Vale Surpasses Expectations In 2018; Can It Spring A Surprise In 2019 As Well?
Vale (NYSE: VALE), the world’s largest iron ore miner, announced its Q4 and full year 2018 results on March 27, 2019. The company reported revenue of $9.8 billion in Q4 2018, 7% higher than in the year-ago period. Earnings for the quarter came in at $0.73 per share, much higher than $0.15 per share in Q4 2017. For the full year, revenue increased by 7.7% to $36.6 billion in 2018 from $33.9 billion in 2017. Higher revenue was primarily driven by a strong growth in pellet shipments and premium pricing, partially offset by lower copper sales and a decline in nickel shipments. The company reported earnings of $1.32 per share in 2018 compared to $1.06 per share in the previous year. Higher earnings were mainly a reflection of lower interest expense due to the recent deleverage program of the company, coupled with tax benefit realized during the year.
We have summarized the key announcements from the earnings and our outlook for Vale in our interactive dashboard – How Did Vale Fare In 2018 And What Is The Outlook? In addition, here is more Materials data.
Key Factors Affecting Earnings
Higher iron ore and pellet revenue: Iron ore revenue increased by 9.9% in 2018, driven by a 6.5% growth in shipments and higher price realization. Shipments increased with a rise in production, which was supported by rising demand from emerging market economies. Additionally, the company’s flexible supply chain and ramp-up for the S11D mine also contributed to volume growth. Vale’s pellet shipments witnessed an increase of 9.3% to 56.6 million tons in 2018, 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. Realized price per ton of pellet increased by 7.6% to $117.50 in 2018 as against $109.20 in 2017. As Vale has one of the best ore grades in the industry, we expect higher price realization would contribute to the segment’s growth, which would be partially offset by a decrease in production growth as the company has cuts its production guidance following the recent dam accident in Brazil.
Lower Nickel production: Revenue from nickel increased by 2.9% on the back of better price realization, even though nickel shipments decreased sharply by about 16.4% in 2018, as 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. However, the long-term outlook of nickel is positive due to rising sales of electric vehicles. Thus, we believe that Vale would likely ramp up its nickel production from 2020 and take advantage of higher prices then.
Deleverage program: Due to the deleverage program launched by Vale, the company has been able to reduce its net debt (which had clocked a recent record in 2016) by approximately $8.5 billion in one year, from $18.1 billion at the end of Q4 2017 to $9.7 billion at the end of Q4 2018. This has helped the company reduce its interest outgo from $1.7 billion to $1.2 billion in a year, thus boosting the bottom line.
Higher margins: Vale’s net income margin increased from 16.2% in 2017 to 18.8% in 2018. Higher margins were driven by lower interest expense due to the deleveraging and tax benefit of $0.2 billion realized during the year, compared to a tax outgo of $1.5 billion in 2017. However, margin growth was limited due to foreign exchange loss on borrowings. More than 71% of Vale’s loans and borrowings are denominated in USD. With the strengthening of dollar vis-à-vis emerging market currencies, the company had to bear forex loss of about $2.7 billion on its loans and borrowings, which almost wiped out the gains from deleveraging and tax credits. We expect margin and earnings growth to continue over the next two years, supported by lower finance expenses and rising share of premium pellet sales in the overall revenue.
Vale’s stock price saw a steep reduction about a month ago due to the dam accident at its plant in Brazil’s Minas Gerais state in the last week of January 2019. The company has reduced its production guidance for 2019 which has adversely affected investor confidence and limited a rebound in share price. Though, in the short term, Vale’s stock is expected to decouple from its fundamentals and is likely to be driven by news related to inspection fallout and remediation expenses to be borne for the incident, we believe that the company is fundamentally on a strong growth trajectory, with a positive outlook and higher prices for its premium products.
The Trefis price estimate of $14 per share for Vale’s stock is higher than its current market price, with a potential upside of 14% available to Vale’s stock.
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