Iron ore price realization
In 2Q16, Vale SA’s (VALE) ferrous division accounted for ~90% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). EBITDA for ferrous minerals came in at $2.1 billion, which was $398 million higher than 1Q16. Higher realized prices and higher sales volumes led to this increase.
The CFR (cost and freight) reference price for iron ore fines increased $1.60 per ton to $56.30 per ton in 2Q16. This resulted in a price realization of $55.70 per ton for Vale in 2Q16. Vale’s iron ore content fell slightly during the quarter. However, it was planned as a response to the market demand for higher silica ores.
Impact of exchange rate on costs
Vale’s C1 cash costs for 2Q16 were $13.20 per ton, which was $0.90 per ton higher than in 1Q16. This increase was mainly due to the appreciation of the Brazilian real against the US dollar (USDU) (UUP). It’s worth noting that without cost-cutting, this increase would have been $1.20 per ton. Vale’s freight costs also increased slightly to $11.80 per ton, mainly due to higher bunker oil prices.
Despite the increase in costs, Vale’s EBITDA for its iron ore division rose 23% quarter-over-quarter. This was due to higher sales volumes as well as higher realized prices.
S11D is progressing well
S11D appears to be on track, with physical progress reaching 90% in 2Q16. The work is 70% complete at S11D logistic sites and 92% at the S11D railway spur. This is positive since S11D will significantly reduce Vale’s iron ore unit costs. This will be instrumental in weathering this oversupply and slowdown driven by weaker demand.
Rio Tinto (RIO) and BHP Billiton (BHP) (BBL) have pared back their iron ore forecasts a bit in their latest released quarterly production reports. Fortescue Metals Group (FSUGY) is going full throttle on its installed capacity.
To avoid the risks, you can invest in metals and mining ETFs such as the SPDR S&P Global Natural Resources ETF (GNR), the SPDR S&P Metals and Mining ETF (XME), and the iShares MSCI Brazil Capped (EWZ). Rio Tinto forms 1.8% of GNR’s holdings.
Next, let’s see if Vale’s focus on costs will improve its profitability in coal.