Balance sheet position
Vale (VALE) ended 1Q16 with $3.8 billion in cash compared to $3.6 billion at the end of 4Q15. Its net debt also increased from $25.2 billion to $27.7 billion. The increase was mainly driven by the impact of the exchange rate on translating Brazilian reals denominated in US dollars (UUP) (USDU). It was also driven by negative free cash flow (or FCF) earned by the company during the quarter.
Negative FCF was mainly due to a $1.3 billion increase in working capital in 1Q16 sequentially. Working capital changes should most likely reverse over the course of the year.
During the call, Vale management maintained that “in spite of the increasing prices, we remain fully-committed to the strengthening of our balance sheet through the reduction of our net debt.”
Debt repayments coming due
Vale has the following 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. Asset sales that management is now targeting will be over and above the $4 billion, to the $5.5 billion it highlighted in December 2015.
Earlier, Vale was more focused on selling non-core assets such as ships and fertilizers. Now, the core assets for sale could include anything from iron ore to nickel, copper, coal, and fertilizers. The company maintained its debt reduction target of $10 billion.
The company also dismissed press reports that it could be looking to buy assets in the fertilizer business. While Vale has delivered a solid set of numbers and has shown operational performance consistency, investors are still concerned about its high level of leverage in a volatile commodity price (COMT) environment.
Vale’s drastic measures are not unique. Freeport-McMoRan (FCX) and Anglo American (AAUKY) have also decided to sell their assets to reduce their debts. BHP Billiton (BHP) (BBL) and Rio Tinto (RIO) have reduced their dividends (DVY) in a bid to conserve cash.
In the final part of our series, we’ll see what Wall Street is saying about Vale after its 1Q16 results.