Vale S.A. 2012 Form 20-F Summary
Business context and reporting period
Vale S.A. is a Brazil-based global mining company focused on iron ore, pellets, nickel, copper, coal, manganese, fertilizer nutrients, logistics and energy. The filing was filed April 2, 2013 and covers the fiscal year ended December 31, 2012. The filing is prepared under U.S. GAAP and reports financial information primarily in U.S. dollars. It is an annual filing rather than a standalone fourth-quarter filing; quarterly Q4 financial amounts are not clearly provided in the supplied text.
Iron ore and pellets remained the core business, representing approximately 69.7% of 2012 gross operating revenues. China accounted for 36.2% of gross operating revenues and 37.0% of net operating revenues by destination.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net operating revenues | US$47.694 billion | US$60.946 billion | Down 21.7% |
| Operating income | US$9.223 billion | US$30.112 billion | Down 69.4% |
| Operating margin | 19.3% | 49.4% | Down 30.1 percentage points |
| Operating cash flow | US$16.595 billion | US$24.496 billion | Down 32.3% |
| Net income attributable to Vale shareholders | US$5.511 billion | US$22.885 billion | Down 75.9% |
| EPS | US$1.07 | US$4.33 | Down 75.3% |
| Cash and cash equivalents | US$5.832 billion | US$3.531 billion | Increased |
| Total debt, including accrued interest | US$30.267 billion | US$23.033 billion | Increased |
| Capital and R&D expenditures | US$17.729 billion | US$17.994 billion | Down 1.5% |
Cost of goods sold increased 4.2% to US$26.591 billion despite lower revenue, reflecting maintenance, project ramp-up, personnel and other operating costs. Excluding the US$4.023 billion asset impairment charge, operating margin would have been 27.8%.
Vale paid US$6.0 billion to shareholders in 2012 and did not repurchase shares. Current assets were US$22.897 billion and current liabilities were US$12.585 billion at year-end. The company reported no short-term debt at December 31, 2012 and had an undrawn US$3.0 billion revolving credit facility.
Revenue and operating developments
- Bulk-materials revenue decreased 23.8% to US$35.126 billion, primarily because iron ore and pellet prices fell. Iron ore revenue declined 26.0% to US$26.931 billion and pellet revenue declined 17.4% to US$6.560 billion.
- Base-metals revenue decreased 25.7% to US$7.131 billion. Nickel and other-products revenue fell 26.4% to US$5.975 billion, while copper concentrate revenue increased 4.8% to US$1.156 billion.
- Fertilizer revenue increased 7.5% to US$3.570 billion, driven mainly by higher phosphate volumes and Bayóvar production.
- Logistics revenue decreased 4.7% to US$1.387 billion, and the segment recorded a US$197 million operating loss.
- Iron ore and pellet shipments reached a record 303.4 million metric tons. Iron ore sales increased slightly to 258.1 million metric tons and pellet sales increased to 45.4 million metric tons.
- Iron ore production was 309.0 million metric tons, compared with 311.8 million metric tons in 2011. Pellet production attributable to Vale was 40.2 million metric tons, compared with 39.0 million metric tons.
- Metallurgical coal production increased to 5.083 million metric tons, primarily from the ramp-up of Moatize, while thermal coal production declined following the sale of Colombian assets.
- Nickel production declined to 237,000 metric tons from 241,500 metric tons. Copper production declined to 290,000 metric tons from 302,000 metric tons, although Salobo began production in 2012.
Material changes versus the prior comparable period
- Lower prices for iron ore, pellets, nickel and coal were the principal drivers of the revenue and profit decline. Average realized prices fell 26.5% for iron ore, 23.7% for pellets, 21.2% for nickel and 27.2% for metallurgical coal.
- Vale recorded US$4.023 billion of asset impairments, including US$2.849 billion for Onça Puma nickel assets and US$1.029 billion for Australian coal assets. No comparable asset impairment was recorded in 2011.
