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Lower Footprint in Base Metals to Boost Vale’s Profitability


Mar. 5 2018, Updated 10:33 a.m. ET

Base metals production lower

Vale’s (VALE) base metal (DBB) production, including nickel and copper, was flat to lower in 2017 compared to 2016. Its nickel production fell 7.3% year-over-year (or YoY) to 288,200 tons, which was in line with Vale’s commitment of a smaller nickel footprint. The company has transitioned to a single furnace in Sudbury, which is expected to optimize the North Atlantic flowsheet and improve overall competitiveness. Its strategy is to align investments and production based on market conditions. At the same time, the company wants to preserve its optionality in nickel ahead of the expected boom in electric vehicles (TSLA).

Copper production of 438,000 tons in 2017 was almost in line with 2016.

Salobo’s quarterly production record and higher production at Sudbury helped Vale achieve higher copper volumes. Sudbury was under scheduled maintenance in 2Q17.

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Base metal EBITDA up

Base metals’ adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) came in at $2.14 billion—a 15.7% annual rise. Higher copper, cobalt, and nickel realized prices—partially offset by higher costs—were the main reasons for higher EBITDA. The company is regarding 2017 as a year of transition to a simpler and more efficient nickel flowsheet in the North Atlantic operations. Vale expects this transition to help deliver stronger operations in base metals in 2018. The company is striving to diversify away from its iron ore presence. It’s aiming for base metals to account for ~30% of its financial results by the end of 2019. In 2017, base metals accounted for 19% of its EBITDA.

Vale’s base metal commentary

Vale noted that nickel prices rose 8% year-over-year in 2017, averaging $10,411 per ton. It attributed the increase to strong demand for stainless steel and positive macroeconomic fundamentals, particularly in China. The company expects the nickel market to remain at a deficit in 2018. The long-term outlook for nickel prices, as Vale noted, remains positive.

Copper prices increased by an average of 27% YoY in 2017, averaging $6,166 per ton. Vale attributed this significant increase to increased global demand and tight supply. It expects the demand for copper to increase at a faster pace than previous years, mainly due to electric vehicles and associated infrastructure.

The continuation of current price trends in the coming quarters would likely be positive for the stock prices of base metal producers like Teck Resources (TCK), Southern Copper (SCCO), and Freeport-McMoRan (FCX).

In the next part of this series, we’ll take a look at Vale’s balance sheet.


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