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Vale's Q2 Iron Ore Production Drops 34% Due to Dam Disaster

Zacks Equity Research

Vale S.A.’s VALE second quarter-2019 iron ore production declined 33.8% on a year-over-year basis to 64.1 Mt while quarterly sales dropped 15.5% to 61.9 Mt. This can primarily be attributedto 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. However, the company noted that with resumption of full operations at Brucutu and recent pickup in shipments in the Northern System, it is well poised for the second half of the year. Vale maintained 2019 iron ore and pellets sales guidance at 307-332 Mt. Management also stated that its expected sales volume will move toward the midpoint of the range.

Following the Brumadinho dam rupture on Jan 25, 2019, Vale suspended various operations, either voluntarily or as a result of revocation of licenses or court orders. The company anticipates the Brumadinho dam rupture to have impacted its iron ore annualized production by about 93 Mt. Earlier in June, Vale had announced that it will resume wet processing operations at Brucutu mine as the Superior Court of Justice overruled a previous court ruling. Notably, the previous ruling ordered the suspension of processing at the mine. Brucutu mine, which is Vale’s second largest iron ore operation in Brazil, had been producing iron ore at one-third of its total production capacity.

Vale has made substantial progress concerning the 93 Metric tons per year (Mtpy) of iron ore production capacity stopped in the first quarter, with the resumption of Brucutu operations thus recovering 30 Mtpy of production capacity. Regarding the remaining 60 Mt of lost production, Vale expects 30 Mtpy of dry processing production to be gradually resumed starting by the end of this year and the remaining 30 Mt, which includes wet processing, is estimated to return in about two to three years.

2019 Guidance for Pellet Production & Nickel Lowered

During second-quarter 2019, Vale’s pellet production totaled 9.1 Mt, which came in 29.3% lower than last year owing to the full stoppage of the Southern System pellet plants during the second quarter of 2019, abnormal rain in the Northern and Southeastern Systems, and maintenance carried out at the Tubarao plants. Due to these stoppages, Vale lowered pellets productions guidance for 2019 to 45 Mt, from the prior expectation of 60 Mt.

Iron ore and pellets sales amounted to 70.8 Mt in the reported quarter, down 18.2% on a year-over-year basis. The share of premium products on total sales was 86% in the second quarter.

Finished nickel production totaled 45,000 tons in the second quarter, down 32% year over year and nickel sales volumes were down 6.7% to 57,500 tons. Efforts were made to optimize supply chain opportunities and draw down regional inventories in-line with demand. Owing to the lower production volumes in the second quarter of 2019 and Onça Puma’s stoppage, Vale revised 2019 nickel production guidance to 210,000-220,000 tons.

Copper production inched up 0.4% year over year to 98,300 tons in the quarter under review. Sales volumes of copper reached 95,000 tons in the second quarter, 0.4% higher year-over-year. This improvement reflects higher production volumes and commercial initiatives to reduce inventories.

Cobalt production reached 1,032 tons in the April-June period, 20.7% lower than the prior year quarter weighed down by lower production from Voisey’s Bay and VNC source ore.

In the second quarter, manganese ore production totaled 318,000 tons, 24.5% lower than the prior year quarter owing to a lower production rate at the Urucum mine in order to carry out improvements and safety maintenance. Manganese ore sales volumes were 92,000 tons, 61.5% lower year over year, primarily due to lower production and abnormal rains at the Ponta da Madeira port which in turn affected shipments.

In second quarter 2019, coal production totaled 2.4 Mt and coal sales came in at 2.1 Mt, down 17.5% and 16.6%, respectively, from the year-ago quarter. Due to current challenges at the processing plants and production in the first half, Vale revises 2019 coal production guidance to about 10 Mt. Vale will reassess its mining plan in the near future, which will probably impact its reserves.

Coming to the price performance, shares of the company have gained around 5.7% in a year, in line with the industry’s growth.

Zacks Rank & Other Stocks to Consider

Vale currently sports a Zacks Rank #2 (Buy).
Investors interested in the Basic Materials sector can also consider other top-ranked stocks like Arconic Inc. ARNC, Franco-Nevada Corporation FNV and Kinross Gold Corporation KGC, each carrying a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arconic has an estimated earnings growth rate of 38.24% for the current year. The stock has appreciated 32.3% in a year’s time.

Franco-Nevada Corporation has a projected earnings growth rate of 17.24% for the ongoing fiscal. Its shares have rallied 22.9% over the past year.

Kinross Gold has a projected earnings growth rate of 90% for the current year. The company’s shares have surged 16.5% in a year’s time.

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