Is Vale on Track for Improvement in Its Coal Division?



Coal production improves

After rising 54% sequentially in 1Q17, Vale’s (VALE) coal (KOL) production rose 24.8% quarter-over-quarter in 2Q17 to 3.0 million tons. This implies an impressive year-over-year (or YoY) gain of 101.8%. The strong production increase was due to the continued ramp-up of Vale’s second coal handling and preparation plant (or CHPP2).

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Strong EBITDA generation

Along with volumes, Vale’s profitability in the coal division has also risen in 2Q17. For the third consecutive quarter, the adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was positive at $157 million in 2Q17. In addition to higher volumes, higher sales prices helped the company achieve higher EBITDA in this division.

Vale’s realized price for metallurgical coal improved 22% quarter-over-quarter to $201.2 per ton.

Decline in costs

While the coal division’s EBITDA rose as compared to 1Q17, its production cost per ton also rose 6% sequentially to $89.3 per ton. The increase in costs was due to the impact of logistics tariffs applied after the deconsolidation of the Nacala Logistic Corridor (or NLC). Investors should note that NLC was deconsolidated in March 2017 due to the equity transaction with Mitsui. After this deconsolidation, a tariff was established to cover operation costs, investments, working capital, and taxes.

BHP Billiton (BHP) also reported strong coal production results in 2Q17 and increased its metallurgical coal production expectations for fiscal 2018. While Alliance Resource Partners (ARLP) reported a 2Q17 earnings beat, Cloud Peak Energy (CLD) missed its analyst consensus earnings estimate for 2Q17.


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