Vale SA shares fell the most in two months and its bond yields soared as iron ore’s tumble into the $30s jeopardizes the world’s biggest producer’s ability to generate cash and pay dividends.
The Brazilian company’s share price slumped 6.3 percent, the most since Oct. 13, to 9.22 reais at 1:26 p.m. in Sao Paulo. The yield on its 2022 bonds jumped to a record 9.1 percent, or more than 5.2 percentage points above similar notes sold by Rio Tinto Group and BHP Billiton Ltd., its main competitors.
Producers of steel-making materials are tumbling to the lowest levels in more than a decade as China’s slowdown collides with supply growth that was initiated when prices were booming. An 80 percent drop in the price of iron ore from a 2011 peak to below $40 a metric ton is eroding margins even at the world’s most efficient miners, according to Capital Economics Ltd. Compounding Vale’s woes is a potential multibillion-dollar payout and lost production at its Samarco joint venture in Brazil after a dam collapse.
“Vale is in a horrible situation, which means lower revenue and returns for investors,” Vitor Suzaki, an analyst at the brokerage Lerosa Investimentos, said from Sao Paulo. “Vale hasn’t announced anything yet, but investors already expect the company takes severe measures that include investment and job cuts, as its rivals are also doing.”
Vale’s location presents further headwinds. Besides being further away from Chinese steel mills than its Australian rivals, Brazil is facing its worst recession in a quarter century and an ever-widening corruption scandal. Standard & Poor’s cut Brazil to junk in September.
The Rio de Janeiro-based company is targeting a return to positive free cash flow in 2017 as its investment burden eases with the completion of an expansion project. Vale expects to make some kind of dividend announcement in January, Chief Financial Officer Luciano Siani Pires said Dec. 4, without elaborating. The company has the flexibility to not pay dividends next year, he told investors at a meeting in London.
Anglo American Plc is selling assets, closing mines and will eventually employ 50,000 people, compared with 135,000 now, Chief Executive Officer Mark Cutifani said on a conference call with reporters Tuesday.
Brazil’s Ibovespa equity index fell 1.8 percent.