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Why Outlook on Vale’s Coal Business Is Still Negative

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Nov. 20 2020, Updated 10:49 a.m. ET

Coal production down year-over-year

Vale S.A.’s (VALE) coal production amounted to 2 million tons in 2Q15. This is 18.7% higher than 1Q15 but 8.9% down year-over-year. In 2Q14 and 3Q14, Vale put the Integra coal mine and Isaac Plains mine into care and maintenance, respectively, resulting in the year-over-year fall.

The Carborough Downs (or CD) mine achieved record second-quarter production of 742,000 tons in 2Q15. This was a result of the longwall move completed in the beginning of April.

To read more about Vale’s coal operations, read Market Realist’s overview, Vale SA: The iron ore giant deconstructed.

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Profitability up slightly

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for Vale was -$102 million in 2Q15 compared to -$128 million in 1Q15. This is mainly due to lower costs to the tune of $55 million. Lower coal costs were driven by lower FOB (free on board) costs in Mozambique and good operational performance of Carborough Downs.

Outlook still negative

According to Vale, metallurgical coal prices fell due to the combination of strong supply and weaker demand growth. Coal producers, on the other hand, continued reducing their costs due to oil and energy price declines, currency depreciation, and tax reductions.

Going forward, Vale expects the coal market to remain oversupplied throughout 2015 despite a production decrease from US producers during the year. The outlook thus remains negative for Vale’s coal operations.

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Increased supply coupled with weak demand has led many coal stocks to trade in the penny stock zone for quite some time now. These companies include Alpha Natural Resources (ANRZ), Walter Energy (WLT), and Arch Coal (ACI). While trading of ANRZ and WLT is suspended by the NYSE (New York Stock Exchange), Arch Coal (ACI) has recently announced a reverse stock split to prop up stock prices and stay listed on the exchange.

Peabody Energy (BTU) has fallen substantially in recent weeks. Only a handful of coal players (KOL) such as Alliance Resource Partners (ARLP), Natural Resources Partners (NRP), and Cloud Peak Energy (CLD) are in the safe zone. This is primarily because they don’t have exposure to metallurgical coal and because they boast cleaner balance sheets.

BTU forms 4.75% of the VanEck Vectors Coal ETF (KOL). The SPDR S&P Metals and Mining ETF (XME) also invests in this sector.

For the latest analysis on coal, please visit our Coal page.

It was also not a good second quarter for base metal prices. In our next article, we’ll see how weaker prices impacted Vale’s base metals division.

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