Vale Q3 2017 Earnings Review: Higher Realized Iron Ore Prices and Strong Production Volume Drives Results

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Vale (NYSE: VALE) beat market expectations to report strong earnings growth in Q3 2017, driven by higher average price realized for iron ore fines and strong production volumes.

Iron ore saw a peak in its prices in August ’17 as China underwent a structural change and cut its output of substandard steel products in order to follow the government’s regulatory requirements. Chinese steel producers demanded iron ore with Fe content greater than 60% as it produces more steel per ounce of iron ore and emits less coke into the environment. [1] Vale has access to mines which produces high grade iron ore at low cost. The latest  production report states that the average Fe content was 64.1% in 3Q17, higher than that of Q2 2017. ((Vale’s Production in 3Q17, Vale News Release)) The increase results from Vale’s strategy to benefit from the prevailing demand environment in China to improve the company’s iron ore price realization.

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Strong production volumes were driven by the ramp up of production of the company’s S11D mine in the Northern System due to greater operational efficiency achieved. In Q3 2017, S11D achieved a combined physical progress of 92% which enabled it to boost its production volumes. [2]

The company’s management aims to diversify the company into other metals in order to reduce its dependency on iron ore. This would be beneficial for the company in the long term given that the ongoing environmental regulations in China would have a significant impact on China’s future steel production. In addition to that, Chinese steel demand is most likely to stagnate in 2018 as per the latest outlook released by World Steel Association. [3] This again would have an unfavorable impact on global iron ore prices as China accounts for maximum global steel consumption. Given such unsuitable scenarios, it makes sense for the company to invest in other assets to diversify its portfolio and maintain its revenue on an ongoing basis.

We have a $10 price estimate for Vale’s stock, which is in line with the current market price.

Have more questions about Vale? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Vale
Notes:
  1. Iron ore prices get support from Chinese steel market strength, Metal Bulletin []
  2. Vale’s Performance in 3Q17, Vale News Release []
  3. Short Range Outlook 2017-2018, World Steel Association []