- Vale recorded US$1.641 billion of investment impairments, principally US$975 million related to Norsk Hydro and US$583 million related to Thyssenkrupp CSA.
- The company recorded a US$491 million loss on asset sales in 2012, compared with a US$1.513 billion gain on the sale of aluminum assets in 2011.
- Net foreign-exchange losses increased to US$1.915 billion from US$1.382 billion. Net non-operating expenses increased to US$3.801 billion from US$3.313 billion.
- Debt increased by US$7.234 billion, mainly reflecting new notes, export financing and project-related borrowings. Average debt maturity increased to 10.14 years from 9.81 years.
- Cash flow from operations declined, but year-end cash increased to US$5.832 billion because of operating cash generation and debt issuance.
- Vale converted its 2012 mandatorily convertible notes into common and preferred ADSs in June 2012.
Guidance, outlook, management commentary and unusual items
- Management shifted its strategy from marginal volume growth toward capital-efficient volume, disciplined capital allocation and lower costs. Iron ore and nickel remain the principal businesses, while copper, coking coal and fertilizer nutrients are targeted for further value creation.
- The 2013 investment budget was US$16.296 billion, comprising US$10.126 billion for project execution, US$5.117 billion for sustaining operations and US$1.053 billion for R&D. This was below 2012 spending and reflected tighter capital discipline.
- Management proposed a minimum 2013 shareholder distribution of US$4.0 billion, subject to Board approval, compared with US$6.0 billion paid in 2012.
- Major projects expected to advance or start in 2013 included Carajás expansion, Northern System logistics, Conceição Itabiritos, Tubarão VIII, Long Harbour and Totten. Project timing remains subject to permitting, construction and operational execution.
- Three Brazilian pellet plants were suspended late in 2012 because steelmakers shifted from pellets toward sinter feed. Onça Puma was suspended after furnace damage, with one furnace being rebuilt and ramp-up expected to resume in 2013.
- Vale New Caledonia resumed production in November 2012 and continued ramp-up. Salobo and Lubambe copper operations began production, while Moatize, Oman pellets and Bayóvar phosphate operations continued to ramp up.
- In March 2013, Vale suspended the Rio Colorado potash project in Argentina because expected returns no longer met its capital-allocation discipline. In February 2013, Vale received US$1.9 billion from a gold-stream transaction with Silver Wheaton.
- Management identified substantial exposure to commodity-price cycles, China and global steel demand, foreign exchange, energy costs, regulatory changes, environmental obligations, project execution, labor disruptions, community relations and political risk.
- Vale recognized US$833 million of income-tax benefit in 2012, including a US$1.236 billion reversal of a deferred tax liability related to the Vale Fertilizantes merger and a US$1.327 billion tax benefit related to asset impairments.
- The company reported US$21.016 billion of reasonably possible claims for which no provision was recorded, primarily tax-related. Recorded litigation provisions were US$2.065 billion.
- Vale's management and its independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2012.
Most important facts for investors to verify
- Confirm the effect of iron ore, nickel and coal price movements on 2013 revenue, margins and operating cash flow.
- Assess whether Onça Puma, Vale New Caledonia, Long Harbour, Salobo and Moatize achieve planned ramp-up and cost targets.
- Monitor debt growth, refinancing requirements, covenant compliance and the use of the US$3.0 billion revolving facility.
- Review the sustainability of the proposed US$4.0 billion 2013 distribution against capital spending and commodity-price conditions.
- Track the outcome and potential cash-security requirements of Brazilian tax disputes, including Article 74 assessments and CFEM proceedings.
- Evaluate the impact of suspended pellet plants, the Rio Colorado suspension and potential impairment charges on future production and reserves.
- Verify regulatory, environmental and permitting developments in Brazil, Indonesia, Guinea, Mozambique, Australia and New Caledonia.
- Note that Vale planned to discontinue U.S. GAAP reporting after 2012 and present future annual financial statements under IFRS, which may affect period-to-period comparability.