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Why Vale’s Coal Division Is Becoming More Profitable

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Coal production improves

Vale (VALE) achieved production of 2.4 million tons of coal in the first quarter, which is 5.6% lower sequentially and in line year-over-year. Severe weather conditions in March led to power plant outages and five flooded production pits. The production in the first quarter was also affected by the mobilization of the workforce to resume normal operations following Labor Day action in December. Production in the second quarter is expected to improve significantly compared to the first quarter, given the expansion of mining areas. The factors that led to this decline led the company to review its production guidance for coal lower. Now Vale expects to produce 15.0 million tons of coal in 2018.

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EBITDA generation positive

In 2017, Vale’s coal division generated positive adjusted EBITDA for the first time since 2010. In the first quarter, the coal division generated $104 million in coal EBITDA—an improvement of 41% sequentially despite lower volumes. Higher average realized prices were mainly responsible for this improvement. Vale’s realized prices for coal improved by $15.6 per ton sequentially to $152.2 per ton in the first quarter.

Costs remained flat

Unit costs for Vale’s coal business came in at $104.5 per ton in the first quarter, which is in line with the previous quarter. While the cost at port decreased by $16.1 per ton, its operational costs increased by $8.9 per ton sequentially.

Most of the standalone coal stocks (KOL) are facing tough times due to large accumulated debts. These stocks include Peabody Energy (BTU), Westmoreland Coal (WLB), and Alliance Resource Partners (ARLP).

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