Lower Iron Ore Prices Weigh On Vale’s Q1 Results Despite Record Iron Ore Sales Volume
Vale (NYSE: VALE) released its first-quarter results on 25 April and conducted a conference call with analysts the following day. The company reported an earnings and revenue miss due to lower realized average iron ore prices and higher costs. The company reported adj-EPS of $0.31, roughly 24% lower year-on-year (y-o-y) and revenue was reported at $8.60 billion, almost equivalent to the reported revenue in Q1 2017.
Vale achieved a record iron ore sales figure in Q1 in comparison to the same period last year even though production figures proved to be inferior. Vale’s iron ore production activity was interrupted by weather-related seasonal factors coupled with the management’s ongoing effort to reduce its output of lower grade iron ore. However, despite the lower output, Vale’s total iron ore sales volume increased by 9% y-o-y. Yet, in spite record sales figure, Vale’s Q1 revenue was only marginally higher compared to the same period last year as lower realized iron ore prices weighed on the company’s top line. Vale realized an average iron ore price of $66.41 per ton, ~12% lower y-o-y. Although iron ore prices have remained strong in 2018, prices appear to be lower in comparison to Q1 2017 as the demand outlook for steel a year ago was positively fueled by a fiscal stimulus in China and the U.S. government’s plan for a $1 trillion overhaul of domestic infrastructure.
Vale additionally faced increasing cost pressure in the reported quarter. Total cost and expenses (ex- depreciation) increased by almost 13%, thus weighing on the company’s bottom line. Higher oil costs and an otherwise inflationary environment seemingly added to the company’s total cost. On a brighter side, however, the company reported a 26% decline in its gross interest expense as a resultant impact of lower gross debt.
Going forward, the company aims to follow its path to de-lever the company and make its performance more predictable. The company reiterated its plan of achieving a net debt target of $10 billion in the short term. Vale reported a net debt of $14.9 billion as of March 31, the lowest since 2Q11 as confirmed by the company. We have our 2018 outlook for the company unchanged based on its Q1 performance. You can make changes to our assumptions in our interactive dashboard to arrive at your own fair price estimate for the company.
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