Vale’s Q1 Earnings Preview: Higher Shipment Volumes To Partially Offset Impact Of Lower Iron Ore Prices
Vale (NYSE:VALE), the world’s largest iron ore mining company, will announce its first quarter earnings results and conduct a conference call with analysts on Thursday, April 30. We expect lower iron ore prices in Q1 2015, as compared to the corresponding period of 2014, to negatively impact the company’s quarterly results. Vale’s adjusted EBITDA margin stood at 24.1% in Q4 2014, as compared to 33.1% in the corresponding period of 2013, primarily due to a fall in iron ore prices. [1] Vale has already released is production figures for Q1, which point to a significant year-over-year increase in iron ore and copper production volumes. Higher shipment volumes will partially offset the impact of lower iron ore prices on the company’s Q1 results. In this article, we will take a look at what to expect from Vale’s first quarter results.
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Iron Ore Prices
Iron ore is an important raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its prices. Benchmark international iron ore prices are largely determined by Chinese demand, since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. [2] Chinese steel demand growth is expected to slow to 2.7% in 2015, from 6.1% and 3%, in 2013 and 2014, respectively. [3] Weak demand for steel has indirectly resulted in weak demand for iron ore.
On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. The worldwide surplus of seaborne iron ore supply is expected to rise to 300 million tons in 2017, from an expected surplus of 175 million tons in 2015, and a surplus of 72 million tons and 14 million tons in 2014 and 2013, respectively. [4] [5] A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term. [6] Iron ore prices stood at $58 per dry metric ton (dmt) at the end of March, around 48% lower as compared to prices a year ago. [7] The sale of iron ore fines and pellets collectively accounted for around 65% of Vale’s net operating revenues in 2014. [8] Thus, weak iron ore prices will certainly have a major impact upon the company’s results.
Production Review
Iron ore production in Q1 2015 rose to 77.4 million tons, which was 4.5% higher than in the corresponding period of 2014. [9] The increase in iron ore production was due to the ramp-ups of Plant 2 and the Serra Leste processing plant at the Carajás mine, where production rose 18% year-over-year. [9] The increase in iron ore output is consistent with Vale’s long-term plans to boost volumes, capitalizing on its low-cost iron ore deposits. Various projects are expected to result in growth in Vale’s iron ore production from 331 millions tons in 2014 to 459 million tons in 2019. [10]
Copper production stood at 107,200 tons in Q1 2015, up 21.1% from the corresponding period in 2014, primarily due to the ramp-up of production at the Salobo mining complex. [9] Nickel production stood at 69,200 tons in Q1 2015, 2.5% higher than in the corresponding period a year ago. [9] This was primarily due to higher production at the company’s operations in Indonesia and New Caledonia, offsetting the decline in production from the company’s Canadian operations, which were negatively impacted by bad weather conditions. Coal production stood at 1.7 million tons in Q1 2015, down 5.1% year-over-year. [9] Higher production from the Moatize and Carborough Downs mines partially offset the fall in volumes from the Integra and Isaac Plains coal mining operations, which were idled in 2014.
Other Developments
In view of the weak iron ore pricing environment, Vale has adopted a strategy of cost reduction and disciplined capital allocation, in order to remain competitive. In 2014, the company realized $1.2 billion in savings in operating costs as compared to the previous year. [1] The main components of this decline in operating costs were selling, general, and administrative expenses, which decreased by around 21%, and pre-operating and stoppage expenses, which decreased by around 46%. [1]
Vale’s capital expenditure in 2014 stood at $12 billion, as compared to $14.2 billion in 2013. [1] The company idled the Isaac Plains and Integra coal mines earlier in the year, which contributed to the lower capital spending. The reduction in capital expenditure is consistent with the company’s strategy to allocate capital to projects that will generate better returns. [11] Disciplined capital allocation will continue to be the strategy for Vale in 2015, with capital spending expected to be further reduced to $10.2 billion. [10] With iron ore prices expected to remain subdued, the company’s efforts to reduce costs and capital spending will stand it in good stead in 2015.
Expectations from Conference Call
With iron ore prices likely to remain subdued in the near term, we would like to know the latest developments in the company’s response to the weak iron ore pricing environment. Specifically, we would like to know if the company management has identified any further opportunities for portfolio optimization or cost reduction. This will throw some light on the road ahead for Vale.
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Notes:
- Vale’s Q4 2014 Earnings Release, SEC [↩] [↩] [↩] [↩]
- China Ore Stockpiles Rise to Record on Financing Deals, Bloomberg [↩]
- Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association [↩]
- Iron Ore Price Forecast Cut by Morgan Stanley on Supply, Bloomberg [↩]
- Iron Ore Caps 2014 Loss as Morgan Stanley Says Worst Over, Bloomberg [↩]
- BHP, Rio Gamble with Stacked Iron Ore Deck, Mineweb [↩]
- Iron Ore Spot Prices, Y Charts [↩]
- Vale’s 2014 20-F, SEC [↩]
- Vale’s Q1 2015 Production Report, Vale Website [↩] [↩] [↩] [↩] [↩]
- Vale Day 2014 Presentation, Vale Website [↩] [↩]
- Vale comments on Isaac Plains mine, Vale News Release [↩]