Vale’s Q4 2016 Production Review: Rising Iron Ore Production Bodes Well Amid Favorable Pricing Environment
Vale released its production report for the fourth quarter towards the end of last week, with record iron ore production levels the standout takeaway from the report. The company reported a 4.5% year-over-year increase in the production of iron ore fines, driven by the commencement of production at the company’s S11D mine. [1] The S11D mine represents one of Vale’s lowest-cost iron ore deposits and the ramp up of production from the mine will lower average cash costs for the company’s iron ore mining operations.
The timing of the ramp-up of production at the S11D mine is fairly opportune, given the recovery in iron ore prices over the past few months.
Iron Ore Spot Prices, Source: Y Charts
Iron ore prices declined sharply over the course of 2014 and 2015 due to a global oversupply of iron ore. The curtailment of production by high-cost iron ore producers in response to subdued prices helped lower the extent of the oversupply in global markets. In addition, prices reacted to an improved demand outlook for iron ore from China, driven by the Chinese government’s fiscal stimulus in the latter half of last year. [2]
The ramp-up of production by Vale, the world’s largest iron ore producer, is expected to boost the global supply of the commodity. This could act as a dampener on prices this year. However, given that Vale ranks among the lowest cost producers of the commodity in the world and could lower its production costs further this year, the company’s profitability is unlikely to be significantly impacted by a modest decline in prices. The trajectory of prices will largely be determined by the resilience of Chinese demand for the commodity in the wake of the fiscal stimulus of last year. If prices maintain current levels over the rest of the year, given the sharp increase in Vale’s iron ore production driven by the S11D mine, the company should report a substantial improvement in earnings in the coming quarters.
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:
- Vale’s Q4 2016 Production Report, Vale Website [↩]
- China’s stimulus-driven growth bolsters metal prices, Financial Times [↩]