Vale’s drawdown of 60 per cent of its available revolving credit facilities overnight highlights the tightrope the Brazilian mining giant is walking as it tries to negotiate the collapse in commodity prices and maintain a heavy capital expenditure program with a weak balance sheet within a recessed economy.
Vale said yesterday that it had drawn down $US3 billion of its $US5bn facility to increase liquidity and bridge its potential cash flow needs pending the conclusion of its divestment program, particularly the sale of an interest in its Mozambique coal project to Japan’s Mitsui & Co.
The statement encapsulates the challenges the group faces, with the collapse in commodity prices, but most particularly the plunge in iron ore prices to $US40 a tonne, as it ploughs ahead with its giant $US16bn to $US17bn S11D project aimed at adding 90 Mtpa of iron ore to an already oversupplied market. The project is expected to be completed by the end of this year, reaching its full capacity in 2018.
While S11D, which should be the world’s lowest-cost iron ore project, will transform the economics of Vale’s iron ore business, in the meantime it is continuing to drain cash.
Vale’s overall capital expenditures this year are expected to be about $US6.2bn, reducing to $US5.3bn in 2017 and $US4.6bn in 2018.
Unlike the other two major iron ore miners, Rio Tinto and BHP Billiton, Vale has a weak and vulnerable balance sheet. It has $US28.7bn of gross debt, or $US24.2bn of net debt. The interest cost of that debt this year will be about $US1.5bn.
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