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Why Vale’s Base Metals Production Was Strong in 1Q16

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Nickel production was strong

As discussed in the last article, Vale (VALE) achieved strong production results for iron ore in 1Q16. Its base metals production was also impressive in 1Q16.

Vale’s nickel production rose 6.2% year-over-year (or YoY) to 74,000 tons. Sudbury production rose 71%, while Vale New Caledonia (or VNC) reached a new production record. Sudbury’s production rose 49.5% quarter-over-quarter, and 71% YoY due to higher utilization rates at both the Sudbury and Clydach refineries. VNC’s production was a record 9,700 tons, a rise of 48% YoY.

The strong production results at Sudbury and VNC offset weaker production results at other operations. The production at Onca Puma fell 8.8% YoY and 13.7% quarter-over-quarter due to short-circuits in furnace electrodes in February 2016.

The company, however, maintained that its operations have since recovered, and the lost production should be made up during the remainder of the year.

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Record copper production

Copper production also rose 4.4% YoY in 1Q16 to reach a first-quarter record of 110,000 tons. This was mainly driven by the ramp-up of Salobo and improved production from Sudbury. These two operations helped offset the lower production at Sossego, which was impacted due to a lower ore grade.

Gold production for Vale also reached a record 118,000 ounces in 1Q16 due to the successful ramp-up of Salobo.

Usually, the first quarter is the weakest in terms of production due to weather-related seasonality, and production should improve for the rest of the year for base metals.

In its 4Q15 commentary, Vale wasn’t very hopeful about base metals prices. Vale expects the surplus in copper to continue in 2016, which will negatively impact prices. This will be negative for the share prices of all copper producers, including Freeport-McMoRan (FCX), Southern Copper (SCCO), and Teck Resources (TCK).

Freeport-McMoRan currently forms 4.0% of the SPDR S&P Metals and Mining ETF (XME) and 2.8% of the Materials Select Sector SPDR ETF (XLB).

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