What Could Support Vale’s Cash Flow?



Boosting cash flows

Vale (VALE) generated $15.5 billion of cash from operations and $8.6 billion of free cash flow (or FCF) in 2017. The company achieved its highest FCF since 2011. Its FCF in 4Q17 also increased considerably versus 3Q17, coming in at $2.74 billion, which helped with net debt reduction of $2.92 billion during the quarter.

The company is expecting its cash flows to significantly expand going forward. It has identified several levers to help future cash flows. Let’s take a look at those levers.

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Streamlined and optimized asset portfolio

As we’ve already highlighted in the previous article on base metals (DBB) in this series, the company is streamlining its portfolio to keep only those assets that can provide returns on investment. It’s ensuring that every asset in base metals is cash flow–positive, irrespective of prices. The company has an exit plan for its non-core assets, which includes sales after a turnaround for some and strategic opportunities for others.

In the past, Vale’s peers BHP (BHP), Rio Tinto (RIO), and Freeport McMoran (FCX) have gone for portfolio optimization and streamlining approaches in order to simplify their structures, reduce costs, and maximize profits.

Optimized capital expenditure

Vale’s capital expenditure (or capex) in 2017 declined 25% year-over-year (or YoY) to $3.8 billion due to the completion of its S11D project. 2017 was also the first year since 2005 when its investments in sustaining projects exceeded investments in growth projects. Vale has guided for flat capex of $3.8 billion for 2018. As the most capital-intensive phase for the company is over, its cash flows going forward should be freed for other uses.


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