Why Did Vale’s Iron Ore Division Outperform Expectations?
What Led Vale SA to Beat Market Expectations in 1Q16?
Iron ore price realization
In 1Q16, Vale SA’s (VALE) ferrous division accounted for ~87% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). EBITDA for ferrous minerals came in at $1.7 billion, which was $711 million higher than 1Q15.
Lower realized prices YoY (year-over-year) contributed to a decline of $255 million. This was more than offset by the following:
lower bunker oil prices
exchange rate gains
real competitiveness
Of this EBITDA, $1.4 billion was contributed by iron ore alone. This is an impressive gain of 28.7% sequentially. As expected, higher realized prices for iron ore were the main driver behind this sequential increase. The CFR (cost and freight) reference price for iron ore fines increased $9.60 per ton to $54.70 per ton in 1Q16 compared to 4Q15. Vale, however, also lowered its costs by $205 million QoQ (quarter-over-quarter).
Cost reduction on track
Vale’s C1 cash costs for 1Q16 were $12.30 per ton, almost in line with $12.20 per ton in 4Q15. We should note that this was despite lower seasonal volumes produced in 1Q16 compared to 4Q15. Iron ore content also decreased slightly from 63.7% in 4Q15 to 63.5% in 1Q16.
Its landed costs, however, fell from $31 per ton in 4Q15 to $28 per ton in 1Q16, mainly due to a $2.80 per ton reduction in freight costs.
S11D is progressing well
S11D appears to be on track, with physical progress reaching 85% in 1Q16. The work is 64% complete at S11D logistic sites and 85% at the S11D railway spur. This is positive since S11D will significantly reduce iron ore unit costs for Vale. This will be instrumental in weathering this oversupply and slowdown driven by weaker demand.
Rio Tinto (RIO) and BHP Billiton (BHP) (BBL) have pared back their iron ore forecasts a bit in their latest released quarterly production reports.
To avoid the risks, you can invest in metals and mining ETFs such as the SPDR S&P Global Natural Resources ETF (GNR), the SPDR S&P Metals and Mining ETF (XME), and the iShares MSCI Brazil Capped ETF (EWZ). Rio Tinto forms 1.8% of GNR’s holdings.
Next, let’s see if Vale’s focus on costs will improve its profitability in coal.
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