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Why Vale’s Iron Ore Margins Should Remain Supported

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Dec. 4 2020, Updated 10:52 a.m. ET

Strong EBITDA in the first quarter

For the first quarter of 2018, Vale’s (VALE) ferrous division’s adjusted EBITDA came in at $3.41 billion, accounting for 82% of its total EBITDA, versus ~97% in the first quarter of 2017. The EBITDA for the ferrous division was almost in line with the previous quarter despite seasonally lower volumes, mainly due to higher premiums and the net effect of the 13% increase in the benchmark iron ore index.

The per-ton EBITDA for the quarter came in at $39.8 per ton, compared to $36.1 per ton in 4Q17. Vale’s sales mix improvement and higher pellet premiums are mainly responsible for this increase.

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Iron ore costs

Vale’s free-on-board (or FOB) cost per ton for iron ore fines was $14.8 per ton in the first quarter, in line with 4Q17. The fixed cost dilution due to lower volumes was offset by the successful ramp-up of S11D. The company expects costs to remain below $14 per ton in the second half of the year.

Vale’s iron ore volumes

Vale’s iron ore production (XME) reached 82.0 million tons in the first quarter of 2018, which was 5.0% and 12.2% lower, respectively, year-over-year and sequentially. The decline resulted from management’s decision to reduce production of lower-grade material, which reinforces Vale’s position as a premium producer. This fall resulted in higher price realization and better margins for the company. Vale’s iron ore content reached 64.4% in the first quarter this year, compared to 63.9% in the first quarter of 2017 and 64.3% in the last quarter of 2017. BHP Billiton (BHP) and Rio Tinto (RIO) have lower iron ore content. Cleveland-Cliffs (CLF) has very low iron content. Vale reaffirmed its production guidance of 390 tons for 2018.

In this series, we’ll see how Vale is planning to deal with the current volatile commodity price environment. We’ll also discuss the performance of its different segments in the first quarter and analyze the outlook.

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