Vale SA (ADR)(NYSE:VALE) and its associate, Japan’s Mitsui & Co Ltd have finalized a $2.73-billion project finance agreement for the Nacala logistics corridor. It is a railway system linking the Moatize coal mine and the Nacala port in Mozambique.
In a recent securities filing, Vale reported that the deal comprised a loan of $1.03 billion from Japan Bank and $1 billion from a syndicate of financial entities. More recently Morgan Stanley experts revised the rating of Vale shares to “Overweight”, stating company’s cash flow story is improving and approaching closer to that of its peer Rio Tinto, on which the firm has an “Equal-weight” rating.
While the Morgan Stanley revised price target on Vale indicates merely around 6% upside from a recent price of around $11, Vale’s payout could grow. Analysts Carlos De Alba, Reinout H. Goossens, Menno Sanderse, Jens Spiess and Nicholas Robison stated that essentially ignored by the market, in their view, from 2007 to 2016, the company paid $35.9 billion in dividends and, discounting net equity issued, returned $29.5 billion to shareholders.
This amount is more than $25.2 billion and $20.8 billion, correspondingly, that Rio Tinto compensated during the same period. Analysts expect Vale will generate free cash flow of $31 billion in 2018-22 versus Rio’s $26 billion. At prevailing spot prices, the difference is even more, $50 billion versus $41 billion.
They project Rio Tinto to return increased cash to stakeholders during this period due to its robust balance sheet; however, they consider Vale’s ability to fast reduce leverage and/or increase dividends will come as a surprise to the market. Considering Vale compensates merely the minimum required dividend, analysts expect its ND/EBITDA to come in between 1.4x in 3Q17 and 0.4x by 2020.
In the last trading session, the stock price of Vale jumped more than 3% to close the day at $11.33.