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UPDATE 3-Ore rally, cost cuts giving Vale breathe to rethink asset sales

(Adds details on potential new deals)

By Christian Plumb

NEW YORK Nov 29 Vale SA, the world's No. 1 iron ore producer, is taking advantage of recent gains in mineral and metal prices and successful cost-cutting steps to rethink the pace of an asset sale plan to bring down debt, executives said on Tuesday.

Higher ore recovery and price realization may help Vale generate $2.2 billion next year in free cash flow - the money left for bond and shareholders after all expenses are paid - accelerating debt reduction plans, Chief Executive Officer Murilo Ferreira told the company's investors in New York.

Ferreira and other executives expect the announcement soon of several, unnamed asset divestitures that could help Vale trim net debt to a range between $15 billion and $17 billion next year. Last year, in the middle of a rout in ore and metal prices, Ferreira set a target of disposing of non-essential assets to help cut debt by $10 billion.

"The key message is that we are in a much more comfortable position to be very thoughtful about the divestitures," said Chief Financial Officer Luciano Siani at the same event. "We shall not fool ourselves, we have to keep on pursuing relentlessly that goal" for net debt.

The remarks underscore Ferreira's strategy of making Vale a more cost-competitive player in a market hammered by a global slowdown and steel industry overcapacity. With commodities prices recovering as the new year approaches, his tack is paying off faster than expected and allowing Vale to avoid selling units that could add to growth once the world economy recovers.

Iron ore on the Dalian Commodity Exchange is up 180 percent this year. Some investors, however, questioned whether Vale may be relying too much on iron ore and metal price behavior to boost returns and cut debt.

"They're doing all the right things. The question is, can commodity prices hold," said Charles Bradford, an analyst at Bradford Research. Relying too much on prices could make results more volatile over time, he said.

COST-CUTTING

Still, cost-cutting efforts are helping to ease Vale's capital spending needs for the years ahead. The company cut the budget for planned investments to $4.5 billion next year and $2.9 billion in 2021 from an expected $5.6 billion this year.

For next year, Vale expects to produce between 360 million tonnes and 380 million tonnes of iron ore, the main ingredient for steel. It set a target of 400 million tonnes to 450 million tonnes in 2021.

Preferred shares, Vale's most widely traded class of stock, fell 3.2 percent to 26.62 reais in late Tuesday afternoon trading in São Paulo.

While investors welcomed the goals from management, the decline had to do with profit-taking activity among iron ore traders, they said.

Ferreira told a news conference after the investor meeting that plans to sell Vale's fertilizers unit are on track and a deal could be announced soon, without elaborating. Reuters first reported on June 17 that Mosaic Co was eyeing the unit, with payment being negotiated in cash and stock.

In addition, despite the recent rally in ore prices, a deal by which Vale would sell a stable stream of iron ore shipments to investors for a long period remains "an option," Ferreira said. Reuters first reported the plan, by which Vale would raise up to $10 billion through a 30-year sale of future ore output, on Aug. 3.

He is also hopeful that the companies that are members of Vale's controlling shareholder bloc will renew terms of their accord before the end of this year. The accord expires around April or May next year. (Writing by Guillermo Parra-Bernal and Roberto Samora Additional reporting by Gustavo Bonato in São Paulo; Editing by Tom Brown)

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