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Why Vale’s Cost Saving Efforts Weren’t Enough to Avoid a Downgrade

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Vale’s cost saving efforts

Vale SA (VALE) released its 2015 results on February 25, 2016. It announced several cost-cutting and cost-saving measures to weather the prolonged downturn in commodities (COMT).

Earlier, the miner focused more 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 isn’t considering equity offerings 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.

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Cost reductions

In addition to its focus on selling assets, Vale is also focusing on cutting costs. Its C1 cash costs fell 6.3% quarter-over-quarter to $11.9 per ton in 4Q15. Interestingly, Vale’s bunker oil hedges will roll off from 1Q16, which should positively impact its landed costs if energy prices (USO) (UCO) continue to decline.

Vale expects the cost of delivered iron ore to China to reach $25 per ton from $32 per ton currently.

Vale, however, isn’t 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.

While Moody’s acknowledged Vale’s cost reductions, it still sees more downside. According to Moody’s, “Supply imbalances, particularly in iron ore, the major earnings and cash flow driver for Vale, will maintain pressure on prices for several years. While lower oil prices, lower freight costs, and currency depreciation contribute to reduced costs, the drop in prices has and will continue to significantly impact performance.”

In the next part of this series, we’ll see how robust Vale’s balance sheet is in the current environment.

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