Vale S.A. Form 20-F Summary
Business context and reporting period
Vale is a Brazil-based global mining and logistics company producing iron ore, pellets, nickel, copper, coal, manganese, ferroalloys, cobalt, precious metals and related products. Its principal operations are in Brazil, Canada, Indonesia, New Caledonia, Mozambique and Oman. The filing was filed on April 18, 2019 and reports audited consolidated results under IFRS for the year ended December 31, 2018. The filing is annual rather than a standalone 2018 fourth-quarter report.
Key financial metrics
| US$ millions, except per-share data | 2018 | 2017 | Change |
|---|---|---|---|
| Net operating revenues | 36,575 | 33,967 | 7.7% |
| Gross profit | 14,466 | 12,928 | 11.9% |
| Operating income | 11,955 | 10,930 | 9.4% |
| Net income from continuing operations | 6,988 | 6,334 | 10.3% |
| Net income attributable to Vale stockholders | 6,860 | 5,507 | 24.6% |
| Adjusted EBITDA from continuing operations | 16,593 | 15,338 | 8.2% |
| Operating cash flow from continuing operations | 12,901 | 12,450 | 3.6% |
| Capital expenditures | 3,784 | 3,831 | Down 1.2% |
| Total debt | 15,466 | 22,489 | Down 31.2% |
| Cash and cash equivalents | 5,784 | 4,328 | Up 33.6% |
| Basic and diluted EPS | US$1.32 | US$1.05 | 24.8% |
Calculated margins were approximately 39.6% gross, 32.7% operating, 19.1% net from continuing operations and 45.4% Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure.
- Ferrous minerals generated US$27.933 billion of revenue, or 76.4% of total continuing-operations revenue, and US$14.711 billion of Adjusted EBITDA.
- Coal revenue increased to US$1.643 billion, but Adjusted EBITDA declined to US$181 million from US$362 million because of higher logistics costs.
- Base-metals revenue declined 2.5% to US$6.703 billion, while Adjusted EBITDA increased 12.7% to US$2.542 billion, supported by higher nickel prices and lower expenses.
- Iron ore sales increased to 307.4 million metric tons from 288.7 million metric tons, and pellet sales increased to 56.6 million metric tons from 51.8 million metric tons.
- Cash exceeded current debt and the company had US$5.0 billion of undrawn revolving credit facilities. Net debt was approximately US$9.7 billion, consistent with management’s US$10 billion target.
- Debt principal due in 2019 was US$773 million. Contractual obligations totaled US$34.002 billion, including debt, interest, leases and purchase obligations.
Material changes versus the prior comparable period
- Revenue growth was driven principally by higher iron ore and pellet prices and volumes, including the S11D ramp-up, and higher base-metals prices.
- Cost of goods sold increased 5.1% to US$22.109 billion. Higher freight, royalties and ferrous-minerals costs were partly offset by currency benefits from the depreciation of the Brazilian real.
- Financial results deteriorated to a net expense of US$4.957 billion from US$3.019 billion. The change primarily reflected a US$2.247 billion foreign-exchange loss and a US$266 million derivative loss.
- Impairment and onerous-contract charges increased to US$577 million from US$271 million, including a US$393 million provision for Midwest-system transportation and port contracts.
- Cash distributions to stockholders totaled US$3.313 billion in 2018, compared with US$1.456 billion in 2017. Vale also completed a US$1 billion share repurchase program covering 71.2 million shares.
- Vale sold significant fertilizer assets to Mosaic and Cubatão assets to Yara, received US$2.6 billion from Nacala project financing, and received US$690 million from a cobalt-streaming transaction supporting the Voisey’s Bay underground expansion.
Outlook, unusual items and risks
The January 25, 2019 failure of Dam I at the Córrego do Feijão mine in Brumadinho was treated as a subsequent event and did not adjust the December 31, 2018 financial statements. The filing states that 306 people died or remain missing. The full financial impact could not be reliably estimated at filing.
- As of April 15, 2019, suspended operations were expected to reduce annual production by approximately 92.8 million metric tons, including the estimated impact of Brucutu.
- Management expected a US$124 million asset write-off in 2019, a US$220 million provision related to employee claims, and US$260 million to US$520 million for preliminary indemnification arrangements with authorities. Additional provisions were expected.
- Brazilian courts froze or attached approximately R$17.6 billion, or about US$4.5 billion, of Vale assets. The financial statements separately disclosed approximately US$4.4 billion of blocked assets as of the reporting date used for the subsequent-event disclosure.
- Vale accelerated decommissioning of upstream tailings dams. A preliminary estimate of approximately US$1.3 billion was disclosed for de-characterization based on removal and reprocessing of tailings, but management stated that the final cost and timing remained uncertain.
- New Brazilian rules require technical plans and eventual decommissioning of upstream dams, potentially increasing capital expenditures, operating costs, licensing uncertainty and production constraints.
- The shareholder-remuneration policy and new share buybacks were suspended after the Brumadinho failure, although the company had already paid US$1.876 billion in September 2018, exceeding the 2018 mandatory amount.
- Samarco remained suspended following its 2015 Fundão dam failure. Vale’s Samarco-related provision was US$1.121 billion at December 31, 2018, and Vale expected to contribute approximately US$309 million in 2019 under the remediation framework.
- Other key risks include iron ore and metals price volatility, China concentration, foreign-exchange exposure, regulatory and environmental liabilities, legal proceedings, operational incidents, reserve revisions, community disputes and potential funding needs.
- Management expected IFRS 16 adoption on January 1, 2019 to recognize approximately US$1.8 billion to US$2.0 billion of right-of-use assets and lease liabilities.
Most important facts for investors to verify
- Actual 2019 production, revenue, cash flow and cost effects from Brumadinho-related suspensions and any subsequent operating resumptions.
- Final provisions, settlements, fines, insurance recoveries and decommissioning costs associated with Brumadinho and other tailings dams.
- Liquidity after asset freezes, remediation spending, mandatory debt payments and potential additional borrowing.
- Compliance with debt covenants and the availability of revolving credit facilities.
- Progress and cost of upstream-dam decommissioning, alternative tailings technologies and new regulatory requirements.
- Developments in Samarco obligations, Renova funding and the timing of any Samarco restart.
- Iron ore prices, quality premiums, China demand and the sensitivity of operating income to commodity-price changes.
- Changes in reported reserves for Paraopeba, manganese, nickel and other operations affected by dam safety reviews and revised economic assumptions.
- Whether shareholder distributions and share repurchases remain suspended and the timing of any policy reinstatement.