Vale’s financial condition
Net debt is total debt less cash and cash equivalents. Vale SA’s (VALE) net debt at the end of September 2014 was $21.03 billion. The company reduced its net debt by $2.16 billion since June 30, 2014. This was supported by the sale of a 26.5% stake in VLI to Brookfield.
Vale’s strategy is to maintain long debt maturity to minimize refinancing risks. Its average debt maturity was 9.1 years at September 30, 2014. And, 78% of its debt settlement will occur after 2018.
Interest coverage, measured by EBITDA (earnings before interest, tax, depreciation, and amortization) divided by interest payments, was 11.1x as of September 30, 2014.
The above chart shows that Vale SA is in a comfortable position as far as its EBITDA position is concerned for now. But, any increase could spell trouble in this weak commodity price environment.
The debt-to-EBITDA ratio is a common metric that’s used by credit rating agencies to assess the probability of default on issued debt. A higher number suggests that a firm may not be able to service its debt.
Vale SA peers BHP Billiton Ltd. (BHP) and Rio Tinto plc (RIO) are also in a comfortable position in terms of debt-to-EBITDA. However, smaller and less diversified players Cliffs Natural Resources (CLF) and Fortescue Metals Group (FSUGY) might be in trouble if iron ore prices remain low for long.
Investors can also consider investing in exchange-traded funds, or ETFs, that invest in the metals and mining sector such as the SPDR S&P Metals & Mining ETF (XME).
Moody’s changed the rating outlook for Vale SA to positive from stable in April 2014. It also affirmed the company’s Baa2 rating. The change was because of Vale’s more focused and disciplined approach to project development, capital allocation, and portfolio optimization. Fitch has a BBB+ rating on Vale with a stable outlook.