The Year 2016 In Review: Vale Well Placed To Benefit From Gradual Improvement In Business Conditions
The year 2016 witnessed a revival in the fortunes of Vale, the world’s largest iron ore miner, as illustrated by the increase in the company’s stock price over the course of the year.
Vale’s Stock Price, Source: Google Finance
An improvement in the iron ore pricing environment over the course of the year and the lowering of production costs by the company helped prop up its quarterly results, particularly those of Q3. Taking cognizance of the weakness in demand conditions in the near term, the company has also lowered future capital expenditure plans as well as moderated the pace of increase of its iron ore output. These developments taken together have helped improve Vale’s business prospects going into the new year.
Iron Ore Prices
Iron ore prices have stabilized somewhat this year, after two years of continuous decline, as illustrated by the chart shown below.
Iron Ore Spot Prices, Source: Y Charts
Oversupplied iron ore markets as a result of an increase in iron ore production by mining giants such as Vale and Rio Tinto amid weak demand conditions adversely impacted prices of the commodity over the past two years. Slowing economic growth in China, the world’s largest consumer of iron ore, has lowered expectations of a rapid improvement in demand conditions. Recognizing that demand conditions are unlikely to improve significantly in the near term, large iron ore producers have moderated their planned ramp ups in production. The following chart shows how Vale has moderated the trajectory of the future increase in production from its Northern System of iron ore mines, which includes the company’s S11D project.
(Source: Vale Day 2016 Presentation, Vale Website)
Moderation in future iron ore production by major iron ore miners has helped prop up prices of the commodity.
Decline in Production Costs
Vale has tried to lower average production costs through a combination of initiatives aimed at cost reduction and efficiency improvement. In addition, the commencement of mining from the low-cost S11D iron ore mine, will allow Vale to further reduce its production costs. The following table illustrates the extent by which S11D cash costs are lower than those of the company’s current production.
The decline in Vale’s production costs has complemented the improvement in iron ore prices, boosting the sentiment around the company’s stock. This has also been helped by the declining trajectory of the company’s capital expenditure.
Capital Expenditure Outlook
With the completion of the S11D project towards the end of the year, Vale does not have any other major expansion projects on the horizon. With relatively subdued demand conditions expected to prevail in the near term, the company has prioritized the maximization of cash flows. This was reflected in the company’s latest capex guidance, which is illustrated by the table shown below.
The Road Ahead
With Chinese economic growth expected to slow further in 2017, demand conditions for iron ore are likely to remain subdued in the near term. [1] However, Vale has taken appropriate actions to better align the company’s operations with the prevailing business conditions. With plans for capex rationalization, a moderated increase in production, and lower cost operations, the company is in much better shape at the end of 2016 as compared to the situation at the start of the year.
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?
Notes:
- World Economic Outlook, IMF [↩]