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Vale’s Base Metals Profitability Impacted by Lower Prices in 2Q15

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Nickel and copper production

Vale S.A.’s (VALE) nickel production for 2Q15 was 67,100 tons. This is 3% lower quarter-over-quarter but 8.7% higher year-over-year. The company expects nickel production to increase in the second half of the year, as some of its mines will operate at full capacity when their planned maintenance shutdowns are completed.

Copper production, on the other hand, achieved a record for the second quarter at 104,900 tons. This is 29.5% higher year-over-year. The production is still expected to increase in the second half of the year, driven by the ramp-up of the Salobo operation.

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Base metals adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) totaled $406 million in 2Q15. This is an improvement of $43 million compared to 1Q15, after adjusting for the gold stream transaction. However, EBITDA was below market expectations, mainly due to weaker shipments and lower realized copper prices.

Price outlook is challenging

Base metals were negatively impacted in 2Q15 due to concerns over Chinese commodity consumption. Nickel prices averaged $13,008 per ton in 2Q15, which is 9% lower quarter-over-quarter and 30% lower year-over-year. Nickel prices fell to $12,000 per ton by the end of the quarter.

According to Vale, at this rate, about half of the nickel operations are cash negative. The company, however, maintained that as Chinese net imports of ferronickel have started picking up, the market for nickel should move higher in the coming months.

Copper is testing its six-year lows. This has had a negative impact on the share price of all copper producers, including Freeport-McMoRan (FCX), Southern Copper (SCCO), and Teck Resources (TCK). Freeport-McMoRan currently forms 3.98% of the SPDR S&P Metals and Mining ETF (XME) and 2.8% of the Materials Select Sector SPDR ETF (XLB).

To weather the current commodity downturn, Vale has taken several measures, including the sale of non-core assets. In our next article, we’ll see how the divestments are progressing for Vale.

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