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Vale's (VALE) Dividend Cut Highlights Financial Flexibility - Fitch

September 29, 2015 3:05 PM EDT

A recent decision by Vale S.A. (NYSE: VALE) (Vale, 'BBB+'/Outlook Stable) reinforces the company's commitment to a strong capital structure during periods of heavy investment and weakness in iron ore prices, according to Fitch Ratings. Yesterday Vale's Executive Committee announced that it will reduce the company's October dividend payment to $500 million from $1 billion.

The move highlights Vale's flexible financial policy, which stands in contrast to those of its peers Rio Tinto Plc ('A-'/Outlook Negative) and BHP Billington Plc ('A+'/Outlook Negative). Both companies have always either maintained or increased their dividend levels.

Vale is expected to raise USD10 billion through non-core asset sales in 2015 and 2016 to support its aggressive capex program in addition to reducing dividends. Funds from these measures will be used to fund capex of $8 billion in 2015 and $7 billion during 2016. The majority of these expenditures will be geared toward increasing the company's output of iron ore to more than 450 million tons of iron ore in 2018 from 330 million tons in 2014.

On Sept. 28, 2015 Vale announced that its Executive Board approved and will submit to the Board of Directors a proposal for payment of the second installment of the 2015 dividends in the amount of USD500 million. Fitch expects this proposal to be approved, which should lead Vale to distribute USD1.5 billion of dividends in 2015. This level of dividends compares with an average of $4.9 billion over the past three years.

Fitch had previously projected that Vale would generate around $7.4 billion and $9 billion of EBITDA in 2015 and 2016, respectively, using exchange rates of BRL3.2 in 2015 and BRL3.3 in 2016 and an iron ore price of $50 per ton. Give the sharp decline in the Brazilian real during the second half of 2015, Vale's performance in both years should exceed these expectations as 90% of its iron ore production costs in Brazil are denominated in Reais. As of June 30, 2015, Vale had $33 billion of total adjusted debt and $3.3 billion of cash and marketable securities.



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