A Look at Vale SA’s Focus in Its Coal Division



Coal production rose

Vale SA’s (VALE) coal production for 3Q16 rose 54.0% QoQ (quarter-over-quarter) to reach 2.3 million tons. The rise was mainly due to the ramp-up of the Moatize II plant after its startup in August 2016.

Vale’s Carborough Downs coal mine has also started operations after facing operational challenges in 2Q16.

While production of metallurgical coal was 32.0% higher QoQ, thermal coal production rose 56.0% QoQ.

To read more about Vale’s coal operations, read Market Realist’s overview of the company at Vale SA: The iron ore giant deconstructed.

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Profitability has risen

Vale’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was -$7.0 million in 3Q16 compared to -$110.0 million in 2Q16. It’s worth noting that this is despite the fact that the recent spike in coal prices isn’t fully reflected in the index prices due to Vale’s lagging pricing systems.

Vale’s realized price of $91 per ton is significantly lower than the index price average of $135.60 per ton. That should lead to a considerable improvement in Vale’s realized prices in 4Q16.

Focus on costs continues

During Vale’s 2Q16 earnings call, the company maintained its focus on reducing costs, increasing profitability, and ramping up Nacala. During 3Q16, the focus was quite visible as the production cost per ton at the Nacala port continued to improve at $87 per ton in 3Q16. That figure was 16.0% less than 2Q16. The company expects further improvement in the coming quarters due to the ramp-up of Nacala.

Increased supply and weak demand have caused many US coal companies (QQQ) to file for bankruptcy in 2015. The scenario has changed in 2016 on the back of a strong Chinese demand and tight global supply. Strong Chinese demand is also supporting thermal coal prices.

Higher coal prices in 2016 are allowing coal producers (KOL) such as Alliance Resource Partners (ARLP), Arch Coal (ACIIQ), Peabody Energy (BTUUQ), and Cloud Peak Energy (CLD) to reap the benefits. Cloud Peak Energy forms 3.0% of the SPDR Metals and Mining ETF (XME).

In the next part of this series, we’ll see how Vale’s base metals division is doing.


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