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Will Vale’s Strategy of Preserving Optionality in Nickel Work?


May. 24 2018, Updated 5:55 p.m. ET

Base metals production lower

Vale’s (VALE) base metal (DBB) production, including nickel and copper production, was in line with its decision to lower its footprint by putting non-competitive mines on care and maintenance. Vale’s strategy is to preserve its optionality in nickel in case of higher demand for nickel class I. Nickel production, therefore, reached 58,600 tons in the first quarter, a decline of 18% year-over-year and 25 sequentially.

Copper production for the company reached 93,300 tons in the first quarter, 13.2% lower year-over-year. Cobalt production totaled 1,327 tons, which implies a decline of ~20% sequentially and 5.4% growth year-over-year.

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Base metal EBITDA down as expected

Base metals’ adjusted EBITDA came in at $644 million, a decline of $171 million sequentially. The decline was, however, expected due to lower nickel and copper sales volumes.

The company also recorded higher costs in its base metal division, which were partially offset by better price realization. The company’s realizations improved due to the higher premiums and an increase in benchmark nickel prices.

Preserving optionality for better returns later

About 65% of Vale’s nickel supply is a Class I product, which commands a premium to the benchmark price. Moreover, the company expects this product to be in a stronger deficit than Class II products. Vale currently sells part of its high-quality nickel products to the stainless steel market, which doesn’t really need the premium product. So its nickel business isn’t currently capturing the full premium for its high-quality product. Vale believes that, if more and more car manufacturers trend toward electric vehicles, it could see an upside. By reducing the current production of nickel and cobalt, it plans to preserve optionality when the returns on its products could be better.

Vale noted that nickel prices rose 15% sequentially in the first quarter, which represents the strongest pricing since Q1 2015. 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. It also noted that copper prices slightly increased in the first quarter sequentially. It expects copper’s near-term outlook to remain balanced and expects a deficit in the long-term, supporting prices.

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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