Vale SA (VALE 2.01%) lost money in the first quarter, much as analysts had expected. In large part that was attributable to a moribund commodities market, most notably iron ore, which makes up roughly 60% of the miner's revenue. However, there's a lot going on under the headline number, and much of it is positive, a fact that CEO Murilo Ferreira wants you to understand.
OK, commodity prices are a problem
There's no way around it, Vale and its competitors are suffering through a tough market. Ferreira really had no choice but to acknowledge that front and center: "Despite our efforts [and] good results in reducing costs and expenses, this environment of lower commodity price[s]" resulted in adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, which is a proxy for cash flow, falling 60% year over year to $1.6 billion, .
There's no denying the pain in iron ore. Source: Lars Lentz, via Wikimedia Commons.
Doing what we can
According to the CEO, "Adjusted EBITDA for iron ore and pellets reached $1 billion, decreasing over a $600 million from the last quarter." The big problem was that "iron ore price[s] dropped by $12 per ton in the first quarter of the year." Until commodity prices stabilize, notably for iron ore, Vale will face serious headwinds.
But that doesn't mean Vale is just sitting around. "In the first quarter," touted the CEO in the quarterly conference call, "we achieved a reduction of over $560 million in cost and expenses when compared to first quarter 2014." Some key areas of success included sales, general, and administrative expenses falling by 30% and the fact that Vale has "reduced our costs and expenses in iron ore including freight costs by $13.10 per ton in the first quarter of 2015 when compared to the fourth quarter of 2014," he continued.
So Vale, like its peers, is working control expenses, and it's doing a solid job.
Trimming back to the core
Another piece of the puzzle is finding hidden value within the company. For example, Vale entered into a $900 million gold streaming agreement and sold a $100 million stake in a hydroelectric plant in the first quarter. That comes on top of an agreement last year to take on a partner, Mitsui, in the coal space and the sale of four ships.
The deal with Mitsui is expected to bring in "about $1 billion ... and we're working on that," according to Vale CFO Luciano Siani. Proceeds from the ship sale should also come in soon.
Look for more news on the cash-raising front in the coming quarters.
That will be good thing, because Vale hasn't stopped spending. In fact, CEO Ferreira said "I am proud to announce that iron ore achieved a higher production in the first quarter." Sales volume for iron ore was up 9% year over year, reaching a record for a first quarter.
Essentially, Vale is still spending on expansion, but it's doing so more judiciously. That means the cash from asset sales is going to good use. A key project to watch is Carajás Serra Sul, where Vale is building a new iron ore mine. But other projects are progressing as well. According to the CEO, "we [are sticking] to our plans which are ongoing in the Nacala Corridor and our capacity goes from 350 million to 450 million tons [of iron ore] overall in Vale."
The biggest near-term benefit of this expansion, however, isn't more iron ore. It's more flexibility. Ferreira said Vale can "substitute some low-margin ores with some higher-margin ores." Essentially, the company will reduce output from more expensive mines and replace that with output from newer, less expensive mines. And that's only possible because of the capital spending taking place right now.
That should help profitability in the near term. But, according to the CEO, "it doesn't mean that we are going to close mines, but there are mines with several product[s]." That means Vale can sustain most of its operations while still shifting work around to generate the best margins. That, in turn, should make it easier to bring additional iron ore production online when prices rise. So the spending happening today is positioning the company for a brighter tomorrow.
There's no question the commodity market is tough these days. And you should expect relatively weak headline numbers from Vale in the near term. But what's going on underneath those numbers is crucial, too. In fact, it might be more important since Vale is clearly trying to set itself up to prosper in an industry rebound.