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Should Investors Consider Vale after Recent Weakness?

PART:
1 2 3 4 5 6 7
Part 5
Should Investors Consider Vale after Recent Weakness? PART 5 OF 7

Is Vale on Track with Debt Reduction Plan?

Balance sheet position

While Vale (VALE) has done a commendable job increasing its production and at the same time reducing its unit costs, the high debt still remains one of the major investor concerns for the stock. As the company embarked on a growth phase, particularly its S11D project, its debt escalated. This is particularly worrying as the capital projects started at the peak of the commodity (XME) cycle are completing when commodity prices are under renewed pressure. While Vale is still in the capital deployment stage, most of the growth capital expenditure for its peers such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF) is over for now.

Is Vale on Track with Debt Reduction Plan?

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Balance sheet position

Vale ended 1Q17 with a net debt of $22.8 billion as compared to $25.1 billion at the end of 4Q16. It also had a cash balance of $6.8 billion at the end of March 2017.

During its 1Q17 earnings call, the company maintained that it is on track to achieve its net debt target of $15 billion–$17 billion by the end of 2017. Vale’s CEO also stated that the company’s cash will be utilized towards liability management, which will reduce gross debt in 2017.

Asset sales

Vale has announced asset sales worth more than $3.8 billion in 2016. The company is trying to achieve a stronger balance sheet through divestments as well as internal cash flows. While earlier, Vale was looking to divest core as well as non-core assets for sale, that has changed now. During the 4Q16 earnings call, the company mentioned that it now aims to divest only its fertilizer and coal assets.

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