What Could Support Vale’s Iron Ore Earnings



EBITDA increased in 4Q17

For 4Q17, Vale’s (VALE) ferrous division accounted for ~81% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization), compared with ~88.0% in 3Q17. The EBITDA for this division fell ~10% sequentially and 19% YoY (year-over-year). The lower prices for the commodity led to this decline. For 2017, Vale’s ferrous EBITDA came in at $13.2 billion, 26% higher than in 2016.

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Factors supporting an EBITDA increase

The major driver supporting the EBITDA increase was the net effect of a 22% increase of the Platts benchmark index in revenues and costs. Vale also benefitted from higher premiums for 62%-and-higher-iron-content ore.

The company also stated that, since 2016, it had maintained the same EBITDA per ton as its Australian peers (BHP)(RIO)—despite its freight disadvantage.

Vale’s iron ore’s realized prices for 2017 came in at $71.3 per ton, which is an increase of 22% from 2016. Vale noted that the increase in prices was supported by the steel sector’s outperformance, which led to higher steel prices.

Vale’s iron ore volumes

Vale’s iron ore volumes reached a record 366.5 million tons in 2017, marking growth of 5.1% YoY. The ramp-up of Vale’s S11D mine is helping its volumes.

Vale’s (VALE) expected volumes for iron ore for 2017 are 365 million tons. It kept its production guidance stable at 390 million tons for 2018, capping it at 400 million tons over the next four years. That level is in keeping with the company’s new focus on value over volume. The company has a total capacity of ~450 million tons.

Vale’s C1 cash costs were $14.6 per ton in 4Q17, almost flat sequentially and compared to 4Q16. The unit cash cost for 2017 came in at $14.8 per ton.

Peer costs

Peer (PICK) Rio Tinto (RIO) had a unit cost of $13.80 per ton for its Pilbara operations in 1H17. BHP’s (BHP) unit costs for fiscal 2017 (which ended in June 2017) was $14.60 per ton. Cleveland-Cliffs (CLF), which has different drivers than its seaborne peers, also reduced its production costs in the United States.

In the next part of this series, we’ll look at Vale’s take on iron ore prices and how it’s positioning itself in this price environment.


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