(BRL mn) 2012A 2013E 2014E 2015E Key Figures 4-Dec-13 EPS (R$) 4.14 5.95 5.91 4.65 Local price 32.39 Net earnings 21,126 30,388 30,180 23,747 ADR 14.76 EBITDA 36,048 50,446 48,195 45,087 Price range - 52 weeks (BRL) 25.52-43.09 Shareholders' equity 166,101 185,853 205,470 220,905 Shares outstanding (mn) 5,102.90 ROE% 12.72% 16.35% 14.69% 10.75% 3-month ADTV (R$mn) 469.5 P/E 7.82 5.44 5.48 6.96 Market cap (R$mn) 165,283 EV/EBITDA 6.11 4.37 4.57 4.89 EV (R$mn) 220,315 P/BV 1.00 0.89 0.80 0.75 Net debt (R$mn) 50,446 Dividend yield 6.96% 6.37% 6.33% 4.98% Net debt/EBITDA (LTM) 1.17 4 Vale Day: Capex, Iron Ore Market, Partnerships & Cost Cuts Vale hosted its Vale Day 2013 on Dec. 2 in NYC. Overall strategy, project developments and the company’s expectations regarding the various markets in which it operates were discussed in detail. Our main takeaways are: Strategy: Reducing uncertainties while keeping austerity Settling a major tax dispute with large reduction in the liability (to R$22.3bn, from R$45bn) reduces uncertainties surrounding Vale. Austerity and simplicity are guiding the overall decision-making process, with a conservative approach. A strong balance sheet and maintenance of “A” credit rating are paramount to management, especially considering the company’s large capex needs. Capex: Scaling back budget (US$14.8bn for 2014), with 3 rd consecutive reduction The focus is still on the main projects: Carajás (35.3%), Moatize (27.7%), Itabiritos (11.5%), distribution network (4.7%) and Salobo II (3.6%). R&D should remain stable in 2014, with feasibility studies expenses decreasing significantly (down US$192mn). Sustaining capex budget was also reduced, to US$4.5bn from US$4.8bn, and there is potential for a further reduction of US$107mn related to a non-recurring ERP implementation project. Iron ore market: Less volatility and healthier market ahead Iron ore price volatility should decrease as the cap price is limited by new low- cost supply, while the floor is determined by quality deterioration and cost inflation at Chinese mines. Vale believes 1/3 of new supply will be only filling the depletion gap. Vale is continuously working on approval for docking Valemax ships in China. Scrap is not an issue, as Chinese scrap has low quality and is difficult to collect. Base metals: Rightsizing operations to increase efficiency Closing of one furnace at Sudbury (two currently in operation) should help reduce sustaining capex by US$1bn, while productivity can be assured by operating the remaining furnace with greater capacity utilization. Salobo: first quartile cash cost could generate US$1bn in annual cash flow. Coal/Fertilizers: Partnership for Nacala and Kronau Vale intends to sell half of its 70% stake in the Nacala corridor, and believes it could also be used to transport grain, boosting domestic agriculture. Vale could sign a MOU for the Kronau project in the coming weeks. Caves: S11D project approved already meeting cave legislation requirements Vale obtained the environmental permit for S11D already complying with cave legislation, therefore not representing an unplanned risk for the project. (…continued on following pages…) COMPANY REPORT Vale FLASH NOTE BBI Equity Research Wednesday, December 4, 2013 Vale (VALE5, VALE US) Mining Outperform Target Price: R$54.00, US$25.00 Upside: 66.7%, 67.6% Alan Glezer, CFA - 55 11 2178 5466 [email protected]Arthur Suelotto, CFA - 55 11 2178 6104 [email protected]Bradesco Corretora – Av. Paulista, 1.450 – 7 th floor – Sao Paulo – Brazil – 55 11 3556-3001 Bradesco S.A. Corretora de Títulos e Valores Mobiliários (Bradesco Corretora) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Bradesco Corretora and its affiliates may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For full disclaimer and definitions, please refer to the end of this report. 70 75 80 85 90 95 100 105 110 115 120 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Sep-13 Nov-13 Ibovespa Vale PNA
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Vale Day: Capex, Iron Ore Market, Partnerships & Cost Cuts Vale hosted its Vale Day 2013 on Dec. 2 in NYC. Overall strategy, project developments and the company’s expectations regarding the various markets in which it operates were discussed in detail. Our main takeaways are: Strategy: Reducing uncertainties while keeping austerity
Settling a major tax dispute with large reduction in the liability (to R$22.3bn, from R$45bn) reduces uncertainties surrounding Vale.
