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Can Vale Lower Its Net Debt Significantly in 2018?

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Balance sheet position

Vale (VALE) has considerably reduced its net debt in 2017. At the end of 2017, its net debt totaled $18.1 billion, a decline of ~28% year-over-year (or YoY). The company was guiding for a net debt of $15.0 billion–$17.0 billion by the end of 2017. Vale recorded net proceeds of $3.7 billion from the sale of its fertilizer assets, which were received in January 2018. Plus, the company should receive the Nacala Corridor project finance by March 2018. After considering these two transactions, we find that the company’s pro forma net debt is $14.4 billion.

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Debt escalation

Vale’s debt started escalating as it embarked on its growth phase, particularly with the S11D project. The start of the project almost coincided with the peak in the commodity price cycle (XME).

Vale’s other peers didn’t face the same situation because the heavy capital deployment stage for peers Rio Tinto (RIO), BHP (BHP) (BBL), and Cleveland-Cliffs (CLF) is over—for now. Now, the company’s growth capex is almost done. During Vale Day on December 6, 2017, the company said its growth capex is modest.

Further debt reduction

The company remains committed to reducing its net debt to $10.0 billion “in the shortest possible period.” The company plans to use the significant cash generation to repay a major part of this debt. Vale’s CEO, Fabio Schvartsman, has stated many times that the company can’t hold too much debt. During the Vale Day call in December 2017, he mentioned that the company could end 2018 with much lower debt. After that, the company intends to focus on other uses for the cash generated from its operations.

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