Balance sheet position
For commodities (DBC), including iron ore, 2015 was nothing short of a nightmare. Iron ore stocks such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale SA (VALE), and Cliffs Natural Resources (CLF) fell to multiyear lows.
While 2016 is holding up better in terms of commodity prices, the financial concerns for these companies are far from over. Vale’s debt, in particular, rose as it embarked on a growth phase.
Vale ended 3Q16 with a net debt of $25.9 billion. It fell sequentially from $27.5 billion, mainly due to positive free cash flow (or FCF) generated during the quarter. The company had a cash position of $5.5 billion at the end of 3Q16.
The company expects to lower its net debt to $15.0 billion–$17.0 billion by 2017. It’s committed to achieving a stronger balance sheet through divestments as well as internal cash flows.
Vale’s balance sheet still remains one of the company’s major investor concerns.
One of the main reasons for Vale’s higher debt compared to its peers is its higher capex (capital expenditure) requirements. For its peers, the growth phase is more or less over. But Vale’s S11D is still ramping up. Now Vale is focusing on discipline in capital allocation with a reduction in capex. The company has revised its capex downward for 2016 and beyond. Its capex has been trending downward since 2011 when $16.3 billion was allocated.
The iShares MSCI Global Metals & Mining Producers ETF (PICK) provides diversified exposure to the metals and mining sector. Rio Tinto’s listings form 11.5% of PICK’s holdings. The SPDR S&P Metals and Mining ETF (XME) also invests in some of these stocks.
In the next part, we’ll see what the company is doing to generate positive free cash flow and whether it will be enough to see it through these volatile times.