Austerity and simplicity are guiding the overall decision-making process, with a conservative approach.
A strong balance sheet and maintenance of “A” credit rating are paramount to management, especially considering the company’s large capex needs.
Capex: Scaling back budget (US$14.8bn for 2014), with 3
rd consecutive reduction
The focus is still on the main projects: Carajás (35.3%), Moatize (27.7%), Itabiritos (11.5%), distribution network (4.7%) and Salobo II (3.6%).
R&D should remain stable in 2014, with feasibility studies expenses decreasing significantly (down US$192mn).
Sustaining capex budget was also reduced, to US$4.5bn from US$4.8bn, and there is potential for a further reduction of US$107mn related to a non-recurring ERP implementation project.
Iron ore market: Less volatility and healthier market ahead
Iron ore price volatility should decrease as the cap price is limited by new low-cost supply, while the floor is determined by quality deterioration and cost inflation at Chinese mines.
Vale believes 1/3 of new supply will be only filling the depletion gap.
Vale is continuously working on approval for docking Valemax ships in China.
Scrap is not an issue, as Chinese scrap has low quality and is difficult to collect.
Base metals: Rightsizing operations to increase efficiency
Closing of one furnace at Sudbury (two currently in operation) should help reduce sustaining capex by US$1bn, while productivity can be assured by operating the remaining furnace with greater capacity utilization.
Salobo: first quartile cash cost could generate US$1bn in annual cash flow.
Coal/Fertilizers: Partnership for Nacala and Kronau
Vale intends to sell half of its 70% stake in the Nacala corridor, and believes it could also be used to transport grain, boosting domestic agriculture.
Vale could sign a MOU for the Kronau project in the coming weeks.
Bradesco S.A. Corretora de Títulos e Valores Mobiliários (Bradesco Corretora) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Bradesco Corretora and its affiliates may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For full disclaimer and definitions, please refer to the end of this report.
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Ibovespa Vale PNA
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Strategy: Reducing uncertainties while keeping austerity
Capex downtrend with simultaneous asset divestments:
o The company will only deploy capital in world-class assets.
o Already disinvested US$6.4bn in non-core assets (US$4.5bn in 2013).
o Disinvestment trend may continue going forward (management will
analyze all possibilities involving its non-core assets, but taking a careful
and disciplined approach, avoiding mispricings at all costs).
o Currently searching partners in some businesses to leverage returns.
Important milestones to reduce uncertainties achieved in recent months:
o Several tax disputes solved with no major cash flow pressure:
ICMS tax in Minas Gerais successfully negotiated.
CNI claimed unconstitutionally of state inspection fees.
Tax liability claimed by Swiss government settled.
o REFIS settlement of income tax on non-Brazilian subsidiaries
20% upfront with a remaining 15-year refinancing.
50% discount.
Reduced tax exposure to R$22.3bn from R$45.0bn – NPV of
R$14.4bn tax exposure for 2002-2013 was not included.
If a court rules in favor of Vale, it will have the right to stop paying
installments and request a refund of payments made.
Uncertainties regarding cave regulation: In light of the technical work Vale has
been performing, it is optimistic about sorting out issues.
Structure of controlling group: Although a formal decision has yet to be made, the
chairman said there is no reason not to renew the shareholders agreement.
o Approval of the S11D project could be an early indicator of renewal of the
agreement, as cash flow generation will only happen after the
agreements expire, while investments will mostly occur before it.
Figure 1: Capex Plan for 2014
Source: Company
Capex: Scaling back budget (US$14.8bn for 2014), with 3rd consecutive reduction
Third consecutive year of capex reduction (-5% vs. 2013, -16% vs. 2012).
2014 budget: US$14.8bn (using average BRL/USD rate of 2.35).
o US$9.3bn in projects, highly concentrated in key ones:
Carajás (iron ore): US$3.3bn (35.3%).
Moatize II (coal): US$2.6bn (27.7%).
Itabiritos (iron ore): US$1.1bn (11.5%).
