Will Vale SA (ADR) (NYSE: VALE)’s Belt-Tightening Pay Off?


Times are tough for miners but Vale SA (ADR) (NYSE: VALE) is hoping to weather the storms as it continues with cost-cutting and disciplined capital deployment. The company’s 1Q2016 results both demonstrated that the early efforts are paying off and that there remains much ground to cover.

The soft commodity prices have been a major headwind for miners including Vale SA (ADR) (NYSE: VALE). Because Vale generates nearly two-thirds of its revenues from the sale of iron ore, a key ingredient in the production of steel, the company is struggling with years of lower prices and doused demand for steel. The economic slowdown in China has added to the pain of weak commodity demand.

The way forward

Vale’s management recently acknowledged the volatility in the commodity market and reiterated their commitment to continue working on strengthening the balance sheet. In recent times, Vale has been divesting non-core assets to unlock funds that it uses to finance operations and pay down its debt. Additionally, the company has shown strong commitment in driving internal efficiency to lower expenses and save money that can be used to reduce the debt burden.

Disciplined capital deployment

In 1Q2016, Vale SA (ADR) (NYSE: VALE)’s capital investment stood at $1.45 billion, nearly 33% lower than the amount it spent on the same in 4Q2016. Although Vale is taking major steps toward austerity, the company is careful not to starve key projects whose growth will largely depend on in the coming years. Such important projects include the S11D.

Lower shipping cost

Vale’s belt-tightening was recently boosted by the lower shipping costs. The company recently reported that its shipping costs in 1Q2016 fell about 20% from 4Q2015.

What happened in 1Q2016?

Vale SA (ADR) (NYSE: VALE) posted revenue of $5.7 billion, 5.5% lower than the corresponding quarter a year ago and about 3% below the previous quarter. Although the revenue reading declined both YoY and QoQ, the figure was better than the consensus estimate of $5.3 billion.

Coming to the bottom-line, Vale posted EPS profit of $0.10, far much better than EPS loss of $0.13 a year ago and EPS loss of $0.20 in 1Q2015.


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