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How Vale Reacted to Higher Iron Ore Prices in 4Q16

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Iron ore price realization

In 4Q16, Vale’s (VALE) ferrous division accounted for ~85.0% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). The company’s EBITDA for ferrous minerals came in at $4.1 billion, which was $1.6 billion higher than 3Q16. Higher realized prices and higher sales volumes led to these rises.

The CFR (cost and freight) reference price for iron ore fines rose $19.8 per ton to $79.1 per ton in 4Q16. That resulted in a price realization of $69.4 per ton for Vale in 4Q16.

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Cost increases

Vale’s C1 cash costs for 4Q16 were $14.4 per ton, which was $1.4 per ton higher than 3Q16. The increase was mainly due to the non-recurring events. These events included adjustments in inventory, the collective bargaining agreement with employees in Brazil, and the provision for profit sharing.

The increase in costs was, however, more than offset by higher volumes and prices. This helped Vale achieve 65.0% higher EBITDA quarter-over-quarter.

Peers’ costs

The unit costs for BHP’s WAIO (west Australian iron ore) fell 1% to $15.05 per ton in the half-year ended December 2016. While BHP has improved its unit costs, it’s still higher than its major peers. Rio Tinto (RIO) had a unit cost of $13.7 per ton for its Pilbara operations. Cliffs Natural Resources (CLF) also reduced its production costs in the United States due to headcount reduction and other input costs.

Notably, BHP Billiton, Rio Tinto, and Vale make up 32.1% of the iShares MSCI Global Metals & Mining Producers ETF (PICK). The SPDR S&P Metals and Mining ETF (XME) also provides exposure to this space.

Now let’s discuss if Vale’s focus on costs will improve its profitability in coal.

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