Should Investors Consider Vale after Recent Weakness?

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Part 4
Should Investors Consider Vale after Recent Weakness? PART 4 OF 7

Why Vale’s Base Metals Production Could Be Weaker in 2Q17

Base metals production lower

Vale’s (VALE) base metals production was also lower sequentially, mainly due to seasonal factors and planned maintenance shutdowns. Its nickel production fell 14% quarter-over-quarter to 71,400 tons. Its copper production was also 11% lower as compared to 4Q16 at 109,000 tons due to lower production from the Sudbury mine. Investors should note that Vale’s copper production achieved a quarterly record in 4Q16 helped by Salobo’s and Sudbury’s quarterly records.

Why Vale’s Base Metals Production Could Be Weaker in 2Q17

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Vale expects nickel and copper production to be impacted negatively in 2Q17 as well due to the transition to a single furnace operation at Sudbury and a three-week-long surface-plant-wide maintenance shutdown.

Base metal EBITDA fell

In line with lower production and higher one-off costs, Vale’s base metals’ adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was ~25% lower sequentially at $410 million.

Vale’s base metal outlook

Vale believes that the Indonesian government’s decision to allow for controlled recommencement of unprocessed and semi-processed ore export from the country might lead to the extra supply of nickel in the market, which might lead to pressure on the prices. The longer-term outlook, however, remains positive as the deficit keeps on increasing while the capital investment for new projects is being deferred.

Vale expects the copper market to shift into balance in 2017 as demand improves and supply growth levels off. The company believes that the recent supply disruptions related to labor strikes, negotiations in Chile and Peru, and export issues in Indonesia should support copper prices (DBC) in the near term. The longer-term outlook for copper is positive, according to Vale. The company believes that future supply is constrained due to declining grades and deferred capital investment.

This outlook should be positive for the stock prices of all copper producers including Southern Copper (SCCO), Teck Resources (TCK), and Freeport-McMoRan (FCX).

In the next part, we’ll take a look at Vale’s balance sheet.


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