Vale’s Coal Generated Positive Earnings: 1st Time since 2010

Vale (VALE) achieved an annual production record at Moatize of 11.3 million tons in 2017, which is 56% higher than in 2016. The ramp-up of Moatize II, which was partly offset by Carborough Downs, led to this significant increase. The production in 4Q17 came in at 2.6 million tons, which was 19.8% lower sequentially. The lower quarterly production was due to an already addressed failure of one of the hydraulic excavators.

The adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) for Vale’s coal division came in at $330 million in 2017—the first positive result for the coal division since 2010. This improvement is due to Nacala, where coal shipped led to adjusted EBITDA of $410 million. Higher realized prices and higher sales volumes from Mozambique led to higher year-over-year (or YoY) earnings.

Realized prices for metallurgical coal increased by $36.6 per ton in 4Q17 sequentially despite an increase of just $15.9 per ton in the seaborne index price. The better realization was due to higher exposure to current and lagged contracts as well as lower penalties and commercial discounts compared to 3Q17. The realized price for thermal coal was $78.6 per ton in 4Q17, 6.4% higher than 3Q17.

The unit costs for Vale’s coal business came in at $104.4 per ton in 4Q17, compared with $93.8 per ton in 3Q17. Higher operational costs and higher tariffs charged at the NLC (Nacala Logistics Corridor) in 4Q17 led to this increase in costs.

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