Iron ore distribution network: US$436mn (4.7%).
Salobo II (copper): US$332mn (3.6%).
o US$4.5bn in maintenance and sustaining current operations.
Fourth year of stability in sustaining investments.
o US$0.9bn in R&D.
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Guidance for 2015 and 2016: US$13.6bn and US$10.4bn, respectively, for
approved projects only.
Still investing US$107mn in ERP implementation – potential to lower future
sustaining capex.
R&D – Feasibility studies on a downtrend, as focus on key projects increases.
Strategy: Vale is on the path to becoming cost competitive.
o 2013: “low-hanging fruit” (COGS down 5% YoY, R&D down 47% YoY,
SG&A expenses down 39% YoY – 9M12 vs. 9M13).
o 2014: “efficiency and productivity” (simplification of organizational
structures – potential for additional 10% reduction in SG&A expenses).
o 2015: “structural changes”.
Growth – Divestitures and partnerships may allow for potential dividends and
lower leverage.
Figure 2: EBITDA Growth for 2014
Source: Company
Iron ore market: Lower volatility and healthier market ahead
Vale’s outlook: Iron ore seaborne market and steel production will continue to
enjoy healthy growth (+34% and +23%,respectively, between 2012 and 2020).
Scrap should not be an issue until 2023-2025.
o Scrap from construction in China is difficult to collect, and has low quality.
o China does not have a proper collection network.
o Electricity is scarce and expensive.
Vertical integration (iron ore production controlled by the steel industry)
decreased from 28% in 2004 to 23% in 2012 (increasing seaborne market).
Depletion will increase with lower prices.
o 1/3 of new capacity will replace depletion.
o Vale does not see an oversupplied market.
Figure 3: Iron Ore Supply
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Chinese steel consumption intensity: on a very steep path and still in the
beginning of an uptrend, still having a long way still to go.
Figure 4: Steel Intensity versus GDP
Source: WSA, IMF, Company
Prices should remain stable going forward, and volatility is decreasing as new
low-cost supply curbs the cap, while cost inflation/deterioration of Chinese
producers’ mines increases the price floor.
Strategy: 2CTS
o Continuous confidence in Asia/China.
o Cost curve and quality:
Being well positioned in the cost curve is essential.
Maintaining very high quality is also indispensable.
o Time to market.
o Tailored to market (focus on Asian growth).
Vale needs to adapt its strategy to maximize returns in the Asian
market.
o Safety and health.
o Sustainability.
o Delivering shareholder value by:
Keeping market leadership.
Keeping FOB cost parity.
Increasing quality advantage.
Reducing logistics costs.
Improving customer services.
Staying in the first quartile is indispensable:
o Vale believes the cost curve is not becoming flatter. On the contrary, it is
actually becoming steeper (costs of high-cost producers are growing).
Figure 5: Iron Ore Industry Cost Curve (Seaborne + China Domestic)
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
The shift to Asia should continue, representing a key challenge for Vale, due to
the logistics challenge.
o VALEMAX has already transported 44mn tons.
o Vale already has 30 ships in operation, and should receive the remaining
5 ships in 2014.
The company believes it will be able to dock VALEMAX directly in China in the
near future:
o It has already made 121 shipments with this kind of vessel.
o China is becoming a more market-oriented economy, and as VALEMAX
reduces pollution by 25%, it is in line with the Chinese government’s
current strategy.
The company expects 215mtpy of additional capacity, vs. 65mtpy of depletion,
with net growth of 150mtpy.
Many iron ore projects are presently addressing the issue of quality in order to
improve overall iron ore quality.
2018 – expected capacity of 450mtpy with better quality:
o Increase in average iron ore content by 1%.
o Decrease in silica content by almost 2% – in China a smaller silica
premium is being priced in.
Figure 6: Vale’s Iron Ore Capacity
Source: Company
Third-party purchases should stay in the 6-10mtpy range, depending on iron ore’s
overall attractiveness.
Figure 7: Vale’s Total Iron Ore Supply Forecasts
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Base Metals: Rightsizing operations to increase efficiency
o As per Brazilian legislation, any underground cave accessible to a human
being is protected by the regulation.
It took 24 years for the rules to become clear (only in 2012).
