Vale’s Liquidity Improves with Proceeds from Stake Sale in Mozambique Business
On Monday, Brazilian mining giant Vale S.A. (Ba2 positive) said that it had concluded the equity portion of a major coal transaction first announced in December 2014, in which Vale sold part of its equity share in Mozambique’s Moatize coal mine and Nacala Logistics Corridor to Japanese trading company Mitsui & Co Ltd. ((P)A3 negative) for around $770 million. The conclusion of the transaction gives Vale $733 million in proceeds now, improving its liquidity, a credit positive. The remaining $37 million payment of proceeds will come once an agreement for up to $2.7 billion in project finance related to the coal project goes through, probably by the end of 2017. The transaction also supports the continuity of Vale’s investments to complete the coal expansion, a key project toward product diversification and organic growth. If Vale uses the $770 million cash infusion and $2.7 billion from project finance to pay down debt, the company’s total debt/EBITDA ratio, including our standard adjustments, will improve to 2.3x from 2.6x at the end of December 2016. Vale’s leverage will likely decline further through mid-2018, based on our ore price forecast of $45-$65 per ton. Meanwhile, Vale continues to cut costs and reduce its annual capital spending to an average $4.5 billion from 2017 onward, which will reduce its debt requirements and lead to positive free cash flow generation. Vale will remain the key partner behind Moatize and Nocala. As part of the deal, Mitsui will pay Vale $255 million for a roughly 14% stake in Moatize, leaving Vale with 81% ownership in the Moatize mine, and $350 million for half of Vale’s 70% share in the Nacala Logistics Corridor, which includes railway and port facilities. The deal also includes a $165 million long-term loan to Nacala, and an additional contribution of up to $195 million based on meeting certain conditions, including mine performance. Vale has already spent about $2.1 billion on Moatize, and $4.2 billion on Nacala, most of its projected $4.5 billion cost. The partners will seek to raise $2.7 billion in non-recourse project finance debt for Nacala, which will be fully returned to Vale to repay the shareholder loan used to fund the project until now. The coal operations in Mozambique are a key project for Vale, improving its product diversification and organic growth. Moatize in 2016 produced 5.5 million tons of coal, or 76% of Vale’s total coal production. Coal accounted for around 3% of Vale’s roughly $27.5 billion in gross revenues in 2016, with a minor contribution to EBITDA. The project will expand Moatize’s total nominal coal export capacity to 20 million tons by 2020, and production will rise once export capacity expands, thereby raising Vale’s cash flows. Moatize will pay service tariffs to Nacala for logistics. The terms of the deal give Mitsui the right to cancel it, if not approved by the end of 2017, but the governments of Mozambique and Malawi signed certain adjustments to the concession agreements, which were important steps for allowing project financing to proceed and reducing the risks that this process will not conclude on time. The terms of the deal are relatively small for Mitsui, which recorded about ¥9.6 trillion ($80.1 billion) in revenues in the fiscal year that ended 31 March 2016.
On Monday, Brazilian mining giant Vale S.A. (Ba2 positive) said that it had concluded the equity portion of a major coal transaction first announced in December 2014, in which Vale sold part of its equity share in Mozambique’s Moatize coal mine and Nacala Logistics Corridor to Japanese trading company Mitsui & Co Ltd. ((P)A3 negative) for around $770 million. The conclusion of the transaction gives Vale $733 million in proceeds now, improving its liquidity, a credit positive. The remaining $37 million payment of proceeds will come once an agreement for up to $2.7 billion in project finance related to the coal project goes through, probably by the end of 2017. The transaction also supports the continuity of Vale’s investments to complete the coal expansion, a key project toward product diversification and organic growth. If Vale uses the $770 million cash infusion and $2.7 billion from project finance to pay down debt, the company’s total debt/EBITDA ratio, including our standard adjustments, will improve to 2.3x from 2.6x at the end of December 2016. Vale’s leverage will likely decline further through mid-2018, based on our ore price forecast of $45-$65 per ton. Meanwhile, Vale continues to cut costs and reduce its annual capital spending to an average $4.5 billion from 2017 onward, which will reduce its debt requirements and lead to positive free cash flow generation. Vale will remain the key partner behind Moatize and Nocala. As part of the deal, Mitsui will pay Vale $255 million for a roughly 14% stake in Moatize, leaving Vale with 81% ownership in the Moatize mine, and $350 million for half of Vale’s 70% share in the Nacala Logistics Corridor, which includes railway and port facilities. The deal also includes a $165 million long-term loan to Nacala, and an additional contribution of up to $195 million based on meeting certain conditions, including mine performance. Vale has already spent about $2.1 billion on Moatize, and $4.2 billion on Nacala, most of its projected $4.5 billion cost. The partners will seek to raise $2.7 billion in non-recourse project finance debt for Nacala, which will be fully returned to Vale to repay the shareholder loan used to fund the project until now. The coal operations in Mozambique are a key project for Vale, improving its product diversification and organic growth. Moatize in 2016 produced 5.5 million tons of coal, or 76% of Vale’s total coal production. Coal accounted for around 3% of Vale’s roughly $27.5 billion in gross revenues in 2016, with a minor contribution to EBITDA. The project will expand Moatize’s total nominal coal export capacity to 20 million tons by 2020, and production will rise once export capacity expands, thereby raising Vale’s cash flows. Moatize will pay service tariffs to Nacala for logistics. The terms of the deal give Mitsui the right to cancel it, if not approved by the end of 2017, but the governments of Mozambique and Malawi signed certain adjustments to the concession agreements, which were important steps for allowing project financing to proceed and reducing the risks that this process will not conclude on time. The terms of the deal are relatively small for Mitsui, which recorded about ¥9.6 trillion ($80.1 billion) in revenues in the fiscal year that ended 31 March 2016.
