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Will Vale’s Coal Business Shine in 2016?

Vale's 3Q15 Earnings Missed Estimates, but Stock Rose

(Continued from Prior Part)

Lower coal production year-over-year

Vale (VALE) has increased coal production by 2% quarter-over-quarter to 2.1 million tons in 3Q15 from 2.0 million tons in 2Q15 while it fell 12% year-over-year from 2.3 million tons in 3Q14. The quarter-over-quarter higher production was driven by improved productivity of coal plants.

Metallurgical coal’s volume sold decreased by 133 thousand tons quarter-over-quarter to 1.4 million tons due to 20% lower sales from Mozambique operations, partially offset by higher volume sold from the company’s Australia operations. With lower sales volumes and lower prices, metallurgical coal sales fell by 16% quarter-over-quarter to $115 million in 3Q15.

On the other hand, thermal coal’s volume sold increased by 78 thousand tons quarter-over-quarter to 243 thousand tons. With higher sales volumes, thermal coal’s sales increased to $12 million in 3Q15 from $9 million in 2Q15.

The coal segment has recorded losses

Vale’s coal business has incurred substantial losses. Coal’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was down $27 million from -$102 million in 2Q15 to -$129 million in 3Q15. This was primarily due to higher costs and lower prices, partially offset by lower expenses. Vale’s Australian coal operation was severely impacted by higher costs as the EBITDA for Australian operation fell from $16 million in 2Q15 to -$4 million in 3Q15.

Total coal costs have risen by $21 million quarter-over-quarter from $186 million in 2Q15 to $207 million in 3Q15. This was due to increased sales of higher cost coal inventory and higher mining costs.

Subdued coal demand outlook

The metallurgical coal market was weak due to higher supply and lower demand. Coal demand continued with its poor performance due to lower demand primarily from China while coal supply consistently increased.

Alpha Natural Resources (ANRZ), Walter Energy (WLT), and Arch Coal (ACI), Vale’s peers, were also impacted by weak demand. However, coal producers, primarily from Australia, Canada, and Russia, are expected to benefit from favorable currency, lower oil and energy prices, as these factors could reduce their costs going forward. The lower coal demand and higher supply will continue to affect the coal prices in the short term.

Investors can invest in the Market Vectors Coal ETF (KOL) to get exposure to coal miners. The S&P Metals and Mining ETF (XME) also invests in the coal sector. Vale forms 2.8% of the iShares MSCI Brazil Capped ETF’s (EWZ) holdings.

In our next article, we’ll look at the performance of the Vale’s base metals production.

Continue to Next Part

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