Vale Lowers Iron Forecast as Dam Spill Adds to Low-Margin Cuts

  • Lower iron-ore guidance in line with average analyst estimates
  • Brazilian miner increases 2016 base-metal output forecasts

Vale SA cut its iron-ore output forecast for next year as efforts to limit low-margin operations and a dam spill at a joint venture threaten to close the gap between the Brazilian giant and producers in Australia.

The world’s biggest miner of the steel-making ingredient expects to produce 340 million to 350 million metric tons in 2016, it said in a filing Tuesday. That compares with guidance of 376 million tons given a year earlier. Vale was expected to forecast 344 million tons, according to the average of three analyst estimates compiled by Bloomberg.

Vale flagged the guidance reduction in July as slumping metal prices spurred efforts to lift average ore quality. Adding to that are interruptions related to the Nov. 5 dam collapse at its Samarco joint venture with BHP Billiton Ltd. that halted output and damaged infrastructure used by another Vale mine.

“Trying to be the largest producer of anything in the world of metals these days isn’t necessarily a positive,” David Gagliano, a New York-based analyst at BMO Capital Markets, said on Monday.

The price of iron ore has tumbled more than 70 percent from a 2011 peak amid slowing growth in China and as the largest suppliers -- including Vale, Rio Tinto Group and BHP -- raise output to boost savings and squeeze out higher-cost rivals. Now the Rio de Janeiro-based company is reducing output from lower quality facilities and replacing it with more productive projects.

Investor Day

Chief Executive Officer Murilo Ferreira, who on Monday stepped down as chairman of oil company Petroleo Brasileiro SA, hosted the miner’s annual investor day at the NYSE on Tuesday. The stock fell 2.4 percent to an 11-year low 10.37 reais in Sao Paulo that day.

Vale said it’s on track to produce 340 million tons of iron ore this year.

Rio Tinto -- which produced 37 percent less than Vale last year, according to data compiled by Bloomberg -- forecasts 2015 shipments of about 340 million tons from its operations in Australia and Canada, although that includes third-party tons. In July, Rio lowered its forecast by 10 million tons after output was hampered by cyclones.

Even if the production gap is closing now, Vale is set to expand as its giant S11D project starts next year. It expects output to reach 380 million to 400 million tons in 2017 and as much as 450 million tons by 2019. Last year, it anticipated surpassing the 450 million mark by 2018. The S11D mining project was 77 percent complete as of October.

Nickel Raised

Vale raised nickel and copper production guidance for 2016 to 324,000 tons and 459,000 tons, respectively.

The company said it expects capital expenditure to decline to $6.2 billion next year and $4.6 billion by 2018. Divestment of non-core assets reaped $3 billion and could generate $4 billion to $5.5 billion in 2016, it said.

“We expect positive free cash flow by 2017 with a gradual reduction in leverage and an increase in dividend distribution,” it said in the presentation.

Lost Output

What Brazilian authorities are describing as the country’s worst environmental disaster couldn’t come at a worst time for Vale. It was already contending with plunging prices and the deepest economic recession in its home country in a quarter century. 

The incident -- which damaged a conveyor belt at Vale’s Mariana mine in the same town and shut the Fazendao mine that fed output to Samarco -- is costing 9 million tons of iron-ore fines and 8 million tons of so-called run-of-mine output. The financial impact for Vale will be about $443 million including lost revenue and dividends, it said Tuesday.

The Samarco dam collapse also threatens to drive up Vale’s costs as the scale of the accident almost certainly means more stringent oversight. The spill buried a village and contaminated the 530-mile (853-kilometer) Rio Doce river. Brazil will seek as much as 20 billion reais ($5.2 billion) compensation, Attorney General Luis Inacio Adams told reporters Friday.

Samarco said Nov. 6 it’s too early to determine what caused the accident and that dams were deemed to be in compliance with safety standards in a July inspection.

In a joint statement on Nov. 11, BHP and Vale said they were assisting with rescue efforts, providing aid to victims and making the area safe again. And while operating permits have been suspended indefinitely, both owners said they’re committed to restoring the venture.

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