Spending $14.8 billion on capital expenditures in a year may sound like a huge sum of money, and it is, but that level marks the third year in a row Vale (VALE +1.43%) has cut its investment budget even as it reported third-quarter earnings last month that more than doubled on higher sales and improved pricing.
The world's biggest iron ore producer generated $28.2 billion in revenues last period, a 24% increase from the third quarter of 2012, but it needs to focus its efforts on those projects that will make it the most money. In 2014, Vale says some 80% of its capital outlays will be directed toward iron ore production and distribution, with a coal project in Mozambique and a copper and gold project in Salobo receiving some attention as well.
Vale has been in the midst of a huge garage sale, putting tags on everything that's not a core asset in a bid to raise cash to meet a massive tax obligation to the Brazilian government. With a take-it-or-leave-it deadline looming last Friday, the miner opted to accept a government proffered tax amnesty program that slashed the near-$16 billion bill to a more manageable $9.6 billion that only requires a portion be paid up front with the balance due over 15 years.
Rio Tinto (RIO 0.33%) is also taking an axe to its capex program, announcing recently it was slashing its budget from $14 billion in 2013 to $11 billion in 2014 and just $8 billion the year after. Its investment outlays had reached a bloated $17 billion last year as miners of all stripes got caught up in an expansion program that was fueled by runaway pricing on commodities.
Like Vale, Rio's tried to sell a lot of its assets, but when the commodities bubble burst, it was caught with projects that no longer could be justified and, like everyone else, they've been trying to sell them. But the glut of inventory has reduced the price investors are willing to pay, and Rio was forced to reject bids for its Canadian iron ore assets as too low, a tough realization that comes after it also failed to unload diamond mines this past summer.
Other miners are going through similar changes. BHP Billiton (BHP +1.40%) sold a 15% stake in its Australian Jimblebar iron ore mine to two Japanese conglomerates for $1.5 billion and 28% of two petroleum projects off the continent's coast to a Chinese investment firm. U.K. steel trader Stemcor is trying to sell off its Indian iron ore mines, Barrick Gold (ABX +1.86%) wants to shed its Barnicoat Gold Project (not to mention having to put its Pascua-Lama gold project on ice), and Glencore Xstrata will shelve a $7 billion coal mine in Australia.
Glencore is also slashing its capex budget by $3.5 billion over the next two years, a trend developed by other coal miners including Alpha Natural Resources, Arch Coal, and Peabody Energy. Vale also recently extricated itself from an aluminum project by selling its 22% stake in Norsk Hydro for $1.8 billion.
With its tax bill settled, and the ability to pay for it out of cash flows, a lot of the pressure is off Vale to sell everything that's not nailed down. Having lost 25% of its value in 2013, focusing only on its "world-class assets with large reserves" suggests that next year it won't have to dig so deep to see a recovery in its stock and growth prospects.
