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Should Investors Consider Vale after Recent Weakness?

PART:
1 2 3 4 5 6 7
Part 3
Should Investors Consider Vale after Recent Weakness? PART 3 OF 7

Can Vale’s Coal Profits Rise after a Decline in 1Q17?

Coal production back up

After falling 26% quarter-over-quarter, Vale’s (VALE) coal production for 1Q17 rose 53.7% sequentially and 170.4% year-over-year. The impressive production increase was due to the strong ramping up of Vale’s second coal handling and preparation plant (or CHPP2).

Can Vale’s Coal Profits Rise after a Decline in 1Q17?

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EBITDA in green

Vale’s profitability in the coal (KOL) division has also increased. For the second quarter in a row, the adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was positive at $61 million in 1Q17. The EBITDA was, however, $95 million lower than that for 4Q16, mainly due to lower coal prices.

Due to lower reference prices during the quarter, Vale’s realized price for metallurgical coal fell 24% sequentially to $165.2 per ton.

Decline in costs

One relief for the coal division was the decline in costs during the first quarter. In 1Q17, the production cost per ton fell 14% sequentially to $83.9 per ton. There were several factors responsible for this decline:

  • ramp-up of Moatize II
  • ramp-up of Nacala Logistics Corridor
  • reestablishment of explosives supply

BHP Billiton (BHP) believes that the current system of quarterly contract price setting for coking coal prices is close to shifting to spot prices. Vale’s other peer, Glencore (GLNCY), is offering $2.5 billion to acquire the Australian coal assets of Rio Tinto (RIO).

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