Vale S.A. 2010 Form 20-F Summary
Business context and reporting period
Vale S.A. filed its annual report on Form 20-F on April 28, 2011, covering the fiscal year ended December 31, 2010. The company reports under U.S. GAAP with financial information translated into U.S. dollars. Vale is a diversified mining and logistics company, led by iron ore and pellets, with additional businesses in nickel, copper, aluminum, coal, manganese, fertilizers, logistics, energy and steel investments.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Gross operating revenues | US$46.481 billion | US$23.939 billion | +94.2% |
| Net operating revenues | US$45.293 billion | US$23.311 billion | +94.3% |
| Operating income | US$21.695 billion | US$6.057 billion | +258.2% |
| Operating margin | 47.9% | 26.0% | +21.9 percentage points |
| Net income | US$17.453 billion | US$5.456 billion | +219.9% |
| Net income attributable to shareholders | US$17.264 billion | US$5.349 billion | +222.8% |
| Basic earnings per common and preferred share | US$3.23 | US$0.97 | +US$2.26 |
| Cash flow from operating activities | US$19.669 billion | US$7.136 billion | +175.7% |
| Capital expenditures and other investments | US$12.705 billion | US$9.013 billion | +41.0% |
| Cash and cash equivalents | US$7.584 billion | US$7.293 billion | +4.0% |
| Short-term investments | US$1.793 billion | US$3.747 billion | -52.1% |
| Aggregate debt, excluding aluminum businesses held for sale | US$24.553 billion | Not clearly comparable in the filing summary | — |
| Total assets | US$129.139 billion | US$102.279 billion | +26.3% |
Cash and cash equivalents plus short-term investments totaled approximately US$9.377 billion at year-end. Current assets were US$31.791 billion versus current liabilities of US$17.912 billion. Long-term debt, including the current portion and accrued charges, was US$24.414 billion; average debt maturity was 9.92 years. The filing states that available credit lines and cash holdings were expected to support 2011 requirements.
Material changes versus the prior comparable period
- Iron ore revenue increased 105.6%, driven by an 84.9% increase in average realized prices and an 11.2% increase in volume sold.
- Iron ore pellet revenue increased 373.5%, reflecting higher prices and an 118.5% increase in volume sold.
- Bulk materials became more dominant, representing 74.2% of gross operating revenues in 2010 versus 63.5% in 2009. Iron ore and pellets together represented 70.5% of 2010 gross operating revenues.
- Nickel revenue increased 17.6% despite a 22.8% decline in volume sold, primarily because average prices increased 50.6%. Canadian labor strikes affected production and deliveries.
- Potash revenue declined 32.2% because of lower prices and lower volumes, while the fertilizer platform expanded through the acquisition of Brazilian phosphate and nitrogen assets.
- Operating costs and expenses increased 36.8% to US$23.598 billion. Cost of goods sold increased 38.1%, with energy costs up 45.7% and third-party iron ore and pellet purchases increasing materially.
- Net non-operating results changed from income of US$1.066 billion in 2009 to expenses of US$1.381 billion in 2010, reflecting higher financial expenses, lower derivative gains and lower foreign-exchange gains.
- Operating cash flow increased substantially, but investing cash use reached US$17.184 billion, including US$12.647 billion of property, plant and equipment additions and US$6.252 billion for acquisitions.
- Vale completed a US$2.0 billion share repurchase program in October 2010, acquiring 21.7 million common shares and 48.2 million preferred shares for treasury.
- Iron ore pricing shifted from annual benchmark contracts to quarterly index-based pricing during 2010, increasing price transparency but also increasing price and cash-flow volatility.
Guidance, outlook, commentary, risks and unusual items
- Management described 2010 as a record year and expected strong mineral and metal demand to continue in 2011, supported by emerging-market growth, particularly China. China represented 33.1% of operating revenues in 2010.
- The 2011 investment budget was US$24.0 billion, including US$19.521 billion for organic growth and US$4.479 billion to sustain existing operations. The company announced a minimum 2011 dividend of US$4.0 billion and paid a US$1.0 billion extraordinary dividend in January 2011.
- Major projects included Carajás expansions, Serra Sul S11D, Simandou in Guinea, Moatize coal, Salobo copper, Onça Puma nickel, Bayóvar and Rio Colorado fertilizers, logistics corridors and energy projects. Project timing remains subject to construction execution, financing, permits and regulatory approvals.
- Subsequent events included the February 2011 transfer of major aluminum assets to Norsk Hydro in exchange for cash and a 22.0% equity interest in Hydro; the March 2011 ramp-up of Onça Puma; and the proposed acquisition of Metorex for US$1.125 billion, subject to approvals.
- Unusual 2010 items included US$143 million of discontinued-operations loss related primarily to assets classified as held for sale, US$719 million of preliminary goodwill from the fertilizer acquisition, and acquisition-accounting adjustments that contributed to negative fertilizer operating margins.
- Key risks include global economic and steel-cycle sensitivity, concentration in China and iron ore, commodity-price volatility, quarterly index pricing, currency mismatch, energy costs, labor disputes, project delays and overruns, environmental and permitting requirements, mine-reserve uncertainty, political and regulatory changes, joint-venture dependency and substantial legal and tax claims.
- Provisioned contingencies totaled US$2.043 billion at year-end, while claims considered reasonably possible but not probable totaled US$4.787 billion and were not provisioned. Notable disclosed claims included approximately US$4.729 billion of CFEM royalty proceedings and US$16.029 billion of tax assessments relating to Article 74 of Brazil’s Provisional Measure 2,158-34/2001.
- The filing reported no SEC-defined off-balance-sheet arrangements. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2010.
Most important facts for investors to verify
- Confirm the sustainability of 2010 margins and cash generation after separating iron ore price recovery, index-based pricing effects, acquisitions and nonrecurring items.
- Reconcile reported cash, short-term investments, debt, assets held for sale and post-filing aluminum transaction proceeds.
- Assess the funding capacity and execution risk associated with the US$24.0 billion 2011 investment budget and announced dividends.
- Monitor Chinese steel production, iron ore demand, customer inventories and Vale’s revenue concentration in China.
- Review the status, cost estimates, permits and commissioning schedules for Simandou, S11D, Salobo, Moatize, Onça Puma, Bayóvar and Rio Colorado.
- Evaluate exposure to currency movements, energy and fuel prices, nickel and copper prices, freight costs and derivative fair-value volatility.
- Track labor relations following the Canadian strikes and the potential production impact from the Sudbury furnace shutdown disclosed for February 2011.
- Review the latest developments in CFEM, Article 74 tax litigation, environmental matters, railway disputes and other contingent liabilities.
- Verify the final purchase-price allocation for the fertilizer acquisitions and the accounting and financial impact of the aluminum divestiture.