What Could Provide an Upside to Vale SA’s Free Cash Flow?

Free cash flow generation

Vale SA (VALE) generated free cash flow (or FCF) of $1.6 billion in 3Q16. In August 2016, the company sold an additional 25.0% of its gold stream as a by-product of Salobo’s copper concentrate. The gold stream transaction generated cash inflow of $800.0 million in 3Q16.

What Could Provide an Upside to Vale SA’s Free Cash Flow?

FCF scenarios

Vale expects its FCF to be positive in the coming years, even in adverse price scenarios. The company has previously discussed the following two scenarios:

  • iron ore prices at $45 per ton: Accumulated FCF will be $5.9 billion–$6.1 billion for 2017–2020. At this level, the company will go for marginal distribution of dividends and debt reduction.
  • iron ore prices at $60 per ton: Accumulated FCF will be $27.5 billion–$28.0 billion for 2017–2020. At this level, the company will go for high distribution of dividends and accelerated debt reduction.

Divestments

In the most likely scenario, Vale’s FCF in 2016 should remain negative. To fill the FCF gap, the company is looking to divest its core as well as non-core assets. Below are some of the assets the company could sell:

  • iron ore revenue stream: Vale currently has a revenue stream on its Carajás mining facility. Some reports suggest that Vale could sell the future iron ore production for as much as $10.0 billion. In August 2016, the company sold an additional gold stream in copper concentrate from its Salobo mine to Silver Wheaton (SLW) for an initial payment of $800.0 million.
  • fertilizers: Vale is looking for a strategic partner in its fertilizer business. It could also completely divest its fertilizer business. According to a Bloomberg article from August 2016, Mosaic (MOS) is in late-stage discussions with Vale for the purchase of a stake in its fertilizer business. Morgan Stanley estimates the value of the business at $2.7 billion–$3.4 billion.
  • Nacala: The closing of the Nacala project finance deal might take place in early 2017 rather than 4Q16.
  • vessels: Vale has sold many of its vessels in the past. It still has four Valemax vessels and four Capesize vessels.

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.

We’ve looked at Vale’s fundamentals. Now let’s try to find out what analysts are thinking about the stock.