Vale SA (NYSE:VALE) is riding in some rough waters right now. This giant miner, with its huge exposure to iron ore, is dealing with generally declining commodity prices. While that has left results weak, Vale is working hard to rein in costs and strengthen its business. That should position it for an upturn. Here's what the company has to say about how it is doing and how it is changing.
As iron goes, so goes Vale
According to CEO Murilo Ferreira in Vale's latest quarterly conference call, "I'm pleased to report that, despite the declining commodity prices, Vale delivered a sound operational and financial performance in 2014." That's nice, but Ferreira also had little choice but to add that, "despite our efforts, the lower commodity price took their toll [on] our adjusted EBITDA."
Is Vale's glass half full or half empty? Source: S nova, via Wikimedia Commons.
That toll was actually quite material, with EBITDA falling around 40% year over year in 2014. The big culprit was iron ore, which in its various forms made up around 65% of the company's sales last year and nearly 85% of EBITDA. Iron ore prices were down roughly 30% year over year, a decline that, in fairness, was virtually impossible to offset. The big takeaway here is that while Vale has other operations, iron ore steers this ship. Until this market recovers, Vale's top and bottom lines will remain in the doldrums.
The year wasn't all bad
So the CEO was trying to put a positive spin on a bad year, but he's right that 2014 wasn't all bad. For example, according to Ferreira, Vale hit, "annual production records in iron ore, copper, and gold, as well as the highest production in nickel since 2008." Selling more product at lower prices isn't the best outcome, to be sure, but it shows Vale is doing well on an operational level. Since commodity prices are out of its control, the company did as well as could be expected under bad circumstances.
In that context, perhaps, Ferreira's description of the company's financial and operational performance as being "sound" is about right. However, I'd say hitting production records is more than just sound -- it sets the company up for a much brighter future. Vale is a giant in the mining industry, particularly when it comes to iron ore. It has the wherewithal to survive this downturn and take share from weaker rivals that don't. Under the weakness, strength is clearly being built.
We aren't wasting money
That said, it's also important to note that the company's production isn't coming from overspending. According to Ferreira, "We give emphasis to a reduction in capex for the fourth consecutive year, with a reduction of $2.2 billion in our investments from $14.2 billion in 2013 to $12 billion in 2014." That's a 15% decline in capital spending year over year. Moreover, he added, "Our general sales and administrative expenses decreased by over 20%."
Vale expanded production across key products while at the same time pulling back on capital spending. In fact, the company completed eight projects last year and is getting more particular about how it spends its money. Expect capital spending to remain a key focus in 2015.
Sure, you can say Vale is being forced to focus on cost containment. But it's nice to see this effort is producing results even as it positions its production profile for an upturn.
But that's all big-picture stuff. Sometimes it's interesting to look at the minutiae. For example, in the coal business, it's worth noting the company's deal with Mitsui in Vale Mozambique. Mitsui bought, "...15% of Vale´s stake in Vale Moçambique (VM) – the owner of 95% of the Moatize mine – and 50% of Vale's 70% equity stake in the Nacala Logistic Corridor."
Coal has been a big sore spot for Vale, posting negative EBITDA last year. So the miner was left to figure out how to keep its toe in the coal waters while cutting costs. Finding a partner was the answer. According to the CEO, "the deal with Mitsui allowed us to receive cash back and reduce our investment needs in both, Moatize and the Nacala corridor projects, while maintaining our operational control of the mine."
At the same time, "underperforming coal mines, such as Integra and Isaac Plains coal mines, have [been] put in care and maintenance," Ferreira said. In other words, Vale is working hard to optimize its operations, and is willing to take creative, perhaps aggressive, actions. Though coal isn't the company's largest segment, these moves show how the company thinks. Most notably, these actions preserve its long-term position in coal while at the same time protecting the top and bottom lines today.
Spin it like BHP
The last key takeaway from Vale's conference call came from the Q&A session. When asked about a spinoff of the company's base metals business, Ferreira responded, "we are working hard in the IPO process." However, he added, "We need to consider that the main purpose of this project is regarding a lock value, is not just to bridge funds to Vale mainly in 2015 and 2016." In other words, Vale isn't looking at an IPO as a way to quickly raise cash, but rather as an opportunity to return value to shareholders. The company is taking a wait and see approach on this.
What's interesting here is that mining peer BHP Billiton is spinning off some of its smaller businesses. Although Vale clearly must come to its own conclusion on whether such a spinoff will work for it, you should keep a close eye on BHP's South32 spinoff to see what might happen at Vale. Success at South32 could be just the push Vale needs to shake its house up a bit.
To be honest, there wasn't all that much out of the ordinary in the fourth quarter conference call when it comes to the mining sector today. Commodity prices are bad, operations are strong, and costs and returning value to shareholders remain key. This means Vale is doing what every other major miner is doing to survive this downturn and, perhaps more important, prepare for an eventual recovery. The only real wild card is the potential of a base metal spinoff, which isn't likely to happen until a competitor tests the waters first.