Vale S.A. Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 20-F filed April 3, 2020; it does not provide a standalone fourth-quarter income statement.
Business context
Vale is a global mining and logistics company producing iron ore, pellets, nickel, copper, coal, manganese, ferroalloys, cobalt, precious metals and related products. Ferrous minerals generated 79.9% of 2019 continuing-operations revenue, including iron ore revenue of US$23.343 billion. China represented 48.6% of total revenue.
The January 25, 2019 failure of Dam I at the Córrego do Feijão mine in Brumadinho, Brazil, resulted in 270 fatalities or presumed fatalities and materially affected Vale’s operations, financial statements, liquidity, legal exposure and reputation.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net operating revenue | US$37.570bn | US$36.575bn | +2.7% |
| Operating income | US$1.319bn | US$11.955bn | Down materially |
| Net income attributable to Vale stockholders | Loss of US$1.683bn | Income of US$6.860bn | Turned to loss |
| Adjusted EBITDA | US$10.585bn | US$16.590bn | -36.2% |
| Cash flow from operating activities | US$12.110bn | US$12.901bn | -6.1% |
| Capital expenditures | US$3.704bn | US$3.784bn | -2.1% |
| Cash and cash equivalents | US$7.350bn | US$5.784bn | +27.1% |
| Total debt | US$13.056bn | US$15.466bn | -15.6% |
| Net debt | US$4.880bn | US$9.650bn | -49.4% |
Margins: Gross profit was US$16.383 billion, equivalent to an approximately 43.6% gross margin. Operating margin was approximately 3.5%, compared with approximately 32.7% in 2018. Adjusted EBITDA margin was approximately 28.2%, compared with 45.4% in 2018. Net loss attributable to Vale stockholders represented approximately 4.5% of revenue.
Debt included US$1.214 billion of current debt and US$11.842 billion of long-term debt. Principal debt maturities were US$1.012 billion in 2020, US$788 million in 2021, US$1.026 billion in 2022 and US$1.192 billion in 2023. Vale reported compliance with its financial covenants at December 31, 2019.
Vale used US$1.719 billion for Brumadinho-related expenditures during 2019, including US$989 million for dam decharacterization and settlement obligations and US$730 million for humanitarian, legal, logistical and other expenses. US$1.608 billion of assets remained restricted at year-end, including US$125 million of restricted bank cash and US$1.483 billion of judicial deposits.
Material changes versus 2018
- Revenue increased because higher iron ore and pellet prices more than offset lower volumes. Iron ore revenue increased 14.7% to US$23.343 billion, while pellet revenue declined 10.6% to US$5.948 billion.
- Iron ore and pellet sales volumes declined 12.8% and 23.7%, respectively, primarily because of Brumadinho-related suspensions and weather-related disruption.
- Adjusted EBITDA declined by US$6.005 billion. Ferrous minerals EBITDA increased to US$16.997 billion, but this was more than offset by the US$7.402 billion Brumadinho charge, weaker base-metals performance and a US$533 million coal EBITDA loss.
- Base-metals revenue declined 8.1% to US$6.161 billion, reflecting lower nickel and copper sales volumes. Coal revenue declined 37.9% to US$1.021 billion.
- Impairment and disposal charges increased to US$5.074 billion, including US$2.511 billion for New Caledonian nickel assets and US$1.691 billion for Mozambique coal assets.
- Operating cash flow remained strong but declined to US$12.110 billion. Deleveraging reduced net debt by US$4.770 billion.
- Vale adopted IFRS 16, recognizing US$1.692 billion of right-of-use assets and US$1.791 billion of lease liabilities at December 31, 2019.
Brumadinho provisions, contingencies and operational outlook
- Vale recognized a total 2019 income-statement impact of US$7.402 billion related to the Brumadinho event, comprising US$3.925 billion for social and economic compensation, environmental remediation and related agreements; US$2.625 billion for decharacterization of upstream dams; and US$730 million of incurred expenses.
- At December 31, 2019, Brumadinho-related provisions totaled approximately US$5.472 billion, including US$2.489 billion for dam decharacterization and US$2.983 billion for social, economic and environmental obligations.
