Why Vale’s Financial Condition Is Deteriorating



Vale’s financial condition

Vale S.A.’s (VALE) financial condition is deteriorating. Its gross debt was $29.8 billion at the end of 2Q15, increasing by $1.29 billion from its debt position on March 31, 2015. The company’s cash position was $3.3 billion and net debt was $26.5 billion as of June 30, 2015.

The increase in debt is despite selling off assets worth $450 million during the quarter. Vale’s average debt maturity remained almost stable at 8.4 years.

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Vale’s debt indicators deteriorated

Most of Vale’s debt indicators worsened during the quarter. Its gross leverage, or gross-debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), increased to 3.3x as of June 30, 2015, from 2.6x at the end of 1Q15 and 1.5x at the end of 2Q14.

Interest coverage, measured by the last 12 months (or LTM) adjusted EBITDA-to-LTM-interest-payment ratio, fell to 5.9x, from 6.9x at the end of 1Q15 and 13.4x at the end of 2Q14.

Capex needs still high

In 2Q15, Vale had capex (capital expenditures) of $2.1 billion. 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 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. For 2015, management sees $8–$8.5 billion as the capex requirements, which will trend down to $6.5–$7 billion for 2016.

Together, BHP, RIO, and VALE account for 32.1% 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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