How Vale’s S11D Mine Would Remain a Boon For the Company and Add To the Perils of Iron Ore Producers
Vale‘s (NYSE:VALE) S11D mine, which is part of its Northern Systems, has commenced production this year and have begun to contribute toward the company’s iron ore volumes. The mine is expected to add 90 metric tons of capacity by 2020, which will account for roughly 22% of the company’s expected production in 2020. ((Vale informs on estimates update, Vale News Release))
You can view our base case for Vale’s S11D mine here and create different scenarios using our interactive platform.
The output from Vale’s S11D mine is expected to produce high-grade hematite ore type (iron grade of more than 65% on average) [1] This would remain favorable for the company given an environment of China’s stringent regulations against pollution. Chinese steel producers are increasingly demanding iron ore with Fe content greater than 60% to produce steel. Usage of high grade iron ore produces more steel per ounce of iron ore and consequently emits less coke into the environment. [2] Vale’s current access to high grade iron mines has already remained beneficial for the company throughout 2017, enabling the company to charge a premium for their product. Additional volumes from the company’s S11D mine would add to this dominant position of the company. Vale expects a price premium of $ 3.50/ton to $ 4.50/ton in 2018. [3]
However, this would continue to remain disadvantageous to Vale’s competitors such as Fortescue Metals Group, who are currently selling their low grade ores at a discount of up to 30%. [4] Coupled with the concern over China’s structural change with respect to their demand for higher grade ores, Vale’s enormous output from its S11D mine would add to the global distress of excess supply of iron ore. China, the world’s largest consumer of steel, is expected to show a stagnated growth in its demand for steel in 2018 as per the World Steel Association (WSA). ((Short Range Outlook, World Steel Association)) With less demand for steel, demand for iron ore is also likely to be reduced, which would magnify the oversupply situation and lead to even lower price realization for low grade ores. Although the seaborne iron ore market can operate profitably even in an environment of low iron ore prices as they operate at significantly low cost, a fall in global iron ore prices would materially impact the revenues of major iron ore producers.
Thus, Vale would be in an favorable position in such a scenario, however, it would add to the concerns of its competitors who currently do not have access to such large volumes of high grade iron ore.
We have $10 price estimate for Vale, which is currently below the market price.
Have more questions about Vale? See the links below.
- Why has Vale Opted to Reduce its Nickel Output
- How Vale’s Access to High Grade Iron Ore is an Advantage for the Company
Notes:
- Vale 2016 20F, Vale Financial Statements [↩]
- Iron ore prices get support from Chinese steel market strength, Metal Bulletin [↩]
- Vale informs on estimates update, Vale News Release [↩]
- Miners big and small bank on China’s hunger for high-grade iron ore, Reuters [↩]