Vale Taps Brakes on Asset Sales as Iron Bounce Drives Profit

(Bloomberg) -- The best iron-ore rally in years is giving top producer Vale SA pause as it considers asset-sale options.

While divestitures are still the best way to reduce debt quickly, a 50 percent jump in iron-ore prices that sent earnings to the highest in two years means the Brazilian miner is “progressing with a little bit more caution” in the sale of some of its best assets, Chief Financial Officer Luciano Siani said. 

The Rio de Janeiro-based company is looking to bring down debt to as low as $15 billion by the end of next year from $26 billion at the end of last quarter. The sale of coal and fertilizer assets and a possible transaction involving its prized Brazilian iron-ore mines will help it get there. But the deal structure -- at least for fertilizer and iron ore -- is yet to be defined.

“We wouldn’t like to be in a situation in which you do anything just because you need to get to some point,” Siani said in an interview with Bloomberg Television Canada. “The goal continues to be there, but we are going to be very careful to deliver transactions that make sense.”

Vale is emerging from the biggest commodities downturn in a generation after cutting costs and selling assets as prices recover. In August, it sold future gold output to Silver Wheaton Corp. for $800 million upfront and is looking to wrap up a protracted negotiation to sell coal assets in Mozambique. That same month, people with knowledge said a group of Chinese investors was in talks for a multibillion-dollar iron-ore streaming deal with Vale.

“We are looking into all the alternatives in all the portfolio,” Siani said when asked if an iron-ore streaming deal was still on the table. It could also make sense to sell an equity stake in some iron assets, he said.

The company has already exited coal mines in Australia and in August people familiar with the matter said it was in talks to sell fertilizer assets to companies including Mosaic Co. The press departments of Vale and Mosaic declined to comment at the time.

Exploring Alternatives

Vale doesn’t want to exit the fertilizer business altogether and is “experimenting with several structures,” Siani said, adding that the company is unable to disclose would-be buyers. “This may be one reason it is taking longer because we are exploring alternatives of how to keep that exposure.”

While iron ore prices may come down from today’s $65 a metric ton, steadying Chinese demand combined with supply-side discipline has put a floor under the market, with prices set to hover around $50 to $55, Siani said.

For Vale, higher prices combined with lower costs and a focus on higher-grade deposits have resulted in a surge in cash generation. Free cash flow is expected to reach $2 billion next year, according to the average estimate among analysts tracked by Bloomberg.

“The magnitude should be around that number, but it will depend on what your assumption for prices is,” Siani said.

While nickel prices have also rallied this year, Vale doesn’t intend to sell any of those assets as long as there’s a mismatch between what the company and the market perceive them to be worth, Siani said.

The metal’s 42 percent plunge last year killed a plan to sell as much as a 30 percent stake in its nickel operations via an initial public offering. “If prices rebound to where we believe they should be, that discussion would naturally arise again within Vale,” he said.

--With assistance from Peter Millard To contact the reporters on this story: R.T. Watson in Rio de Janeiro at rwatson71@bloomberg.net, Danielle Bochove in Toronto at dbochove1@bloomberg.net. To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Steven Frank