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How Vale Plans to Increase Free Cash Flow

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Vale’s operating cash flow

Vale SA’s (VALE) operating cash flow was weak at $1.2 billion with negative free cash flow (or FCF) of $2.2 billion after capital expenditure of $3.4 billion. Vale’s goal is to achieve outstanding free cash flow and dividend yield by 2017–2018 by employing several measures. In 2014, Vale achieved certain important milestones in order to reach its goal.

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Vale’s 2014 milestones

  • Vale obtained the operating license to expand the N4WS mine pit located in Carajás, which will support its iron ore production plan for 2015 and 2016.
  • Vale completed eight projects on time and on budget, namely Tubarao VIII, Serra Leste, the distribution center in Malaysia, Vargem Grande, the 5th line of Brucutu, Salobo II, Nacala, and Long Harbor.
  • Vale completed the investment agreement with Mitsui whereby Mitsui will own 15% of Vale’s stake in Vale Mozambique and 50% of Vale’s stake in Nacala. This will have an impact of ~$3.7 billion in terms of capex (capital expenditure) avoidance and cash inflow.
  • Vale renegotiated an extension of PT Vale Indonesia (or PTVI) contract of work (or CoW) and mining concession until 2045.

For 2015, the company has optimized and revised down its capex plan and is intensifying its corporate simplification and cost-cutting efforts. This, along with accelerating divestment and initiatives, is expected to unlock value and generate strong free cash flow generation by 2017 onward.

Vale’s peers, including BHP Billiton (BHP), Rio Tinto (RIO), and Cliffs Natural Resources (CLF), are also focusing on cost-cutting and productivity measures to increase its cash flow profile. BHP, RIO, and VALE make up 31.6% of the iShares MSCI Global Metals & Mining Producers ETF (PICK). The SPDR S&P Metals and Mining ETF (XME) provides diversified exposure to the metals and mining space.

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