Vale, the world’s biggest iron ore producer, would be able to hit its $10bn debt reduction targets without selling additional assets if ore prices hold steady, its chief financial officer has told the Financial Times.
Luciano Siani said the Brazilian group would be able to generate enough cash from its mining operations to complete its deleveraging programme “organically”, if iron ore, the key ingredient in steelmaking, remained at around $65 a tonne.
“If prices stay where they are today — admittedly an aggressive forecast — deleveraging will be very quick,” said Mr Siani. “We wouldn’t need much to achieve our target beyond the existing transactions.”
Iron ore has risen more than 50 per cent this year helped by a huge credit surge in China, the world’s biggest consumers of raw materials.
Even if prices fall from current levels, steady Chinese demand and lower output from major producers means iron ore will trade at between $50 and $60 a tonne in 2017, according to Mr Siani. Vale produced 346m tonnes last year.
“Demand is not as bad as it looked a year ago and oversupply is not as pronounced as it looked a year ago. On the supply side you have seen the majors reducing their guidance and you’ve seen domestic miners in China continue to close,” he said.
Vale decided to slow and limit the development of its flagship iron ore project, SD11 in Carajás, northern Brazil, following rivals such as Rio Tinto, which are also putting profits ahead of volume and market share as they recover from the worst commodity downturn in a generation. Iron ore fell 40 per cent last year and is just a third of its 2011 peak.
“We see the market relatively balanced going forward,” said Mr Siani. “If anything, 2017 will have surplus but nowhere near what people predicted a year ago.”
Vale is one of Brazil’s most important companies and biggest export earners. The group is looking to focus on its core mining activities and retain its credit rating with plans to reduce net debt of almost $26bn to $15bn-$17bn by the end next year.
The Rio de Janerio-based company swung back to profit during the third quarter as it has continued to keep a tight rein on costs and expenditure.
It expects to receive around $800m from the sale of stakes in a coal mine and railway project in Mozambique — a transaction that could help free up to $2.7bn of funding commitments — and is looking a partner for its fertiliser business. This would be preferably one with access to a first-class supply of potash, the raw material for fertilisers.
“We can’t commit as much capital as we would like to this particular business so we have always thought about partnership which could also bring some cash into Vale,” said Mr Siani, adding there was “nothing concrete” to announce at the moment.
Vale has also considered selling a minority stake in its industrial metals business, something that is now off the table.
“There is a huge mismatch between what we think the business is worth and what market observers think it is worth,” said Mr Siani. “So we will hold on to it.”
Vale has also been dealing with the fallout from the country’s worst environmental disaster. The company and BHP Billiton are equal partners in the Samarco iron ore venture in Brazil where 19 people died when a dam collapsed a year ago.
Samarco recently missed an interest payment on a $500m bond and it is not clear when the mine will resume operations. Vale’s investors are suing it and BHP to try to force them to pay damages for the market fallout from the disaster.
The companies’ executives are also facing homicide lawsuits from Brazilian prosecutors and have agreed with the Brazilian government to pay environmental damages.
“Our past, present and of future is intrinsically related and linked to that region. For us it’s almost a religious belief that we should bring Samarco back into production,” said Mr Siani.
BHP has said a restart has to make economic sense.
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