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Are Vale’s Plans to Protect Its Balance Sheet Too Aggressive?

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Balance sheet position

Vale (VALE) ended 4Q15 with $3.6 billion in cash as compared to $4.5 billion at the end of 3Q15. Its total debt also increased from $28.9 billion to $29.5 billion. During January 2016, it also drew down $3 billion from its $5 billion revolving credit facility to maintain liquidity. The company also amended its financial covenants from 4.5x to 5.5x until the end of 2016. Vale had a gross debt to adjusted EBITDA ratio of 4.1x at the end of 2015. The company is trying hard to maintain liquidity and solvency in this market environment.

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Debt repayments coming due

Vale has significant debt maturing in the next few years:

  • $2 billion in 2016
  • $3.1 billion in 2017
  • $3.6 billion in 2018
  • $2.8 billion in 2019
  • $3.6 billion in 2020

With these debt maturities looming, Vale is aggressively focusing on selling assets. The asset sales that management is now targeting will be over and above the $4 billion to $5.5 billion it highlighted in December 2015. During the call, the company’s CEO said that it is “exploring more aggressive options to reduce our debt, including the sale of core assets.”

Core asset sales

Earlier, the miner was more focused on selling non-core assets such as ships and fertilizers. Now, the core assets for sale could include any asset from iron ore, nickel, copper, coal, or fertilizers. The company, however, maintained that it is not considering equity offering as an option right now. Management expects to cut net debt to $15 billion in 18 months from $25.9 billion at the end of December 2015. Investors’ main concern at this point in time would be the valuation at which the company sells the assets. At this low point in the cycle, selling off assets at low prices would certainly be a negative.

Vale, however, is not unique in taking drastic measures. Freeport-McMoRan (FCX) and Anglo American (AAUKY) also decided to sell their assets to reduce their debts. On the other hand, BHP Billiton (BHP) (BBL) and Rio Tinto (RIO) have reduced their dividends (DVY) in a bid to conserve cash.

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