by Juan Pablo Spinetto, 30 5월 2014, 05:53
PUSHED: Dump trucks transport mined iron ore at Vale’s Brucutu mine in Barão de Cocais, Brazil. Higher transport costs to the main markets mean the Brazilian company is more vulnerable to falling iron-ore prices. Picture: BLOOMBERG
Vale’s status as most generous payer of dividends among major miners will be put to the test if iron-ore prices do not stabilise after falling
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RIO DE JANEIRO — Vale’s status as the most generous payer of dividends among major miners will be put to the test if iron-ore prices do not stabilise after falling to two-year lows.
Higher cost of freight means Rio de Janeiro-based Vale earns $10 to $15 less per metric tonne than BHP Billiton and Rio Tinto, according to Citigroup, making it more vulnerable than its Australian rivals as expanding production and slowing Chinese demand growth push prices below $100 a tonne.
At the same time, Rio Tinto is lifting output faster than Vale, allowing the London-based firm to displace more higher-cost competitors and gain market share.
While asset sales and cost cutting mean the world’s largest iron-ore producer’s ability to pay dividends this year and next is assured, next year’s payments are at risk if iron-ore prices continue dropping, according to Citigroup and UBS.
"There is a view amongst some investors in Brazil that Vale’s dividend is intangible," Citigroup equity analyst Alex Hacking said in New York. "Vale can only pay what the iron-ore price affords them to pay. There are iron-ore price scenarios that would require a cut in dividends."
Vale declined to comment on its dividend strategy in an e-mailed response to questions.
"We will deliver free-cash flows to appropriately reduce our debt levels and distribute increasing dividends to our shareholders," CEO Murilo Ferreira said during a May 13 conference in Miami, according to a presentation on the company’s website.
While future payouts will depend ultimately on iron-ore prices, in the most likely scenario Mr Hacking still expects Vale to generate earnings before interest, taxes, depreciation and amortisation (ebitda) of at least $16bn a year, enough for the company to sustain its dividend levels. The analyst has a "buy" recommendation on the stock.
Vale’s estimated dividend yield of 6.7% is the highest among the 10 most valuable mining firms, according to Bloomberg data. BHP and Rio Tinto are forecast to pay about 4% over the next 12 months, the data show.
Vale last month paid $2.1bn to shareholders in this year’s dividends, the first installment of at least $4.2bn it agreed to disburse this year. As metals prices declined, the company has been trimming dividends since 2011 when it returned a record $12bn including a $3bn share buyback. It distributed $4.5bn last year.
A period of iron-ore prices substantially below $100 would reduce Vale’s available cash for shareholder retribution, UBS equity analyst Andreas Bokkenheuser said. "Vale’s after-tax ebitda could fall close to or even below management’s near-term capex (capital expenditure) guidance, leaving little cash leftover for dividends. In this case, dividends would likely decline, unless financed by a ramp-up in debt and or asset sales".
Iron ore extended declines and dropped to the lowest in 20 months on Wednesday on concerns that global supply is gaining faster than demand in China, the biggest consumer of the steelmaking ingredient. Ore with 62% content delivered to the Chinese port of Tianjin fell 1.3% to $96.80 a dry tonne on Wednesday, the lowest since September 2012, according to the Steel Index. The commodity has traded below $110 a tonne since April 28, retreating 28% this year.
Vale expects prices for iron-ore to average $110 over the next two years, Mr Ferreira said on April 3. "The iron-ore price falling to the lowest in 20 months confirms a more negative scenario for Vale," Faros Investimentos economist Fernando Senna said in Rio de Janeiro.
"At $100 per tonne, the dividends are compromised."
Benchmark iron ore will average $120 this year and $115 next year, sliding to $105 in 2016 and $98 in 2017, according to forecasts compiled by Bloomberg.
Vale shares have lost 5.2% in dollar terms in the past year while Rio Tinto and BHP Billiton1 have rallied 16% and 13% respectively.
Bloomberg