Strong Dollar To Affect Vale’s FY 2018 Bottom Line

by Trefis Team
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Note: Vale’s results have been postponed from February 13th to March 27th.

Vale (NYSE: VALE) will release its fourth-quarter 2018 results on March 27, 2019 and conduct a conference call with analysts. The market expects the company to post 4Q revenue of $10.1 billion, 9.7% higher compared to the year ago quarter, and an EPS (Non-GAAP) of $0.50, compared to $0.36 in Q4 2017. Vale’s superior performance for the quarter is expected to be attributed to higher iron ore and pellet shipments along with increased iron ore prices. However, the company’s bottom line for the full year is expected to be adversely impacted by large foreign exchange losses on loans due to the strengthening US dollar in 2018.

We have a price estimate of $14 per share for the company. View our interactive dashboard – How Will Vale End 2018? – and modify the key drivers to understand the impact on the company’s revenue and valuation.

Key Factors Affecting Vale’s Earnings

Iron ore volume and prices: Iron ore shipment volume is expected to increase in Q4 2018, mainly driven by higher production and rising demand from emerging market economies. Additionally, the company’s flexible supply chain and ramp-up for the S11D mine would lead to higher volumes. Vale’s pellet volume saw an increase in Q3 and is expected to continue with the trend in the fourth quarter, supported by the company’s decision to restart three idle pellet plants. China’s recent iron ore restrictions (only ores with minimum iron content of 62% to be used in China) to mitigate environmental degradation, has led to a surge in prices of high grade iron ore. Vale’s premium products had a record 79% share in its 3Q total sales. As Vale has one of the best ore grades in the industry, we expect higher price realization would contribute in the company ending 2018 with higher iron ore revenues.

(Source: Vale’s 3Q 2018 Earnings Presentation)

S11D Mine: S11D, the largest mining complex in Vale’s history, achieved a combined physical progress of 98% in Q3 2018, with the mine site completed and 96% progress at the logistic infrastructure site. This has added to the iron ore shipment increase in Q3. With an investment of $14.3 billion and an annual production capacity of 90 million tons, the mine is expected to drive higher volume in Q4. Additionally, the ore from this mine is of premium grade, with 66.7% iron content, which will help the company increase its price realization even further.

Lower Nickel production: Vale has reduced its nickel production in the last one year due to volatile market prices on the back of US-China trade tension. As per the company, it is reducing supply and will ramp it up as soon as it can take advantage of higher prices. Thus, we believe that Vale will end the year with around 9% lower nickel shipments, adversely affecting segment revenue by over 6%. However, the long-term outlook for nickel is positive due to rising sales of electric vehicles.

Deleverage program: Vale has been able to reduce its net debt (which had clocked a recent record in 2016) by over $10 billion in one year, from $21.1 billion at the end of Q3 2017 to $10.7 billion at the end of Q3 2018. We expect lower interest expense to add about $0.15 to Vale’s EPS in 2018.

Strengthening of Dollar: More than 74% of Vale’s loans and borrowings are denominated in USD. With the strengthening of Dollar vis-à-vis emerging market currencies, Vale had to bear huge foreign exchange losses on its borrowings, which, in turn, hit its earnings per share. We believe that the gains in EPS due to the deleverage program would be more than offset by losses from a strong dollar. Net income margin for the first nine months of 2018 was 11.5%, much lower than 19.1% recorded in the corresponding period of 2017. We expect FY 2018 net income margin to remain at similar levels, translating into a lower net income of close to $4 billion for the full year.

Vale’s stock price saw a steep reduction about two weeks ago due to the recent mining accident at its plant in Brazil’s Minas Gerais state. Though Vale’s stock is expected to decouple from its fundamentals in the short term, we believe that the company is fundamentally on a strong growth trajectory, with a positive outlook and higher prices for its premium products.


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