Vale (VALE, Financial), one of the biggest mining companies in the world, is making moves to improve its business. The Brazilian mining giant has done significantly well with respect to its cost-cutting initiatives that have yielded nearly $2 billion in cost savings. Despites various economic headwinds such as seasonality, tax winds, emerging market equity outflows, iron ore quality premium and non-core asset re-rating, Vale is making a move toward better times.
Outlook looks better
Vale outlook looks strong as it recently entered into an agreement with Cemig to create two companies, Alianca Norte Energia and Alianca Geracao de Energia. These companies will jointly engage in energy generation. Vale will incorporate its 9% stake in the Belo Monte hydropower plant syndicates into ANE and will consequently divest 49% of its stake in ANE to Cemig in return for $206 million. Hence this proposed sale looks positive for Vale considering the fact that the company will be able to reduce future capital/debt assurances to this major project of $14 billion total CapEx.
Vale has been consistent enough with its strategic initiatives to reduce future CapEx requirement such as divest non-core asset, and re-focus on core assets while focused on restructuring of its energy business.
In addition, the company is also engaged in exploring strategic partnerships such as Nacala Corridor this will indeed create value for the company and reduce its capital commitment. This $1.1 billion Nacala corridor will be spread from Malawi to Mozambique; that will provide the logistic solution to these regions. Further the company is planning to announce a new strategic partnership in the second quarter of 2014 that will perhaps take 70% of its stake in Nacala Logistic corridor in Mozambique, thus leveraging its Capital Expenditure affluently. The company is also welcoming partnership in the global coal and fertilizer segment. These positive signs could well increase its market share in these segment and fetch better financial and operating results for the company in the current fiscal 2014.
Vale S.A has been allowed by the Brazilian government to implement permit for S11 D and associated logistic passing the way for growth in its iron ore production beyond to 2016. The company has in the first-quarter made progress as the government granted authorization of 9 additional areas around any 4 mining that will support the production target of 120 million tons in Carajas in fiscal 2014 and will supplement its growth for the 2015 and 2016.
Vale is planning to shut its Salobo I plant that is hardly produced over 1,080,000 tons in the last fiscal 2013 to its nominal capacity. Further the company would like to invest in Salobo II and is expecting to yield high returns from the plant.
Apart from this, the company has various other plants such as Onca Puma Plant, Nova Caledonia Plant and Long Harbour. These plants are expected to produce more than 62% of its nominal capacity of 25000, 16000, and 80000 tons per year respectively.
Vale is determined to completing these ongoing projects and to deliver volume growth. Besides the company is focusing to create a value for its shareholders through free cash flow generation that will assist the company to reduce its debt level that stands at $37.7 billion.
Conclusion
Vale currently trades at forward P/E of 7.5 and analysts have expected CAGR of 19.38% for the next year. The company looks not very impressive as its performance is relatively depends upon the industry performance. Yet it can be handy as iron ore and nickel prices are raising with lower cost of production in other emerging market thus can produce better operational and financial result for fiscal 2014.