- Vale disclosed that ongoing negotiations for a potential additional collective-damages agreement could require an additional provision of approximately US$1.0 billion to US$2.0 billion. No amount was recognized for this potential agreement at year-end.
- Vale expects to decharacterize its upstream dams in Brazil and estimated total completion costs at approximately US$2.6 billion. Timing, engineering solutions, regulatory approvals and actual costs remain uncertain.
- At September 30, 2019, Vale had obtained stability certificates for 82 operational structures and had not obtained certificates for 18 structures. At March 31, 2020, 78 operational structures had certificates; nine structures at emergency levels 2 or 3 and 17 inactive structures did not.
- Vale’s 2020 capital-expenditure budget was approximately US$5.0 billion, including US$4.1 billion for sustaining and replacement projects and US$900 million for project execution. The budget was approximately 35% higher than 2019 project-execution spending.
- Key projects include the Voisey’s Bay underground expansion, Gelado, Salobo III and the Northern System 240 Mt program. Vale also announced approximately US$1.8 billion of 2020–2024 investment in dry-stacking technology at selected Brazilian sites.
- The Board suspended the shareholder-remuneration policy and share buybacks following the Brumadinho failure. Although US$1.767 billion of interest on capital was approved in December 2019, payment was deferred pending reinstatement of the policy.
COVID-19 and other subsequent events
- In March 2020, Vale drew US$5.0 billion under revolving credit facilities maturing in 2022 and 2024 to strengthen liquidity in response to COVID-19 uncertainty.
- Vale temporarily placed Voisey’s Bay on care and maintenance and halted operations at the Teluk Rubiah Maritime Terminal in Malaysia. Management stated that, as of the filing date, COVID-19 had not materially affected operations, logistics or sales, but warned that prolonged disruption, weaker demand, supply-chain interruptions or further shutdowns could materially affect 2020 results and liquidity.
- Vale expects Samarco to resume operations by the end of 2020 after implementing filtration and dry-stacking technology. Vale’s Samarco-related provision was US$1.700 billion at December 31, 2019, including Renova and Germano dam obligations.
Principal risks and unusual items
- Additional Brumadinho liabilities, legal proceedings, regulatory sanctions, asset restrictions and remediation costs may materially exceed recorded provisions.
- Failure to obtain dam-stability certifications or required permits could cause further production suspensions, community evacuations and higher capital and operating costs.
- Iron ore and pellets represented approximately 78% of 2019 revenue, creating substantial exposure to iron ore prices, steel demand and China. A US$1 per dry metric ton change in the average iron ore price was estimated to affect operating income by approximately US$290 million.
- Commodity prices, foreign exchange rates, interest rates, freight and energy costs materially affect results. China accounted for 48.6% of revenue, increasing geographic concentration risk.
- Vale faces significant Samarco-related litigation and funding obligations. Possible losses not provisioned totaled US$11.938 billion, including US$8.395 billion of tax claims, US$1.518 billion of civil claims, US$1.094 billion of environmental claims and US$158 million related to Brumadinho.
- Coal assets in Mozambique and nickel assets in New Caledonia were fully or substantially impaired based on revised operating plans and market assumptions.
- The filing reports effective disclosure controls and effective internal control over financial reporting as of December 31, 2019. PwC issued an unqualified audit opinion, identifying Brumadinho provisions, long-lived asset impairment and tax litigation as critical audit matters.
Facts investors should verify
- Progress, cost revisions and completion dates for Brumadinho remediation and upstream-dam decharacterization.
- Status and financial terms of any collective-damages agreement with Minas Gerais authorities.
- Current dam-stability certificates, emergency levels, evacuation requirements and production-restoration approvals.
- 2020 iron ore, pellet, nickel and coal sales volumes, realized prices and effects of COVID-19 on demand and logistics.
- Cash balances after the US$5.0 billion revolving-credit draw, debt maturities, covenant headroom and net debt.
- Whether the shareholder-remuneration suspension is lifted and whether the approved US$1.767 billion interest-on-capital distribution is paid.
- Changes to the US$1.700 billion Samarco provision and the timing and economics of Samarco’s restart.
- Resolution or potential cash impact of the US$11.938 billion of reasonably possible litigation claims and other unrecorded Brumadinho exposures.