Vale Profit Prospects Bolstered by Record Output in Iron Rally

  • Iron output of 77.5 million tons is highest for first quarter
  • Earnings estimates improve as iron ore prices climb above $60

Vale SA, the best-performing major iron miner this year, reported record first-quarter production, boosting its earnings outlook as prices of the steel-making ingredient rally.

The Rio de Janeiro-based company churned out 77.5 million metric tons, putting it on course to meet its annual target range, albeit at the lower end, it said in a statement Wednesday. Excluding third-party purchases, Vale was expected to produce 78.4 million tons, according to the average estimate of six analysts surveyed by Bloomberg.

Vale and its two major rivals Rio Tinto Group and BHP Billiton Ltd. are sticking with a strategy of expanding into a supply glut to grab market share from higher-cost producers. While Vale lowered its annual production forecast in December amid efforts to limit low-margin operations after prices plunged, its expansion is set to accelerate later this year as it begins mining at S11D in Carajas, the industry’s biggest development project.

“We are still seeing ramp-up in production around the world,” Andreas Bokkenheuser, an analyst at UBS Securities LLC in New York, said before the release of production. “A lot of the major producers have been able to lower their cash cost in line with lower fuel costs and weaker currencies. That has lowered the break-even price in China.”

Samarco Plan

Vale’s iron-ore output rose slightly from 77.4 million tons a year earlier, although it was down from 88.4 million tons in the fourth quarter due to weather-related seasonality. Unlike previous quarters, those figures include third-party purchases but strip out production from its Samarco joint venture with BHP. Samarco plans to resume operations by the end of the year after one of its tailings dams collapsed in November.

Vale’s annual production is expected to come in at the lower limit of its guidance range of 340 million tons to 350 million tons, Vale said in Wednesday’s statement.

Higher production, lower costs and a 49 percent surge in iron-ore prices this year to more than $60 a ton have prompted analysts to increase their annual earnings estimates by an average of 103 percent in the past three months, according to data compiled by Bloomberg. That’s the most among major Brazilian companies in the same span.

Vale shares have surged 63 percent this year. BHP is up just 14 percent and Rio Tinto has gained 22 percent.

‘Early Days’

While iron-ore prices are recovering as Chinese slowdown concerns ease, they are still well below the $100-plus levels of two years ago. Analysts from Goldman Sachs Group Inc. and Citigroup Inc. have remained bearish on the commodity. Citigroup expects prices to average $45 this year and $39 in 2017.

Shares of debt-laden miners such as Vale, which are surging this year after being pummeled by collapsing prices, probably will give back ground as Chinese demand declines, according to David Wang, an analyst at Morningstar.

“All of these mining shares have been driven by increased Chinese stimulus for construction, as well as a little bit of tightness on the supply side,” Wang said from Chicago. “On the demand side we continue to see Chinese demand for steel declining from about 700 million down to 630 million over the next 10 years.”

Breathing Room

For now, the rebound is offering Vale some breathing room as it seeks to reduce a $25 billion debt burden that has Standard & Poor’s questioning the company’s investment grade credit rating.

After producing record levels of industrial metals last year, Vale reported nickel output of 73,500 tons in the first quarter, up from 69,200 tons a year ago. Copper production rose 4.4 percent mainly because of the ramp-up of its Salobo mine in Brazil.

While Vale is also the world’s biggest nickel producer, iron ore is its biggest money earner.

Vale is scheduled to release earnings before the start of regular trading on April 28.

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