Vale SA (ADR) (NYSE:VALE), a topnotch iron ore producer based at Brazil revealed that plunging commodity prices have taken a toll at the mining company’s profits. Hence, the think tank at VALE has decided to cut the overall dividend payouts by $2 Billion, for the first time over the past eight years.
Oversupply Resulted In Plunging Of Prices
The company siphoned out approximately $4.2 Billion in FY 2014 as dividends. Iron ore has been brutally hit as benchmarked prices plunged significantly since early 2014. This has been led by downturn in myriad of mineral commodities owing to slowing demands across the Chinese markets and other oversupplied markets.
Competitors Gaining Momentum
In the iron ore industry, VALE has a heavy exposure, particularly owing to its diversified miners. However, the slackening prices and inefficacious environments to do business resulted in slower growth and expansion, in comparison to various competitors based out of Australia, during the period of systemic commodity boom.
VALE’s Deterministic Plans
VALE is on the verge of facing low profitability, as it has cash strapped in its proposed $20 Billion expansion project of the Brazilian Amazon based Carajas iron-ore reserve. The company is determined to accomplish this project in FY 2015-16. However, it is already marred by dropping prices; consequently, the company shall be placed with lesser cash available for investments headway.
Cost Cutting Methodology
VALE summed up that it is likely to sell assets, lessen capital expenses, find partners and cut costs to deal with the precariously volatile commodity prices, besides accomplishing the unfinished projects, like the Carajas.
Credit Rating Lowered
The latest changes in business environments resulted in lessening VALE’s credit rating, as Moody’s Investors Service considered that VALE is merely stable, lowering it from the positive status, after the Standard & Poor’s opted to downgrade VALE from A- to BBB+.
Deteriorating prices of base metals and iron ore and incumbent pressures of accomplishing the unfinished projects have affected VALE’s operations and credit profile dearly; however, the company is upbeat in tackling the current scenarios by enforcing commendable cost cutting drives to maintain profitability.