Vale S.A. VALE announced that it will resume wet processing operations at Brucutu mine as the Superior Court of Justice overruled a previous court ruling that suspended processing at the mine due to safety concerns regarding a nearby dam.
Vale had earlier provided iron ore and pellets sales guidance at 307-332 Mt for fiscal 2019. The company now expects current sales volume to be at the mid-point of the range. It had earlier predicted sales volume between the bottom and the middle of the range.
On Jan 25, 2019, a tailings dam failed at Vale’s Córrego do Feijão mine, in the city of Brumadinho, state of Minas Gerais, leading to 300 casualties and extensive property and environmental damage. Various Brazilian courts have ordered freezing of R$17.6 billion ($4.5 billion) of Vale’s financial assets to secure the payment of damages. The company suspended dividend and stopped all share buybacks. It also eliminated executive bonuses.
Vale suspended various operations, either voluntarily or as a result of revocation of licenses or court orders which impacted the company’s iron ore annualized production by about 92.8 Mt.
Following the accident, Vale’s Brucutu mine has been producing iron ore at an annual rate of 10 Mt, which is one-third of its total production capacity. It has been using ‘dry processing’ to avoid generation of muddy waste by-product. Behind Vale’s Carajás mine, Brucutu is the second largest iron ore operation in Brazil. It has been in operation for 13 years and is the biggest mine in the Minas Centrais Complex. Brucutu’s annual production capacity of 30 Mt of iron ore represents 8% of Vale’s annual output. So the resumption of full operations is a positive development for the company which has been hit hard by the dam disaster.
Vale reported a loss of $1.6 billion or 32 cents per share in first-quarter 2019 — its first quarterly loss since the third quarter of 2015. This can primarily be attributed to the impact of the Brumadinho dam rupture. Revenues in fiscal 2019 will be lower owing to suspended operations. Further, as a result of the suspended operations, Vale may have to purchase iron ore and iron ore pellets from the market to meet its obligations under existing commercial contracts, which may lead to higher costs. The company may have to make investments or adjustments in the operations not impacted by the dam failure to increase production, mitigate the impact of suspended operations or comply with additional safety requirements. It may also have to utilize alternative disposal methods to continue operating certain of its mines and plants, particularly those that rely on tailings dams which may require significant capital investments in mines and plants. As a result, costs are expected to increase, which in turn will dent margins.
The company will write off assets of the Córrego do Feijão mine and those related to the upstream dams in Brazil that will result in a loss of $124 million in 2019. Additional impairments, write-off or write-down of assets may be recognized in 2019. The company also has to make provisions for costs of decommissioning, and further remediation and legal proceedings.
Vale’s “Value over Volume” Approach to Mitigate Impact
The company is focusing on maintaining ‘”value over volume” approach for the iron ore business. Despite production constraints, Vale remains committed to delivering the highest possible margins by managing extensive supply chain and flexible product portfolio. The company strives for better price realization, based on adjustments to product portfolio according to market demand and supply chain optimization. The company is also focusing on improving quality and productivity, controlling costs, strengthening logistics infrastructure.
The Brumadinho dam breach and the consequent capacity closures, and Cyclone Veronica in Australia negatively impacted iron ore supply. This led to fears of a supply crunch, which in turn aided the surge in iron ore prices. Although Vale’s production has gone down owing to the disaster, it will eventually benefit from rising iron ore prices.
Shares of Vale have gained 7.0% over the past year, against the industry’s growth of 7.1%.
Zacks Rank & Stocks to Consider
Vale currently carries a Zacks Rank #3 (Hold).
A few better-ranked stocks in the Basic Materials space are Materion Corporation MTRN, Flexible Solutions International Inc. FSI and AngloGold Ashanti Limited AU, all currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Materion has an expected earnings growth rate of 27.3% for 2019. The company’s shares have gained 22.9% in the past year.
Flexible Solutions has a projected earnings growth rate of 342.9% for the current year. The company’s shares have soared 181.7% in a year’s time.
AngloGold has an estimated earnings growth rate of 90.6% for the ongoing year. Its shares have surged 95% in the past year.
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