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Could Iron Ore Gain from Vale’s Large Production Cut Expectation?

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Vale’s iron ore production

Vale’s (VALE) iron ore production came in at 101 million tons in the fourth quarter of 2018, an increase of 8.2% YoY (year-over-year). Its iron ore production in 2018 totaled 384.6 million tons, slightly below its guidance of 390 million tons. 

The company mentioned that the annualized impact of its dam burst and its mine closures on its production would likely be 92.8 million tons—a significant amount of production stoppage, which could lead to a further rise in seaborne iron ore prices.

Previously, Vale was expected to produce ~400 million tons of iron ore (XME) in 2019. Due to the dam burst and capacity curtailment, the company probably won’t reach the expected production.

Iron ore EBITDA

Vale’s iron ore EBITDA came in at $4.1 billion in the fourth quarter and $14.7 billion in 2018. In 2018, its EBITDA increased 8.5% YoY, mainly due to higher iron ore prices and lower freight costs. The company’s freight costs were favorably impacted by the use of the Valemax second generation.

Vale’s iron ore per-unit cost came in at $12.8 per ton in the fourth quarter, a decline of 12.3% YoY. Vale’s unit costs are expected to decline further after S11D is fully ramped up, which would make Vale the lowest-cash-cost producer among major iron ore miners (XME), including Rio Tinto (RIO) and BHP (BHP). Cleveland-Cliffs (CLF), which has different drivers than its seaborne peers, has also reduced its production costs in the United States (SPY) (IVV).

Price realization

Vale’s price realization in the fourth quarter came in at $68.4 per ton free on board. Its EBITDA per ton in the quarter was $42.3, an increase of 5.8% sequentially. This improvement came despite the increase in bunker oil prices and the appreciation of the Brazilian real against the US dollar (UUP).

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