Iron ore price realization
In 3Q16, Vale SA’s (VALE) ferrous division accounted for ~81.0% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). EBITDA for ferrous minerals came in at $2.5 billion, which was $357.0 million higher than 2Q16. Higher realized prices and lower costs and expenses led to the rises.
The CFR (cost and freight) reference price for iron ore fines rose $3 per ton to $59.30 per ton in 3Q16. That resulted in a price realization of $58.60 per ton for Vale in 3Q16.
Reduction in costs
Vale’s C1 cash costs for 3Q16 were $13 per ton, which was $0.20 per ton less than 2Q16. The fall was mainly due to the strong cost savings in the Brazilian real. Its cost savings more than offset the impact of the appreciation of the real against the US dollar (USDU) (UUP).
The reduction in costs was mainly due to operational productivity, cost-cutting, and increased fixed cost dilution due to seasonally higher production volumes.
This reduction in costs along with higher prices helped Vale achieve 17.0% higher EBITDA quarter-over-quarter.
S11D is progressing well
S11D appears to be on track. It successfully initiated hot commissioning in 3Q16. The company expects to start it in 4Q16, and the first commercial ore sale is planned for 1Q17. S11D will significantly reduce Vale’s iron ore unit costs. The reduction will be instrumental in weathering this oversupply and the slowdown driven by weaker demand.
Rio Tinto (RIO) and BHP Billiton (BHP) (BBL) still believe that iron ore prices have more downside due to increased supply and unsustainable demand. 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.