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What’s Vale’s Outlook for Base Metals in 2016 and Beyond?

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Sep. 23 2016, Updated 10:04 a.m. ET

Strong base metals production

Along with iron ore, Vale SA’s (VALE) base metals production was also impressive in 2Q16. Its nickel production rose 15% YoY (year-over-year) to 77,000 tons.

Copper production also rose 10% YoY in 2Q16 to reach a second-quarter record of 107,000 tons. This was mainly driven by higher volumes from Sossego and Salobo. The ramp-up of Salobo also helped Vale achieve a record gold production of 122,000 ounces in 2Q16.

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Base metals EBITDA

Base metals’ adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was $376 million in 2Q16. This was $47 million higher, or about 14%, quarter-over-quarter (or QoQ). The reduction in costs and expenses as well as higher prices helped drive this sequential improvement. Unfavorable exchange rates partially offset that improvement.

Unit costs at Vale’s North Atlantic operations rose in 2Q16 due to lower copper deliveries and the impact of exchange rates. But unit costs at Onca Puma fell due to higher production.

Base metals outlook is weak

Vale stated that LME (London Metal Exchange) nickel prices improved during 2Q16 to average $8,823 per ton, a 4% sequential improvement. Chinese stainless steel production strength during the quarter supported the prices.

The company also said that tight scrap markets in the United States (DIA) and Europe (HEDJ) increased the demand for primary nickel units. Vale maintained that the market has shifted to deficit after consecutive years of surplus. In the longer term, the company expects nickel prices to remain positive as the market shifts to further deficit and capital investments for new projects and replacement volumes are deferred.

Copper prices also improved 1.2% QoQ to average $4,729 per ton in 2Q16. Vale expects the surplus in copper to continue in 2016. The outlook for key sectors such as property, air conditioners, and grid spending is expected to be a drag on the market in the second half of 2016. However, in the longer term, the company expects prices to improve as future supply remains constrained in declining grades and deferred capital investment.

This could be positive for the share price 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).

To weather the current commodity downturn, Vale has taken several measures, including the sale of noncore assets. In the next part of this series, we’ll take a look at those measures.

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