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Vale (VALE) Temporarily Halts Operations at Brucutu Mine

Zacks Equity Research

Vale S.A VALE recently announced that it has suspended operations at part of its Brucutu mine, in the municipality of São Gonçalo do Rio Abaixo, State of Minas Gerais. However, management stated that the suspension will not impact the production at the mine and maintained its iron ore and pellets sales guidance of 307-332 million tons for fiscal 2019.

The suspension of works in one mining front of Brucutu mine follows a decision from Brazil's National Mining Agency. The decision was based on the agency’s understanding that Vale had exceeded the mineral reserve limit approved by it for the respective area. However, according to Vale, the company had complied with all the requirements of the agency to operate the mining front. The company had also duly reported the same in the economic utilization plan submitted to the agency in 2017.

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. In February, a Brazilian court ordered Vale to halt operations at its Brucutu iron ore mine.

Brucutu is the second largest iron ore operation in Brazil following the company’s Carajás mine.  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.

Since then, the mine had been using ‘dry processing’ to avoid generation of muddy waste by-product and producing iron ore at an annual rate of 10 Mt, which is one-third of its total production capacity. In June, Vale resumed wet processing operations at the mine as the Superior Court of Justice overruled the previous court ruling.

The company had stated that with the resumption of operations at the Brucutu mine and the partial resumption of dry processing at the Vargem Grande complex adding 12 Mtpy, Vale has made substantial progress toward the 93 Mtpy of iron ore production capacity lost in the first quarter following the Brumadinho disaster. Regarding the remaining 50 Mt of lost production, Vale anticipates 20 Mtpy of dry processing production to be gradually resumed by the end of this year. The remaining 30 Mt, which includes wet processing, is estimated to return in about two to three years.

In a separate development, Vale announced that the president of Supreme Federal Court decided to suspend the injunctions and to grant the return of Vale's nickel operations (mine and plant), Onca Puma in Brazil. With this decision, the operation, which had its mines ceased since September 2017 and nickel processing plant since June this year, will resume its activities.
Vale remains committed to delivering the highest possible margins in the iron ore business by striving for better price realization, focusing on product line, improving productivity, controlling costs, among other efforts. The company is also likely to gain from investment in projects and lower debt levels. Further, efforts to ramp up coal business and transforming base metals business will aid growth.

Vale is focusing on recovery in the nickel business through supply chain integration, digital transformation, and optimizing operations in order to increase productivity and improve returns, while maintaining capacity for growth to capitalize on the prospects for an electric vehicle revolution.

However, revenues in fiscal 2019 will be lower owing to suspended operations following the Brumadinho dam disaster. Vale also anticipates incurring significant expenses as a result of assistance and remediation actions following the dam failure.

Price Performance

Shares of Vale have declined 21.7% over the past year, in line with the industry.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the basic materials space are Kinross Gold Corporation KGC, Arconic Inc. ARNC and Alamos Gold Inc. AGI. While Kinross Gold and Arconic sport a Zacks Rank #1 (Strong Buy), Alamos Gold Inc. (AGI) currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kinross has an expected earnings growth rate of 155.7% for 2019. The company’s shares have soared 76.2% in the past year.

Arconic has an estimated earnings growth rate of 50% for the current year. Its shares have gained 23.6% in the past year.

Alamos Gold has projected earnings growth rate of 324% for the current year. The company’s shares have rallied 39.4% in a year’s time.

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