million to reach $28.49 billion as of March 31, 2015. This decline was aided by the divestment of $1 billion. Part of the proceeds were used to repay the losses on the derivative position taken by the company.
Vale’s cash balance decreased to $3.7 billion at the end of 1Q15 from $4.1 billion at the end of 4Q14. The average cost of debt decreased slightly to 4.46% per annum against 4.54% on December 31, 2014.
Most of Vale’s debt indicators worsened during the quarter. Interest coverage is measured by the ratio of the LTM (last 12 months) adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to the LTM interest payment. Vale’s interest coverage reduced to 6.9x against 8.6x on December 31, 2014. Its net debt-to-EBITDA increased to 2.3x from 1.9x in 4Q14, since EBITDA decreased while debt remained almost stable.
Capex needs still high
In 1Q15, Vale had capex (capital expenditures) of $2.2 billion on a cash basis. On an accrual basis, capex would amount to roughly $1.9 billion. According to Vale, this lower number indicates its capex trend for the following quarters.
The company is targeting a level of $3–$4 per ton of sustaining capex for iron ore. Vale is still in the early stages of the capex cycle when compared to its peers BHP Billiton (BHP), Rio Tinto (RIO), and Cliffs Natural Resources (CLF). Particularly for BHP and RIO, most of the capex on expansion projects is done. For Vale, the S11D project still requires a huge capex of ~$10 billion.
Together, BHP, RIO, and VALE account for 31.6% of the iShares MSCI Global Metals & Mining Producers ETF (PICK). The SPDR S&P Metals and Mining ETF (XME) also invests in metals and mining companies.
Generating cash through divestments
In 1Q15, Vale divested more than $1 billion. Of that amount, $900 million came from the sale of a 25% stake in gold stream to Silver Wheaton (SLW). Silver Wheaton (SLW) forms 4.6% of the Market Vectors Gold Miners ETF (GDX). About $100 million came from the sale of a minority stake in the Belo Monte hydroelectric power plant north of Brazil.
Vale management said the company is working on many more initiatives to generate cash. One near-term transaction is the sale of four ships to Cosco. The company also has a coal transaction with Mitsui that will generate about $1 billion.
Vale is also working on project finance, which could bring in another $2 billion. An initial public offering (or IPO) of base metals could be a solution for Vale to close the funding gap between its cash flows and capex requirements. However, Vale didn’t discuss this in its conference call.
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