Vale’s Successful Cost Reduction And Capital Expenditure Rationalization Initiatives Prompt Revision In Our Price Estimate To $8
Vale has been fairly successful at cost reduction and driving improvements in operational efficiency in response to an environment of subdued commodity prices, as evidenced by the company’s recent Vale Day presentation. The company also plans to enforce greater production capacity discipline going forward, with margin improvement the focus area for the company instead of sharply ramping up iron ore production. In addition, Vale’s latest capital expenditure guidance also reflects a strategy characterized by more disciplined allocation of capital. These developments will certainly stand the company in good stead going forward and have prompted us to revisit various estimates for Vale in our model for the company’s stock.
Declining Production Costs
The company’s cost rationalization and efficiency improvement measures have helped drive down its iron ore production costs. Moreover, increasing adoption of the more efficient dry processing technique by the company for the processing of iron ore has also contributed to the reduction in production costs. In addition, the commencement of mining from the low-cost S11D iron ore deposit towards the end of 2016 will enable the company to further lower costs. The following table illustrates the comparison between the company’s current cash costs and those expected from the S11D mine.
Given the success of the company’s cost reduction initiatives and the expected benefit from the S11D mine, we have revised our margin forecasts for the company’s Bulk Materials & Others segment, which includes the results of the company’s iron ore mining operations. The following chart illustrates our revised margin forecast.
Capex Discipline
Post the completion and ramp up of production from the S11D mine, the company does not have any major expansion projects on the horizon. Moreover, greater automation and the adoption of the dry processing technique for the processing of iron ore has helped the company rein in sustaining capital expenditure as well. This is reflected in the company’s latest capital expenditure guidance, which we have incorporated into our model for Vale.
Production Discipline
Recognizing the prevailing oversupply situation in the global iron ore market, Vale has rationalized its plans for production increases going forward. The following chart illustrates the extent of the cutback from the previous trajectory of production at Vale’s Northern System of iron ore mines, which includes the S11D project.
(Source: Vale Day 2016 Presentation, Vale Website)
A more gradual trajectory of ramp up in iron ore production is better aligned with the prevailing subdued demand conditions for iron ore, amid an economic slowdown in China. Considering Vale’s success in capital expenditure rationalization and margin improvement through cost reduction, we have suitably modified our forecasts for the same in our model for Vale. This has translated into our new $8.24 price estimate for the company’s stock.
Have more questions about Vale? See the links below.
- Vale’s Full Year 2015 Pre-Earnings Report
- Vale’s Q4 2015 Earnings Report: Decline In Iron Ore Prices Negatively Impacts Results
- How Important Is China To Vale’s Iron Ore Sales?
- What Is China’s Share Of Vale’s Overall Revenue?
- What Is Vale’s Revenue & EBITDA Breakdown?
- What Is Vale’s Fundamental Value Based On 2015 Results?
- By What Percentage Has Vale’s Revenue & EBITDA Declined Over The Last 5 Years?
- By What Percentage Can Vale’s Revenue & EBITDA Increase Over The Next 3 Years?
- How Has Vale’s Revenue Composition Changed Over The Last 5 Years?
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