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What’s Vale’s cost position compared to other iron ore companies?

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Nov. 20 2019, Updated 2:27 p.m. ET

Vale’s cost position

In this part of the series, we’ll discuss how Vale’s (VALE) cost position compares to other iron ore companies in Australia—including BHP Billiton (BHP), Rio Tinto (RIO), and Fortescue Metals Group (FSUGY).

The costs include mining, processing, and administration. They don’t include royalties, exploration, sustaining capital, depreciation and amortization, interest, and taxes.

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Cash costs

Vale is a low-cost producer. Its cash costs are $22 per ton—compared to $20.40 per ton for Rio Tinto and $26–$27 per ton for BHP.

Fortescue lowered its cost per ton significantly. It invested in infrastructure and operational improvements. This caused its cash costs to fall ~23% to around $32–$34 per ton. However, it attracts a significant discount to the benchmark 62% iron content. Its grade is inferior at 57%–58%. It has lots of moisture content. It doesn’t even produce any premium lump product to offset this discount. It’s still high debt—compared to its overall position. This makes it a distant fourth when it comes to big, low-cost global iron ore miners.

The only cost that differentiates Vale from the other Australian companies is the freight cost. On average, it used to cost $23 per ton to move cargo from Brazil to China—compared to only $9–$10 per ton from Australia to China. This creates a huge difference of $13 per ton between Vale and the other Australian companies. To provide iron ore at similar costs to Chinese steelmakers, Vale would have to discount the iron ore per ton by $13. This reduces its realized price.

In contrast, Cliffs Natural Resources (CLF) sells most of its produce locally. As a result, freight costs don’t impact its core business much.

Investors can also consider investing in ETFs that invest in the metals and mining sector—like the SPDR S&P Metals and Mining ETF (XME).

So, we’ve seen that Vale isn’t a high-cost producer. Why is its stock more sensitive to moves in iron ore prices? We’ll discuss this in the next part of this series.

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