Why Vale’s 3Q17 Earnings from Coal Declined despite Higher Volumes

Coal production improves

Vale’s (VALE) coal production in Mozambique reached a quarterly record of 3.2 million tons in 3Q17. This implies 38.3% YoY (year-over-year) growth and 5.8% QoQ (quarter-over-quarter) growth.

This strong production increase is attributable to the improved performance of two coal handling and preparation plants, CHPP1 and CHPP2. CHPP2 reached a new monthly record of 566,000 tons in July, due to the continued ramp-up.

Why Vale’s 3Q17 Earnings from Coal Declined despite Higher Volumes

Metallurgical coal contributed ~58.0% of overall production. Vale expects the share to return to the 60.0%–65.0% range of overall production.

EBITDA generation declined

While Vale’s coal volumes improved, its EBITDA (earnings before interest, tax, depreciation, and amortization) fell 71% QoQ to $46 million. Lower realized prices and higher tariff costs in the NLC (Nacala Logistics Corridor) led to this decline.

Vale’s realized price for metallurgical coal fell 30% sequentially in 3Q17 to $141.80 per ton. Reasons for this included the following:

  • negative adjustments in provisional prices
  • higher exposure to spot prices, which were lower during the quarter
  • lower lagged prices in 3Q17, compared with the opposite effect in 2Q17

Rising costs

While Vale’s coal EBITDA fell in 3Q17, its costs increased. Its unit costs came at $93.80 per ton in 3Q17, compared with $89.30 per ton in 2Q17. Higher costs were due to higher tariffs charged at the NLC in 3Q17.

The 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.

Most coal stocks have fallen year-to-date. The VanEck Vectors Coal ETF (KOL) has outperformed most major individual coal stocks like Peabody Energy (BTU), Westmoreland Coal (WLB), and Alliance Resource Partners (ARLP).