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Vale Still Has More Capex Needs Than Peers

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Apr. 7 2015, Updated 2:04 p.m. ET

Vale’s capex

In 2014, Vale S.A.’s (VALE) capex (capital expenditure) was $11.98 billion. It included $7.92 billion in project execution and $4.06 billion in sustaining capex. In comparison, capex in 2013 was $14.23 billion. Capex for 2014 was lower by 15.8% year-over-year.

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Project completion

Vale’s project execution capex decreased from $9.65 billion in 2013 to $7.92 billion in 2014, mainly due to the completion of several projects. Vale’s capex fell due to the savings accrued due to scope optimization, efficient project execution, and favorable exchange rates.

The company’s sustaining capex also declined by 11% in 2014 mainly because of its focus on maintaining discipline in capital allocation.

Capital investment

Out of Vale’s investments of $7.92 billion in 2014, ferrous minerals accounted for 61.1%, and base metals and coal accounted for 33.4%. In iron ore, major investment went toward Carajás and related infrastructure expansion. In coal, Vale’s major investment was in the Moatize II project and its associated logistics infrastructure, the Nacala corridor.

Capex in early stage of cycle

Although Vale’s capex fell in 2014 compared to 2013, it’s still in the early stages of the capex cycle when compared to 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. That includes the infrastructure development, which is required to reap the benefits of economics of scale.

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.

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