Vale Beats Production Estimates as Iron Roars Back on China

Updated on
  • Company shifting focus to high-grade mines in Brazil’s north
  • Vale also reported a record quarter of nickel and copper

Vale SA posted record iron-ore output that beat analysts’ estimates as the top producer of the steel-making ingredient feeds growing Chinese demand. Copper and nickel production were also at all-time highs.

The Rio de Janeiro-based company produced 92.4 million metric tons of iron ore in the fourth quarter, including third-party purchases, up from 88.4 million a year earlier, it said in a statement Thursday. The average estimate among five analysts surveyed by Bloomberg was 89.8 million tons.

For the full year, production of 348.8 million tons was a second straight record and at the upper end of its guidance range. Vale is shifting focus from its traditional production base of Minas Gerais state to newer, higher-grade deposits in Brazil’s north, in a bid to bring down costs and defend margins. It kept a forecast for this year of 360 million to 380 million tons, and expects to reach a so-called base case of 400 million tons next year.

“There is really nothing from this report to disrupt Vale’s ongoing supply discipline narrative,” BTG Pactual analysts including Leonardo Correa wrote in a note to clients.

Vale’s shares were up 0.2 percent at 11 a.m. in Sao Paulo Thursday. The stock has rallied 37 percent this year after more than doubling last year.

Production gains will feed through to Vale’s bottom line more than in previous years as prices surge above $90 a metric tons from about $38 at the end of 2015. Cost-cutting efforts by major producers including Rio Tinto Group and BHP Billiton Ltd. in the downturn are also set to drive earnings growth as prices recover.

That will help Vale meet its debt-reduction targets without having to sell key assets. The company has said it can reduce net debt, which stood at $26 billion at the end of the third quarter, at its targeted rate even if prices trade below $60 a ton.

Vale just started commercial shipments at its low-cost, high-tech mine, known as S11D, after investing $14 billion. As the new mine expands, the company expects to lower overall costs, countering the geographic advantage held by competitors Rio Tinto and BHP, whose Australian mines are much closer to Chinese steel mills.

The Brazilian miner is also benefiting from a premium being paid in China for high-quality ore, which makes up about 40 percent of its production. Its goal is to have premium ore account for half of all sales by 2020.

Iron ore’s second-biggest producer, Rio Tinto, is also benefiting from China’s infrastructure spending, while only slightly topping the previous year’s production numbers. Rio’s shipments from Australia rose about 3 percent in 2016 to 327.6 million tons.

Vale also reported a record quarter of nickel production with 83,000 tons. Its copper output also set a new high at 122,500 tons. Both metals also set annual records.

(Updates with comment from analysts in fourth paragraph.)
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