Vale SA (NYSE:VALE) has winnowed its list of big projects as commodity prices, most notably iron ore, have weakened. However, during the company's third-quarter conference call, CEO Murilo Ferreira made it clear that despite the headwinds his company is still pushing forward, including developing key projects. Here are some important takeaways from the call.
The dollar hurt
The biggest shock during the quarter was currency related. According to Ferreira, "We saw a drop in the net income of about $2.9 billion in the quarter, mainly driven by a non-cash impact of the depreciation of the Brazilian real against U.S. dollar." That put a damper on a quarter where there were notable positives, like record iron ore output and a strengthening base metals business.
But there's a silver lining here. With the Brazilian real at a low level, Vale's iron ore starts to look more compelling to foreign buyers. The same thing is bolstering Australian miners, since its currency has been weak relative to the dollar, too. In fact, Western Australia's treasurer, Mike Nahan, recently explained, "The lower the Australian dollar, the higher the price our miners get for those commodities (like iron ore, gold, and coal)." Brazil is no different.
Records are getting and will continue to get broken
Vale's Ferreira made a point of highlighting operational successes during the call: "I'm pleased to report that Vale delivered a strong operational performance in the third quarter, with record output iron ore, copper and excellent production of nickel." In other words, on a base level, the company is running well.
The headwind is pricing. However, don't think that Vale is simply expanding just to expand in a weak market. Sure, it's mining more iron ore, but there's a reason -- lower expenses. And there's no plan to stop even if iron ore prices stay weak.
In fact, when asked about the price that would slow development of a key new iron ore mine, Jose Carlos Martins, head of the company's iron ore group, responded: "I think as far as S11D is concerned, I think the lower the price, more company is to bring in this project in operation, because it is low cost and high quality. So, there is no way that they're going to reduce the pace of investment S11D." He believes that the low-cost product from this mine could replace supply from other miners or even within Vale itself.
We're more than just iron ore
Iron ore makes up the lion's share of the miner's overall business, so the iron ore business is what everyone pays attention to. It makes sense. Iron ore prices will be the big driver of performance over the near term. However, Vale's base metals are doing well right now.
Note that the CEO highlighted record copper production and the strong operational results in nickel. How good are the base metals doing? According to Ferreira: "Base metals EBITDA increased almost by 30% to $781 million in the third quarter 2013 versus second quarter 2013. Looking forward, the ramp-up of the ongoing projects reinforces our confidence that the base metals segment is set to achieve its EBITDA target of $4 billion to $6 billion."
There's no doubt that iron ore pricing is important, and no one at Vale will deny that. But that doesn't mean you should lose sight of the the smaller businesses that are creating value for shareholders. Right now, copper and nickel are two places worth watching.
Being prudent for shareholders
Perhaps most important for shareholders, Vale is focused on being fiscally prudent and returning value. For example, when asked about the sustainability of the dividend, CEO Ferreira said, "I wanted to continue a company with a high-yield dividend." Although the dividend is the board's decision, Ferreira is basically saying that investors like dividends, and Vale realizes that.
And while low iron ore prices could make it more difficult to pay large dividends, Vale is doing everything in its power to make sure it has the financial strength to keep paying. For example, in the CEO's prepared remarks, he explained, "Overall, our balance sheet continues to be healthy with low leverage, high coverage, low debt maturity, and also low cost of debt. Net debt decreased by almost $2.2 billion since the end of June this year."
While there's no crystal ball to say the dividend survives this tough stretch unscathed, the company is working hard to keep costs low and reduce its debt load, and it clearly has a desire to return value to shareholders. There are no guarantees in life, but Vale sounds like it understands what needs to be done to reward its owners.
Not low risk, but ...
Still, Vale shares aren't for the faint of heart. Iron ore prices have to recover before the company's overall business does. That said, the CEO wants to make sure investors know that there are good things going on behind the headlines. That includes strength in other businesses, operational successes across the company, and generally conservative financial decisions. The latter is true even when it comes to expansion efforts, since lower costs are the end goal. Investors with a long-term view should take a long look at Vale. There's a lot to like even in a weak iron ore market.