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Vale Sees $1.6B Charge for Base Metal & Coal Business in Q4

Zacks Equity Research

Vale S.A VALE recently announced that it will incur a non-cash impairment charge of approximately $1.6 billion in fourth-quarter 2019 and write-down its New Caledonia mine in connection with annual strategic planning process and comprehensive review of business prospects.

Reliability of production and processing of the ore originating from New Caledonian operations has been acting as an impediment to Vale’s Base Metals business so far this year. Consequently, the company has reduced the expected production levels for the remaining life of the mine. It will thus write down the value of the $3 billion assets by $1.6 billion.

Further during the strategic planning for the Coal business, Vale found out that the expected yield of metallurgical coal and thermal coal has changed since the inception of the project. This can primarily be attributed to technical issues on the project and operations of those assets. The company also underwent a detailed review of the mining plan that lowered the level of proven reserves and revised metallurgical and thermal coal prices scenarios. Consequently, the company will record a non-cash impairment charge of approximately US$1.6 billion in fourth-quarter 2019.

The new mining plan for the Coal business entails the prioritization of better-quality ore bodies. This will maximize the share of metallurgical coal on the product mix and with a lower stripping ratio. The Moatize operations, which will be under maintenance for three months next year, will implement a new operational flowsheet, increasing the plant’s productivity and yield. Vale expects to reach 15Mtpy run-rate in Moatize in the back half of 2020.

The company´s annual asset review of its New Caledonian operations is ongoing and will be completed by February next year. The company stated additional adjustments that need to be implemented are still under evaluation and therefore does not rule out further impairments charges in fiscal year 2019.

The Zacks Consensus Estimate for fourth quarter 2019 is currently pegged at 45 cents, indicating a decline of 38.36% from the prior-year quarter. The estimate for fiscal 2019 is at $1.37, suggesting a decline of 25.95% from the year-ago reported figure.

Over the past year, Vale's shares have fallen 8.8%, in line with the industry.

The Brumadinho tailing dam failure in January and its consequences have weighed on Vale this year. Nevertheless, the company strives to deliver the highest possible margins by focusing on product line, improving productivity, controlling costs, and better price realization. The company is also likely to gain from investment in projects and lower debt. It is also focused on transforming base metals business into a significant cash generator.

Zacks Rank & Key Picks

Vale currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space include Kirkland Lake Gold Ltd. KL, Agnico Eagle Mines Limited AEM and Franco-Nevada Corporation FNV. While Kirkland Lake Gold sports a Zacks Rank #1 (Strong Buy), Agnico Eagle Mines and Franco-Nevada Corporation carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kirkland Lake Gold has projected earnings growth rate of 96.3% for the current year. The company’s shares have surged around 50% in the past year.

Agnico Eagle has a projected earnings growth rate of 168.6% for the current year. The company’s shares have rallied roughly 44% in the past year.

Franco-Nevada has estimated earnings growth rate of 46.2% for the current year. Over the past year, the company’s shares have surged roughly 39%.

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