vale opened the flow of debt

Brazilian supergroup Vale, the world's No 2 miner by value, and most indebted miner, today announced that it would be selling ten year notes, and additional 6.875% guaranteed notes due 2039. Market reports indicated that Vale would immediately seek to raise USD 1bn in the shorter end notes, and around USD 500m in notes due 2039.

Vale said that it plans to use the net proceeds from the offering for general corporate purposes, a euphemism for the strong need to shore up its internal cash flows. While other miners have worked fastidiously at paying down debt after heavy mineral price corrections sent panic waves through the global sector in 2008, Vale has battled to generate strong free cash flows.

Vale's capital expenditure is running pretty much at the same level as BHP Billiton, the world's biggest diversified resources stock, and generator of copious amounts of free cash flow.

As the world's biggest individual player in seaborne iron ore, Vale can pack a punch when iron ore prices are good and great; in 2008, Vale delivered USD 17.1bn in operating cash flow (compared to Rio Tinto's USD 14.9bn, and BHP Billiton's 17.8bn). The 20 or so months since 2008 have seen Vale's operating cash flows fall sharply back, but at least the trend line has been rising since early 2009.

Vale

USD m	1H10	1H09	2009	2008	2007	2006
Free cash flow
Operating cash flow	5,082	3,231	7,136	17,114	11,012	7,232
Capital expenditure	-4,053	-3,696	-8,096	-8,972	-6,651	-4,431
Free cash flow	1,029	-465	-960	8,142	4,361	2,801
Cash on hand	6,235	11,192	11,040	12,639	1,046	4,448
Debt	-23,959	-19,493	-22,880	-18,245	-19,024	-22,556
Net debt	-17,724	-8,301	-11,840	-5,606	-17,978	-18,108
Dividends	0	0	-2,724	-2,850	-1,875	-1,300

In sharp contrast to BHP Billiton and Rio Tinto, Vale's balance sheet generally has been increasingly stretched in the past few years by its very heavy capital expenditure programme, plus acquistions, mainly in fertiliser, over the past year and more.

Vale remains stung by its seriously overpriced 2007 acquisition of Inco, a nickel group, for USD 18.9bn in cash. Vale raised USD 12.2bn in fresh equity during 2008, diluting shareholders. That only helped stem the slide in Vale's net debt (including cash) from USD 5.6bn at the end of 2008, to USD 17.7bn on 30 June 2010.

Questions can be raised over Vale's ability to deliver new mine builds on time and on budget. Onça Puma, a nickel mine in the Brazilian state of Pará, was announced in July 2006. Investment was put at USD 1.4bn, with start up towards the end of 2008. The latest numbers are for USD 2.7bn and start up towards the end of this year.

Vale has not yet even given the full green light for the build of Serra Sul, its proposed new giant iron ore mine in Brazil. There are equally pressing, and relatively new, demands from Simandou, in Guinea. Serra Sul was announced in 2007, with a budget of USD 10.1bn, with start up for the first half of 2012. The latest numbers are for USD 11.3bn and start up towards the end of 2013, subject to approval by the board of directors.

Going forward, Vale's premium valuation rating, relative to Rio Tinto, in particular, may be tested.

NET DEBT, selected mining names				Market
				value	Value to
USD bn	End-2008	End-2009	30-Jun-10	USD bn	debt ratio
BHP Billiton	-4.2	-7.9	-3.3	179.8	1.8%
Rio Tinto	-38.6	-18.8	-12.2	124.5	9.8%
Xstrata	-16.5	-12.6	-7.9	48.2	16.3%
Anglo American	-11.2	-11.1	-10.3	50.4	20.5%
Freeport-McMoRan	-6.4	-3.7	-1.7	36.6	4.8%
Alcoa	-9.8	-8.2	-8.3	11.1	74.8%
Vale	-5.6	-11.8	-17.7	145.8	12.2%
Barrick	-3.1	-3.8	-3.2	45.1	7.1%
PotashCorp	-2.8	-3.7	-2.4	44.3	5.3%
Total/average	-98.2	-81.6	-67.0	685.6	11.9%

source