Vale S.A. 2009 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2009; filed April 29, 2010. The source is an annual Form 20-F rather than a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars, unless otherwise noted.
Business context
Vale is a Brazil-based 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 include ferrous minerals, nickel and other non-ferrous minerals, coal, logistics, energy investments and steel-related investments. China represented 38% of operating revenue in 2009, while iron ore and pellets represented approximately 59% of gross revenue.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Gross operating revenue | US$23.939 billion | US$38.509 billion | Down 37.8% |
| Net operating revenue | US$23.311 billion | US$37.426 billion | Down 37.7% |
| Operating income | US$6.057 billion | US$14.748 billion | Down 58.9% |
| Operating margin | 26.0% | 39.4% | Down 13.4 percentage points |
| Net income | US$5.456 billion | US$13.476 billion | Down 59.5% |
| Net income attributable to shareholders | US$5.349 billion | US$13.218 billion | Down 59.5% |
| Basic and diluted EPS | US$0.97 | US$2.58 | Down 62.4% |
| Cash flow from operations | US$7.136 billion | US$17.114 billion | Down 58.3% |
| Capital expenditures and other investments | US$9.013 billion | US$10.191 billion | Down 11.6% |
- Liquidity: Cash and cash equivalents were US$7.293 billion, with US$3.747 billion of additional short-term investments, for approximately US$11.0 billion of cash and short-term investments.
- Debt: Aggregate debt was US$22.880 billion, including US$22.831 billion of long-term debt including current maturities and accrued charges. The average debt maturity was 9.17 years.
- Equity and assets: Total assets were US$102.279 billion and total stockholders’ equity was US$59.766 billion at year-end.
- Shareholder distributions: Vale paid US$2.724 billion during 2009 and proposed a minimum 2010 dividend of US$2.5 billion.
- Contingencies: Recorded provisions for contingencies totaled US$1.763 billion, comprising labor, civil, tax and other claims.
Material changes versus 2008
- Revenue declined primarily because of lower commodity prices and shipment volumes following the global recession. Iron ore revenue declined 27.8%, pellets 68.6%, nickel and related products 49.6%, aluminum 32.6% and logistics 31.3%.
- Nickel revenue declined 45.4%, reflecting a 32.6% decrease in average prices, lower volumes and strikes at Sudbury and Voisey Bay in Canada. Nickel and related products generated a US$361 million operating loss versus US$1.131 billion of operating income in 2008.
- Costs declined less rapidly than revenue. Cost of goods sold fell 22.8%, while other operating costs and expenses included approximately US$880 million related to idle capacity and operating stoppages.
- The 2008 US$950 million Vale Inco goodwill impairment did not recur in 2009.
- Non-operating results improved from a US$1.531 billion expense in 2008 to US$1.066 billion of income in 2009, mainly due to US$1.528 billion of derivative gains and US$675 million of foreign-exchange gains.
- Operating cash flow fell substantially, but working-capital releases and lower taxes partly offset the decline in earnings.
- Vale acquired Colombian coal assets for approximately US$300 million, potash projects in Argentina and Canada for US$850 million, the Corumbá iron ore assets for approximately US$814 million, and increased its stake in TKCSA to 26.87% through a US$1.424 billion investment.
- Iron ore production attributable to Vale declined to 229.3 million metric tons from 293.4 million metric tons, while total production including Samarco declined to 246.5 million metric tons from 310.0 million metric tons. Nickel production declined to 186.7 thousand metric tons from 275.4 thousand metric tons.
Guidance, outlook and management commentary
- Management expected continued recovery in global minerals and metals demand, particularly from China, and anticipated strong 2010 nickel demand as stainless steel and industrial activity recovered.
- Beginning in April 2010, Vale reached agreements with most iron ore customers to move toward shorter-term, quarterly price references rather than predominantly annual pricing. The agreements covered approximately 97% of customers and 90% of contracted sales volumes.
- Vale budgeted US$12.894 billion for 2010 capital expenditures, including US$9.876 billion for organic growth and US$3.019 billion for sustaining investments.
- Major planned projects included Carajás expansions, the S11D iron ore project, Oman and Tubarão pellet plants, Onça Puma and Goro nickel projects, Salobo copper, Bayóvar phosphate, Rio Colorado potash, Moatize coal and energy projects.
- In January 2010, Vale agreed to acquire Bunge’s Brazilian fertilizer assets for US$3.8 billion and entered into arrangements that could result in a 78.9% interest in Fosfertil. The filing states that the aggregate fertilizer investment was expected to total approximately US$5.7 billion, subject to closing conditions and regulatory approvals.
- Management described the balance sheet as strong, but future liquidity requirements included the 2010 capital budget, the minimum dividend and the planned fertilizer acquisition.
Principal risks and unusual items
- Results are highly sensitive to global steel production, Chinese demand, iron ore and nickel prices, commodity price volatility and economic cycles.
- Canadian labor strikes materially reduced nickel and copper production and could continue to affect operations, costs and project execution.
- Energy represented 15.6% of cost of goods sold; fuel and electricity prices, power availability and hydrological conditions remain important risks.
- Currency exposure is significant because most revenue is U.S.-dollar-linked while major costs are denominated in Brazilian reais and Canadian dollars. Derivative gains materially affected 2009 earnings and may create future earnings volatility.
- Mining concessions, environmental permits, royalties, taxes and proposed regulatory changes in Brazil, Indonesia, New Caledonia, Canada, Australia and other jurisdictions could increase costs or delay projects.
- Vale disclosed possible-loss claims of approximately US$4.190 billion for which no provision was recorded. Significant matters included Brazilian tax proceedings claiming approximately US$14.694 billion, CFEM royalty proceedings claiming approximately US$2.7 billion, and Itabira-related environmental and social claims totaling approximately US$2.699 billion.
- Asset retirement obligations were estimated at US$1.116 billion. The filing also disclosed US$12.589 billion of purchase obligations and US$874 million of Alunorte take-or-pay obligations within contractual commitments.
- The company had no off-balance-sheet arrangements as defined by Form 20-F. Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2009.
Investor verification points
- Reconcile the annual results with Vale’s fourth-quarter and subsequent Form 6-K disclosures, since this filing is for the full fiscal year rather than a standalone 2009 Q4 report.
- Assess normalized earnings and cash generation excluding the US$1.528 billion derivative gain, US$675 million foreign-exchange gain and other non-operating items.
- Verify the timing, funding, regulatory approvals and final consideration for the Bunge fertilizer and Fosfertil transactions.
- Monitor iron ore pricing changes, quarterly pricing implementation, shipment volumes and customer concentration in China.
- Review debt maturities, including US$2.646 billion of contractual long-term debt payments due within one year and total contractual obligations of US$54.329 billion.
- Track the resolution of Canadian labor disputes, the ramp-up of Goro and other major projects, and actual capital spending against the US$12.894 billion 2010 budget.
- Review the legal, tax, royalty, environmental and reclamation contingencies, including claims for which no provision was recorded.