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Base Metals: Vale’s Focus Is on Optimizing Costs

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Strategic plans

During Vale SA’s (VALE) recent base metals site visit, management indicated that a divestment of the operation is possible if the targets aren’t met. Vale is expecting to implement the following strategic plans in its base metals division in order to turn it around.

  • Vale plans to optimize the North Atlantic flowsheet by further increasing productivity and reducing costs by operating with a single furnace in Sudbury and improving environmental sustainability.
  • Vale expects VNC’s (Vale New Caledonia) production to increase to 45 kt (thousand metric tons) and costs to decrease to $13,000 per ton by 2016. Going forward, the company expects to reach a nominal capacity of 57 kt in 2018. It expects to achieve an EBITDA (earnings before interest, taxes, depreciation, and amortization) neutral position in 2017 with London Metal Exchange (or LME) nickel prices at $14,000 per ton.
  • The company is exploring Salobo III as an option. It involves the construction of a new plant to reclaim previously stockpiled run-of-mine ore. Vale plans to take advantage of the future upfront payment negotiated with Silver Wheaton (SLW) for the expansion of the mine.
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Nickel and copper production

Vale expects its nickel production to reach 324 kt in 2016 and 322 kt in 2017, compared to 296 kt in 2015. The increase will mainly be due to the Long Harbor ramp-up. On the other hand, the Salobo II ramp-up is expected to increase copper production to 459 kt in 2016 and 477 kt in 2017 compared to 430 kt in 2015. The company also mentioned that EBITDA in copper production will be more sensitive to changes in copper prices as the company ramps up further production.

Base metals (DBB) have had a very bad run in 2015 due to weakening demand and an oversupply scenario. Vale’s peers in base metals, including Freeport-McMoRan (FCX), Glencore (GLNCY), Southern Copper (SCCO), and Teck Resources (TCK), have also been hit due to this adverse pricing environment.

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