Vale Said to Sign $1 Billion Bank Funding Backed by Glencore

(Bloomberg) -- Vale SA borrowed $1 billion from a global assembly of banks, guaranteeing it with iron-ore shipments to Glencore Plc, people with knowledge said, in an arrangement that shows the cash squeeze faced by miners.

The world’s top iron-ore producer signed the so-called pre-export financing, which has a maturity of two and a half years, in June, the same people said, asking not to be named because the information is private.

Vale, which draws most of its revenue from Brazilian iron-ore mines, has suffered as the price of the steel-making commodity plunged and its debt ballooned. From a peak of $192 a metric ton in early 2011, iron ore prices fell to $38 in late 2015. Since then, prices have recovered to about $56.

Glencore, which will receive the iron-ore cargoes that guarantee the deal, has minimal exposure to the loan, with a syndicate of banks taking the bulk of the financing, according to two people familiar with the structure of the deal. The trading house disclosed in its half-year earnings report it had advanced to an unnamed iron-ore counter-party $400 million as of June 30, of which $40 million was its own money and $360 million was provided by the “bank market.” The unnamed party was Vale, two of the people said.

Both Vale and Glencore declined to comment.

For Vale, which faced a credit crunch early this year as commodity prices plunged, the pre-export deal was the cheapest source of finance available, two people familiar with the deal said. The yield on Vale’s bonds due 2022 surged to 12 percent in February, the highest since the notes were issued in early 2012. Since then the yield recovered to 5.3 percent.

The Rio de Janeiro-based company has joined global miners Freeport-McMoRan Inc. and Anglo American Plc in selling assets in an effort to reduce its more than $27 billion net debt. Chief Executive Officer Murilo Ferreira raised the prospect of selling some of the company’s most prized assets in February, after the miner reported its first year of losses since 1997.

Aside from Glencore, Vale has held talks this year with Chinese and Japanese traders and financiers to sell future iron-ore production in a potential multibillion-dollar deal, according to other people with knowledge of the matter.

Trading Volume

Glencore plans to use the future deliveries from Vale to boost its trading volumes in iron ore, one of the people said. The Swiss-based company traded 23.6 million tons of the material in the first half of the year, up 3 percent from a year earlier. Vale produced a record 346 million tons from its own mines last year.

Iron ore probably will trade at $50 to $60 next year, Peter Poppinga, Vale’s head of ferrous minerals, said in an interview in London Tuesday. The market will be supported by reduced supply and better-than-expected growth in Chinese steel output next year, he said.

“The market is pretty balanced and going to be pretty balanced next year as well,” he said.

To contact the reporters on this story: Javier Blas in London at jblas3@bloomberg.net, R.T. Watson in Rio de Janeiro at rwatson71@bloomberg.net. To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, James Attwood, Steven Frank