Vale (NYSE:VALE) announced its fourth quarter results on February 26 and held the earnings conference call on February 27. It reported a net quarterly loss of $6.45 billion compared with a loss of $2.62 billion in Q4 2012. Net operating revenue rose to $13.41 billion from $12.26 billion in the previous year’s comparable quarter, mainly due to higher sales volume and slightly higher iron ore prices. The large net loss was mainly due to the settlement of a tax dispute with the Brazilian government. ((Vale Q4 2013 Earnings Release, Vale Media Release))
Iron ore production stood at 81.3 million tonnes, which was 1.8% lower than the 82.7 million tonnes produced in Q4 2012. For the whole year, the production stood at 299.8 million tonnes, about 3% less than the 309 million tonnes produced in 2012.
We have a Trefis price estimate for Vale of $15. We will revise this shortly now that the fourth quarter earnings results are out.
Operational Performance In Q4
As expected, Vale benefited from higher iron ore prices in the fourth quarter. It also managed to reduce sales, general and administrative expenses from $577 million in Q4 2012 to $315 million. 
The average price for Vale’s iron ore shipments stood at $112.97/tonne as compared to$105.58/tonne in Q3 2013. This was due to higher IODEX 62% Fe benchmark prices in the quarter and a larger share of sales made on CFR basis which fetched higher prices. In short, Vale used a mix of different pricing mechanisms in its sales portfolio to optimize profits.
- The production of iron ore this quarter stood at 81.3 million tonnes, 1.8% lower than the Q4 2012 figure of 82.7 million tonnes. This decrease in production was mostly due to lack the of operational flexibility in the Northern System and heavy rainfalls in the Southeastern System during the quarter. However sales remained stable at 73.6 million tonnes as compared to 73.4 million tonnes in Q4 2012. Slightly higher sales combined with higher sales on a CFR basis resulted in sales rising to $8.3 billion from $7.4 billion in Q4 2012.
- Iron pellet production stood at 10.4 million tonnes, 11.1% higher than the comparable production figure last year. The production rose mostly due to the good operational performance of Oman and the recovery from maintenance stoppage in the Southeastern System.
- The production of coal rose to 2.3 million tonnes compared to the Q4 2012 figure of 1.95 million tonnes due to a significant improvement in the performance of Carborough Downs, an Australian mine.
- Total finished nickel production for the quarter was 68,000 tonnes, 9.6% sequentially higher. 
Iron Ore Prices, S11D And Moatize Will Drive Future Performance
To the surprise of most observers, the average price of iron ore in the fourth quarter was higher than in Q4 2012, despite a slowdown in China. We think that higher iron ore prices were mainly due to an economically irrational expansion of steelmaking capacity in China, buoyed by state subsidies and encouragement from local government officials. While the central government has belatedly ordered a crackdown by forcing polluting facilities to shut down, the full impact of this move is yet to be observed. Our opinion is that Vale may benefit if low-quality iron ore sources in Chinese steel mills are replaced by iron pellets and lumps, as efforts to control pollution get underway. However, that largely depends on whether the commitment of the central government persists going forward. After all, even in the past, the Chinese government has shied away from harsh measures in the face of economic slowdowns for fear of causing wider unrest. ((Iron Ore Spot Price Chart, YCharts))
There is also the question of low quality Chinese ore for which the cost of production is high. This will likely act as a floor for iron ore prices which may not drop below $110 per tonne despite the excess surplus capacity of 40 million tonnes expected in 2014. However, we think that it’s certain that prices will be lower compared to last year.
Vale expects its ambitious S11D project in Brazil to start iron ore production in 2016 and will likely face the brunt of falling prices even as its production volume surges. The company reported that work on the mine is progressing according to schedule and is 48% complete. The S11D project has an estimated nominal capacity of 90 million tonnes of iron ore per year and proven iron ore reserves of 4.2 billion tonnes so far. To put the production figure in perspective, Vale produced 299.8 million tonnes of iron ore and about 39 million tonnes of iron ore pellets in 2013. Thus, the S11D project will augment production capacity considerably once it starts in the second half of 2016 and achieves full capacity in 2018.
The Moatize region in Mozambique will start delivering real value once the transport infrastructure bottlenecks are taken care of by building additional railway and port capacity. Vale is investing big in these areas. It reported that at the end of Q4 2013, 41% of the work on the Nacala railway corridor and 40% of the work on the port was complete. Out of a capital expenditure target of $4.4 billion, $1.3 billion has already been spent. Notes: