What Could Support Higher Profitability in Vale’s Coal Division?


Dec. 12 2017, Updated 7:32 a.m. ET

Coal’s earnings position improving

Vale’s (VALE) coal EBITDA (earnings before interest, tax, depreciation, and amortization) has been declining due to lower realized prices and higher tariff costs in the NLC (Nacala Logistics Corridor). Most coal stocks have fallen year-to-date. The VanEck Vectors Coal ETF (KOL) has outperformed most major coal stocks, including Peabody Energy (BTU), Westmoreland Coal (WLB), and Alliance Resource Partners (ARLP).

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Vale has negative EBITDA in 2016 as well. During vale Day on December 6, 2017, Gerd Peter Poppinga, its executive officer of ferrous minerals and coal, said that in 2017, EBITDA will come into positive territory at approximately $350 million. Assuming the same coal prices as 2017 in 2018, EBITDA is expected to rise to $500 million.

Project finance

The company signed project financing for NLC on November 27, 2017. NLC includes a railway system connecting the Moatize coal mine to the Nacala port in Mozambique. The project’s refinancing should be repaid in 14 years. The proceeds from the tariff of coal transportation services and general cargo services provided by NLC will help repay the facility. The company wants to leverage its mine and logistics, which could lead to higher utilization of the asset.

Ramp-up of Moatize

The ramp-up of Moatize and NLC could help the company more than double its coal production in Mozambique from 5.5 million tons in 2016 to 11.7 million tons in 2017. After Moatize completely ramps up, the cash costs will come down significantly. The pro forma cash cost, which was $109 per ton at the port, will fall to $77 per ton by the end of 2022 when Moatize ramps up fully.


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