Vale: Playing With Fire
Jun. 28, 2015 3:35 AM ET | 7 comments | About: Vale S.A. (VALE)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
Vale could sell up to 30% of its base metals business in an IPO.
The company also could make a $1.5 billion asset sale in Brazil.
Vale is placing a huge bet on S11D, and this strategy is very risky.
When I last wrote about Vale (NYSE: VALE), I stated that the company became hostage of its expansion plans. Vale needs funds to finance its crucial S11D project at times when iron ore prices are under serious pressure. Copper and nickel prices have also declined recently. The optimism in Vale's shares at the beginning of May proved to be short-lived, and the shares of the Brazilian giant declined despite the fact that iron ore prices were steady.
The recent news confirmed Vale's absolute concentration on S11D. In May, Vale signed a $3 billion credit facility, bringing the total amount of available credit to $5 billion. Recently, Vale stated that it expected to raise $1.5 billion from the asset sale in Brazil. Also, Vale is looking to sell up to 30% in the base metals IPO. It is evident that Vale is trying to raise cash from all available sources. Vale stated that the vision of doing the IPO was to create value rather than to raise cash, but I take this statement with a grain of salt.
In the first quarter, Vale's operating cash flow was $531 million, down from $1.2 billion in the fourth quarter of 2014 and $4 billion in the first quarter of 2014. The company finished the first quarter with $3.7 billion cash on hand. Add this cash to $5 billion of available credit and we get total available liquidity of $8.7 billion. This might look like a big number, but Vale still has to make significant investment in S11D. Vale has already spent $6.88 billion on S11D, and will commit $9.48 billion more. In this light, the available liquidity does not look that big, hence the proposed asset sale and the possible IPO of base metals segment.
Vale's strategy, just like the strategy of other big miners, have always been risky. Recent developments highlights this risk - Vale has already cut its dividend is has to sell assets in order to finance its iron ore expansion. Earlier this year, Vale has sold an additional 25% gold stream from its Salobo mine to Silver Wheaton (NYSE: SLW) for $900 million. I have little doubt that Vale will successfully start S11D. After all, the company still has assets to sale and can cut or eliminate the dividend. The question that must be of great interest to any potential investors is how the start of S11D will affect iron ore prices. The project's capacity is 90 million tons per year - a huge number for the troubled market.
All in all, Vale's shares might seem cheap, but they are cheap for a reason. In my view, there is a huge uncertainty over the outcome of Vale's aggressive iron ore strategy. All news from the company point to the fact that it needs more cash to finish the expansion project. I reiterate my previous view that Vale's shares will fluctuate around current levels, and that these fluctuations could be significant.
http://seekingalpha.com/article/3288245 ... of=45&dr=1