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Vale’s Ferrous Minerals under Pressure from Declining Prices

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Record iron ore production

Vale S.A.’s (VALE) iron ore production, excluding iron ore acquired from third parties and Samarco’s production, reached a record 319.2 million tons in 2014. That’s 7.2 million tons higher than the company’s guidance for 2014.

In 2014, the Carajás mine achieved a production record of 119.7 million tons. This represents an increase of 14.8 million tons compared to 2013.

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Lower prices impact profitability

EBITDA (earnings before interest, taxes, depreciation, and amortization) for iron ore fines in 2014 was $8.1 billion, which is 52.6% lower than in 2013. This is mainly because of lower iron ore prices that fell ~49% in 2014. The average realized price of iron ore was $76 per ton in 2014, which is significantly lower than the $112.10 in 2013.

Total cash cost at the port for iron ore, which includes mine, plant, railroad, and port, after royalties was $5.7 billion. Cash costs are calculated after deducting iron ore freight costs of $3.3 billion, depreciation of $1.3 billion, iron ore acquired from third parties of $443 million, and one-off effects of $48 million from costs of goods sold (or COGS).

Cash cost per metric ton in 2014 was $23.50, which is slightly higher than the $23.30 per ton in 2013. Overall, Vale’s ferrous minerals performance was under pressure due to declining prices.

Price outlook under pressure

In the next part of this series, we’ll discuss how Vale remains strong on the path to 450 million tons of production guidance. This production growth from large companies, including BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE), without a proportionate increase in demand is putting downward pressure on prices. This could negatively affect pure-play, high-debt iron ore names such as Cliffs Natural Resources (CLF).

It’s important to note that ETFs such as the iShares MSCI Global Metals & Mining Producers ETF (PICK) also provide exposure to the metals and mining sector. BHP and RIO form 28.9% of the fund’s total assets. The SPDR S&P Metals and Mining ETF (XME) also invests in metals and mining companies.

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