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Vale Trims 2020 Production Guidance on Coronavirus Impact

Zacks Equity Research

Vale S.A.’s VALE latest report reveals that production declined year-over-year for all metals, barring copper in first-quarter 2020. The company trimmed 2020 production guidance for iron, copper and nickel, but withdrew guidance for coal citing the uncertainty stemming from the coronavirus pandemic.

Q1 Production Numbers

In first-quarter 2020, iron ore production plunged 24% on a year-over-year basis to 59.6 Mt. Production came in below the company’s guided range of 63-68 Mt thanks to loss of 4.5 Mt in the Northern System from unscheduled maintenance of the long distance conveyor belt at S11D, weather-related conditions and operational restrictions at the Northern Range connected to the postponement of the startup of the new Morro 1 mining section. Additionally, lower third-party purchases owing to reduced availability as a result of the heavy rains in the southeast of Brazil and some operational issues in the Southeastern System, primarily in the Itabira Complex, led to the underperformance.

Pellets production was 6.9 Mt in the reported quarter, reflecting a decline of 26.4% and 43.1% on a sequential and year-over-year basis respectively. Sales volumes of iron ore fines and pellets were 59 Mt in the quarter. Though the figure was down 13% compared with the prior-year quarter, it came in line with the company’s guidance.

In the first quarter, nickel production reached 53.2 kt, down 2.9% year over year and 6.2% sequentially. Nickel sales volumes were 44.2 kt in the quarter, 5.9% lower than fourth-quarter 2019 and 12.1% lower than the prior-year quarter.

Copper production was at 94.5Kt in the quarter, 0.7% higher than the prior-year quarter. The figure was also up 4.7% sequentially, primarily due to higher volumes from Sossego. Sales volumes of copper were 89.2 kt, 1.6% higher sequentially but down 1.3% year over year.Cobalt production reached 1,189 metric tons in the January-March period, up 4.3% sequentially but down 0.5% from the prior-year quarter.

In the first quarter, manganese ore production totaled 363kt, 0.5% lower than the prior quarter and 19.3% lower than fourth-quarter 2019. Manganese ore sales volumes were 219kt, down 61.6% sequentially. This marked a year-over-year drop of 13.1%.

Coal production came in at 2.0 Mt in the fourth quarter, up 4.6% sequentially but down 11.3% from the prior-year quarter. Coal sales in the first quarter totaled around 1.6 Kt, a decline of 23.3% sequentially and 34.6% year over year, primarily due to lower demand as a result of the pandemic. Gold production was down 9.8% sequentially but up 10.2% year over year to 119,000 ounces in the first quarter of 2020.

Guidance for 2020

Vale lowered iron ore fines production guidance for 2020 to 310-330 Mt from the prior 340-355 Mt.  In addition to the first-quarter production miss, the company cited other reasons for the guidance cut. These include delays in the resumption of halted operations, such as Timbopeba and Fabrica, owing to the COVID-19 pandemic, delays in implementation of alternatives for the disposal of tailings by the Brucutu plants, and some additional impacts related to the pandemic.

Vale’s pellet production guidance is 35-40 Mt, down from the previous guidance of 44 Mt thanks to lower pellet feed availability from the Brucutu plant as a result of suspension of tailings disposal at the Norte/Laranjeiras dam and short-term uncertainties regarding pellet demand.

The company anticipates producing nickel between 180 kt and 195 kt in 2020, lower than the prior guidance of 200-210 kt due to the impact of the coronavirus pandemic. The guidance for copper production is now at 360-380 kt, down from 400 kt. The new guidance factors in actual and potential losses, including Voisey’s Bay mine shutdown since March, and other impacts from the coronavirus outbreak.

Due to the uncertainties stemming from the COVID-19 pandemic, which include the postponement of the processing plant revamp in Mozambique, Vale has not provided coal production guidance for 2020.

The company is continuously evaluating the impact of the COVID-19 pandemic on its business and is implementing actions to ensure business continuity and taking necessary safety precautions for its employees and workers during the pandemic.

Coming to the price performance, shares of the company have fallen 36% in a year, in line with the industry.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the basic materials space are Kinross Gold Corporation KGC, The Scotts Miracle-Gro Company SMG and Novagold Resources Inc. NG. While Kinross Gold and Scotts-Miracle-Gro sport a Zacks Rank #1 (Strong Buy), Novagold Resources carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kinross Gold has a projected earnings growth rate of 41.2% for the current year. The company’s shares have surged 91% over the past year.

Scotts Miracle-Gro has an estimated earnings growth rate of 15.9% for fiscal 2020. Its shares have rallied 42% in the past year.

Novagold Resources has an expected earnings growth rate of 11.1% for fiscal 2020. The company’s shares have soared 178% in a year’s time.

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