Vale S.A. Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2011; filed April 17, 2012. The filing is an annual report, not a standalone fourth-quarter filing, and the provided text does not present clear Q4-only financial results. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars unless otherwise stated.
Business context
Vale is a global mining and logistics company and the world's largest producer of iron ore and iron ore pellets and second-largest nickel producer. Its principal businesses are bulk materials, base metals, fertilizer nutrients, logistics, energy and selected steel investments. Iron ore and pellets represented 71.5% of 2011 gross operating revenues, while China accounted for 32.4% of gross operating revenues.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change or comment |
|---|---|---|---|
| Net operating revenues | US$58.990 billion | US$45.293 billion | Up 30.2% |
| Gross operating revenues | US$60.389 billion | US$46.481 billion | Up 29.9% |
| Operating income | US$30.112 billion | US$21.695 billion | Up 38.8%; 51.0% of net revenues including asset-sale gain |
| Operating income excluding aluminum asset-sale gain | US$28.599 billion | US$21.695 billion | Underlying operating margin was 48.5% versus 47.9% |
| Net income | US$22.652 billion | US$17.453 billion | Up 29.8% |
| Net income attributable to Vale shareholders | US$22.885 billion | US$17.264 billion | Up 32.6% |
| EPS, common and preferred | US$4.33 | US$3.23 | Up 34.1% |
| Cash flow from operating activities | US$24.496 billion | US$19.183 billion | Up 27.7% |
| Capital expenditures and other investments | US$17.994 billion | US$12.705 billion | Up 41.6% |
| Cash and cash equivalents | US$3.531 billion | US$7.584 billion | Down following distributions, buybacks and investment |
| Aggregate outstanding debt | US$23.055 billion | Not clearly stated on the same basis | Long-term debt including current portion was US$23.033 billion, down from US$24.414 billion |
Operating cash flow covered capital expenditures by approximately US$6.5 billion before shareholder distributions. Vale paid US$9.0 billion in dividends or interest on shareholders' equity and repurchased US$3.0 billion of shares during 2011. Current assets were US$21.736 billion and current liabilities were US$11.043 billion at year-end.
Material changes versus the prior comparable period
- Revenue growth was driven principally by higher iron ore and pellet prices, higher nickel volumes after Canadian labor disruptions ended, and a full year of fertilizer operations acquired in 2010.
- Iron ore revenue increased 32.7% to US$35.008 billion; pellet revenue increased 27.3% to US$8.150 billion. Average realized prices rose 31.5% for iron ore and 20.2% for pellets.
- Nickel and related-product revenue increased 72.3% to US$8.118 billion, primarily because sales volumes increased 44.8% after the end of labor strikes. Copper concentrate revenue increased 20.6%.
- Fertilizer revenue increased 92.1% to US$3.547 billion, reflecting the full-year consolidation of phosphate and nitrogen operations and higher prices.
- Aluminum revenue fell 85.0% to US$383 million because Vale transferred most aluminum assets to Norsk Hydro in February 2011. Vale received US$1.081 billion in cash and a 22% equity interest in Hydro and recognized a US$1.513 billion gain.
- Cost of goods sold increased 25.3% to US$23.573 billion. Cost pressures included resumed nickel operations, fertilizer consolidation, Onça Puma start-up costs, Brazilian real appreciation, higher personnel expenses and increased depreciation.
- Foreign exchange and indexation losses shifted from a US$344 million gain in 2010 to a US$1.641 billion loss in 2011, contributing to net non-operating expenses of US$3.313 billion.
- Production growth included iron ore production of 311.8 million metric tons for Vale, pellet production of 39.0 million metric tons, nickel production of 241.5 thousand metric tons and copper production of 302 thousand metric tons.
Guidance, outlook, commentary and unusual items
- Management characterized 2011 as a record year for revenue, operating margin, cash generation and net earnings, with nearly 300 million metric tons of iron ore and pellet shipments.
- The approved 2012 investment budget was US$21.411 billion, including US$12.949 billion for project execution, US$2.357 billion for research and development and US$6.106 billion for sustaining operations.
- Vale proposed a minimum 2012 shareholder distribution of US$6.0 billion, payable in two equal installments.
- Major growth projects included Carajás and Northern System expansions, the S11D project, Samarco IV, Moatize II, the Nacala Corridor, Salobo, Long Harbour, Rio Colorado, Belo Monte and CSP. Project timing depends on permits, construction execution, infrastructure and market conditions.
- Significant unusual items included the US$1.513 billion gain on the Hydro transaction, US$3.746 billion of social contribution tax paid following an adverse Brazilian court decision, and a force majeure declaration in January 2012 related to heavy rainfall that was lifted on January 23, 2012.
- Vale reported no off-balance-sheet arrangements as defined in Form 20-F. Provisions for contingencies totaled US$1.686 billion, while reasonably possible claims without provisions totaled US$22.449 billion, primarily involving tax assessments.
Principal risks and contingencies
- Exposure to cyclical global industrial activity, steel demand, Chinese economic growth and volatile iron ore, nickel, copper, coal and fertilizer prices.
- High concentration in iron ore and China; weaker Chinese real estate or steel demand could materially reduce revenue, cash flow and profitability.
- Foreign exchange risk because revenues are primarily U.S.-dollar-linked while a substantial portion of costs is denominated in Brazilian reais and Canadian dollars. The company recorded a US$1.382 billion currency loss in 2011.
- Project execution risk, including cost overruns, construction delays, shortages of equipment and skilled labor, infrastructure constraints, adverse weather and permitting delays.
- Environmental, health, safety, community, indigenous-rights and regulatory risks across multiple jurisdictions, including potential carbon pricing, royalties, taxes and mining-code changes.
- Legal and tax matters include CFEM assessments of approximately US$3.019 billion, Minas Gerais ICMS assessments of approximately US$642 million, substantial Article 74 Brazilian tax assessments and other claims.
- Vale faces a potential VNC-related put option held by Sumic covering 25%, 50% or 100% of Sumic's VNC interest. The filing states that discussions were ongoing and expected to conclude in the second or third quarter of 2012.
- Debt covenants include debt-to-EBITDA and interest-coverage requirements. The company reported no covenant noncompliance at December 31, 2011 and had US$4.1 billion of undrawn revolving credit facilities, subject to expiration terms.
Investor verification checklist
- Confirm that the requested period is annual FY2011 rather than Q4 2011, since the filing text does not provide a clear standalone quarterly income statement or cash flow statement.
- Reconcile reported operating income and margin excluding the US$1.513 billion Hydro asset-sale gain with recurring segment profitability.
- Review cash conversion after US$17.994 billion of investment, US$9.0 billion of shareholder distributions and US$3.0 billion of buybacks.
- Assess sensitivity to iron ore prices, Chinese demand, foreign exchange rates and energy costs.
- Review the maturity profile and currency composition of US$23.033 billion of long-term debt, including 2012-2014 maturities and floating-rate Brazilian real debt.
- Track the status and potential financial impact of Article 74 tax litigation, CFEM and ICMS assessments, and other reasonably possible claims.
- Monitor permitting, construction progress, capital requirements and start-up performance for S11D, Northern System expansions, Moatize/Nacala, Salobo, Long Harbour and Rio Colorado.
- Verify reserve assumptions, projected mine exhaustion dates and the effect of commodity-price changes on reserve economics.