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
o Cave relevance studies normally take 1 year to be completed, as they
are executed in both the dry and rainy seasons.
o The company expects favorable results in 2013, as some studies were
submitted in 2012.
Successful example with S11D – project conceived complying with cave
legislation, already taking into consideration the existence of the caves.
o 137 caves were preserved.
Licensing is usually a complicated process, extending for long periods since each
step depends on conclusion of the previous step.
o Simpler for new projects.
o For actual operations, a compensation for existing caves is needed.
Vale has 200 caves and needs a one-year period to classify
them by relevance – those with greatest relevance should be
compensated.
Massive improvement in rate of accidents, with recordable injuries/million hours
worked falling from 3.33 in 2011 to 2.66 in 2013.
Vale is including contractors in health and safety projects.
Figure 11: Total Recordable Injuries Frequency Rate¹ (per million hours worked)
Source: Company (¹ Medical treatment, restricted work, fatalities and lost time. Includes employees and contractors.
Capital Projects: Discipline in the Development/Completion Phase Transaction
Pre-feasibility studies (FEL2) and feasibility studies (FEL3) are only being
approved after a complete and rigorous maturity assessment.
The company is striving to avoid, at all costs, changing suppliers and contractors
after the initiation of projects.
In addition, contractors are charging fees that are lower than they used to be,
since demand has decreased.
Key projects (delivered in 2013):
o Additional 40mtpy:
Start-up in 3Q13.
Capex of US$3.5bn.
Already produced almost 3mn tons.
Sinter feed with dry processing method.
Figure 12: Additional 40mtpy
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
o CLN150 – railroad and port facilities:
Railroad capacity of 128mtpy (after 5 sections being delivered).
Port capacity is currently 150mtpy.
Capex of US$3.9bn, and development as expected.
Already shipped 6mn tons in 25 VALEMAX vessels.
o Conceição Itabiritos:
High-quality pellet feed.
Presently in ramp-up phase; should start up in 4Q13.
Being delivered on time and on budget – capex of US$1.2bn
Possible positive surprise for 2014.
Figure 13: Conceição Itabiritos
Source: Company
o Teluk Rubiah unloading facilities:
3 ship loaders already placed.
First VALEMAX to be unloaded in the coming weeks.
Next year will start the exportation facility.
Stockyard - 3.2mn tons of capacity.
Stackers and reclaimers installed.
Capex of US$1.4bn.
Start-up in 2H14.
o Long Harbour.
o Totten.
Projects under construction:
o S11D:
No problems even throughout the rainy season.
109 total modules, with 31 already finished.
47% of physical progress completed.
2-year ramp-up.
Transportation of first module over 48km and was very
satisfactory (important part of the project).
Main energy substation has been concluded.
Duplication of 8 sections out of the railroad’s 48 has already
started.
o Moatize II:
48% of physical progress completed.
Will be delivered in 2H15.
Capex of US$775mn.
13,000 workers working at the site.
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Greenfield portion of the railroad is progressing very well, and
whose satisfactory completion is vital for the schedule (should be
exporting in January 2015).
Figure 14: Moatize II
Source: Company
o Nacala corridor:
Railroad progress: 33%.
Start-up: 2H14.
Port progress: 36%.
Start-up: 1H15.
Capacity: 18mtpy.
Capex: US$4.4bn (executed: US$1.1bn).
o Salobo II:
Should be ready in 1H14.
Capex below budget (US$1.7bn budget vs. US$986mn
executed).
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
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Definition Coverage¹ BR²
Expected to outperform the Ibovespa by more than 10%. 49% 96%
Expected to perform in the range of 10% above or below the Ibovespa. 43% 100%
Expected to underperform the Ibovespa more than 10%. 1% 100%
This indicates that both the target price and the rating are currently being revised. 6% 86%
The analyst cannot express his/her view s on the company. 2% 100%
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
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Transportation, Logistics, Malls and Commercial Properties
Bradesco Securities, Inc. | New York (FINRA/SIPC Member) Bradesco Securities Hong Kong Ltd.
Head of Equity Research
Sales Trading - 55 11 3556 3001
Steel, Mining, Pulp & Paper
(Chief Economist)
Consumer Goods and Retail
Telecom, Media and Technology
Electric Utilities, Water & Sewage
Food & Beverage
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the provisions of Art. 16 of CVM Instruction 483/10.