Vale Output Expected to Tease Record Despite Dam Disaster

Updated on
  • Analysts predict miner to fall short of second-quarter record
  • Second half of year includes S11D startup and potential deals

Vale SA’s relentless expansion is expected to keep the world’s biggest iron-ore miner near record output levels despite the hobbling effects of last year’s Samarco dam burst on its Brazilian operations.

The Rio de Janeiro-based miner will report second-quarter output of 86 million metric tons, including third-party purchases, according to the average estimate of five analysts surveyed by Bloomberg. That compares with a second-quarter record of 89.3 million a year earlier, and 77.5 million in the first quarter, when Vale’s production is typically lower.

The numbers don’t include production from Vale’s Samarco Mineracao SA joint venture. That mine in southeastern Brazil, co-owned by Melbourne-based BHP Billiton Ltd., was shut in November after a tailings dam burst, killing as many as 19 people, polluting nearby waterways and confronting the companies with potentially billions of dollars in damages.

Vale has warned that the overall performance of its Mariana mining hub in southeastern Brazil was suffering as a result of the accident that’s been widely called the country’s worst environmental disaster. The miner said in its first-quarter production report that the Samarco closure had reduced output in the rest of the regional hub by 48 percent compared with a year earlier.

“Samarco’s closure indirectly caused the shutdown of some of Vale’s other operations that are close to the mine,” Glauco Legat, an analyst at GBM Research in Santiago, said in a telephone interview. “The company is increasing production in the northern system but it should still report lower numbers than last year’s second quarter, when considering the impact of these interruptions.”

Vale’s relatively lower second-quarter production doesn’t necessarily signal a slowdown as Brazil on the whole shipped 5.7 percent more of the steelmaking ingredient in the first of half of this year, according to Bloomberg Intelligence.

The company has been sticking with a strategy of expanding into a supply glut to gain market share from higher-cost producers. The company has benefited as prices rallied 28 percent this year, bolstering profits after last year’s commodities rout. Ore with 62 percent content delivered to Qingdao surpassed $70 a ton in April, but has since receded, closing just under $56 a ton on Wednesday, according to Metal Bulletin Ltd. data.

Shares Rise

Vale’s shares, which have gained 35 percent this year, rose 0.8 percent to 13.79 reais as of 11:52 a.m. in Sao Paulo.

Vale’s two main rivals, Rio Tinto Group and BHP, also have been increasing output. Rio, which boasts the world’s lowest-cost supply, increased second-quarter production by 7 percent to 85.3 million tons, the London-based company said this week. BHP said Wednesday its production in the same three months declined 7 percent to 55.6 million tons from a year earlier after the start of a maintenance program along its Australian railroad curbed some output.

In Vale’s first-quarter report, it said it was on pace to hit the lower end of its 340 million to 350 million ton output guidance for the year. The company plans to ramp up production at its S11D mine in Carajas, the industry’s biggest development project, while also considering selling off stakes in its core assets.

In June, Vale held talks about a potential sale of a minority stake in its iron-ore assets, according to people familiar with the matter, as the company attempts to raise about $10 billion through next year to reduce debt.

Vale is scheduled to release production numbers before regular trading begins Thursday in Sao Paulo and post its second-quarter earnings report on July 28.

— With assistance by David Stringer

(Updates iron-ore price in seventh paragraph, Vale shares in eighth.)
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