Vale SA (ADR) (NYSE:VALE) Updates Investors on Long Term Growth

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Vale SA (ADR) (NYSE:VALE) recently held its annual investor day in New York and provided a series of updates on its business. The company is on a path to recovery, after suffering losses due to falling metal prices. Added to this, Vale is also recovering from an accident at Samarco. The investor day was mostly surrounded by updates about the company’s iron ore production guidance in the coming years, cost reduction initiatives being practiced at the company and investment estimates and debt.

Primary Business Growth

Vale updated its investors that it would be gradually increasing iron ore production over the next few years, mainly depending on market conditions. Additionally, the company also updated investors about its new S11D, which it believes would be up and running in 2017. The new facility is expected to reach full capacity in 2018. Vale also emphasized the need to have better margins, as compared to larger volumes in the coming years.

Similarly, Vale also plans to increase its pellet production capacity in the coming years. However, the management stated that this would be done without reopening the Tubarao I and II facilities. Additionally, while the company recovers from the Samarco incident, pellet production should remain stable for the FY2016.

Improving Finances

Apart from increasing volumes, as per market growth and demand, the company is also working on improving its margins through cost-cuts. Vale has identified some key areas, through which it expects the company’s iron ore products to remain competitive in the market. These include:

  • Ramp up of two extensions and 1 new facility (S11D).
  • Reduction of all-in costs in China.
  • Broadening of commercial opportunities in Brazil.
  • Capacity management.

These initiatives should help the company products in becoming cost effective. Additionally, since Vale has widely distributed facilities, it should help the company maintain their margins. Coupled with this the company mines provide it with higher ore content, meaning that the company can produce more products for less price.

However, there remains the question about Vale’s debt. The company CFO, Luciano Siano, stated that Vale is approaching the end of its growth investment cycle. This should help the company reduce its growth capital expenditure to decline from $5.4 billion to $1.1 billion. Unfortunately, the management expects to meet this target by 2018. Until then, the company might need to take additional debt to complete its projects. Fortunately, the management’s growth plans should stay on target and might not even require additional debt, if metal prices in the market remain constant.

Secondary Businesses

Apart from the primary metal business, Vale also has a secondary fertilizer and coal business as well. The management sees the fertilizer business as a fail-safe to other businesses. This is because unlike metal and coal, the fertilizer business is unlikely to have an oversupply and hence a decline in commodity price. Added to this, Vale expects the demand for fertilizers to increase over time. Furthermore, the company has placed an emphasis on the Brazilian market, which analysts see as one that has the greatest potential for growth.

Growth in the coal business, however, is a bit more difficult to achieve for Vale. Currently, the company has implemented operational improvements at its facility in Mozambique. Once the coal plant modules have been completed Vale would divert its full attention to the Nacala corridor, which would bring down the costs per ton.

Conclusion

For short-term investment, Vale does not have a lot to offer. The company has a large debt and is expected to continue investing into projects that would be beneficial for future growth. Additionally, the market pricing does not go in Vale’s favor either. However, long-term investors would benefit the most out of the company. Once Vale is done with its projects, by end of 2017, the company can focus on returning its debts and becoming one of the leaders in the market.

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