Vale (VALE) Gains From Investments, Hurt By Brumadinho Impact

On Aug 27, we issued an updated research report on Vale S.A. VALE. The consequences of the Brumadinho tailing dam failure remain a headwind. Nevertheless, the company will gain from focus on delivering improved margins in iron ore operations, ongoing investment in projects, efforts to ramp up coal business and transform base metals business.

Brumadinho Dam Disaster Remains an Overhang

Vale reported a loss of $133 million or 3 cents per share in second-quarter 2019, marking its consecutive quarterly loss. This can primarily be attributed to the Brumadinho dam rupture. Excluding the Brumadinho dam impact, earnings per share came in at 22 cents in the second quarter, which fell short of the Zacks Consensus Estimate of earnings of 58 cents.

The company’s second-quarter 2019 iron ore production plunged 33.8% on a year-over-year basis to 64.1 Mt while quarterly sales dipped 15.5% to 61.9 Mt.  This was primarily owing to the suspension of operations in the aftermath of the Brumadinho dam rupture and unusual weather-related conditions in the Northern System in April and early May.

Vale anticipates incurring significant expenses as a result of assistance and remediation actions following the dam failure. The company will write off assets of the Córrego do Feijão mine and those related to the upstream dams in Brazil, which will result in a loss of $124 million in 2019. Additional impairments, write-off or write-down of assets are likely to be recognized in 2019. The company also has to make provisions for costs of decommissioning, and remediation and legal proceedings. Revenues in fiscal 2019 will be lower owing to suspended operations.

On Track to Recover Lost Production

In June, Vale announced that it will resume wet processing operations at Brucutu mine — its second largest iron ore operation in Brazil — leading to recovery of 30 Metric tons per year (Mtpy) of production capacity. This in addition to the partial resumption of dry processing at the Vargem Grande complex adding about 12Mtpy, Vale has made substantial progress toward the 93 Mtpy of iron ore production capacity stopped in the first quarter. Regarding the remaining 50 Mt of lost production, Vale anticipates 20 Mtpy of dry processing production to be gradually resumed starting by the end of this year. The remaining 30 Mt, which includes wet processing, is estimated to return in about two to three years.

Vale had earlier provided iron ore and pellets sales guidance at 307-332 Mt for fiscal 2019. The company now anticipates current sales volume to be at the mid-point of the range. It had earlier predicted sales volume between the bottom and the middle of the range.

Value over Volume Approach to Mitigate Impact

The company is focusing on maintaining its ‘”value over volume” approach for the iron ore business. Vale remains committed to delivering the highest possible margins by striving for better price realization, and focusing on improving quality and productivity and controlling costs,

Focus on Investment to Spur Growth

Investments totaled $730 million in the second quarter of fiscal 2019, including $130 million in project execution and $600 million in maintenance of operations, out of which $67 million are related to replacement projects. The company also continues to take several measures to increase safety standards in dams’ management.

Focus on Coal & Transforming Base Metals Business

Vale is focused on increasing coal production, primarily through the ramp-up of the Moatize operations and the Nacala Logistics Corridor (NLC) in Mozambique and Malawi, where it has entered into a strategic partnership with Mitsui. As it completes the ramp-up in Moatize and the NLC, the company anticipates reduction in costs, which will boost margins. Other key initiatives, such as knowledge transfer from its iron ore operations, opening of new mine sections and preparation of selected mining pits for future disposals are expected to lead to higher capacity utilization, mine productivity and yields for the coal business.

The company is also focused on transforming its base metals business into a significant cash generator. Vale is concentrating on nickel business through supply chain integration, operational excellence and digital transformation. It is also being aided by consistent review asset utilization and optimizing operations in order to increase productivity and improve returns, while maintaining capacity for growth to capitalize on prospects for an electric vehicle revolution.

Share Price Performance

Over the past year, Vale's shares have dropped 23.1%, in line with the industry it belongs to.

Zacks Rank & Stocks to Consider

Vale currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are Alamos Gold Inc. AGI, Kirkland Lake Gold Ltd. KL and AngloGold Ashanti Limited AU. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alamos Gold has an expected earnings growth rate of 320% for fiscal 2019. The company’s shares have appreciated 61% in the past year.

Kirkland Lake Gold has a projected earnings growth rate of 69.85% for the current year. The company’s shares have soared 159% in a year’s time.

AngloGold Ashanti has an estimated earnings growth rate of 158.49% for 2019. Its shares have rallied 195% over the past year.

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