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Vale's Q2 Iron Production Up 5.5% Despite Coronavirus Impact

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Zacks Equity Research
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Vale S.A.’s VALE latest report reveals that production increased year over year for iron-ore, nickel and cobalt in second-quarter 2020. The company maintained 2020 production guidance for iron, copper and nickel but lowered guidance for pellets.

Q2 Production Numbers

In second-quarter 2020, iron ore production increased 5.5% on a year-over-year basis to 67.6 Mt. Impact of the COVID-19 pandemic including a 12-day suspension of operations in the Itabira complex and increased quarantine related absenteeism in Northern System operations had a negative impact of 3.5 Mt  on production in the quarter. Additionally, a long-distance conveyor belt maintenance at S11D and the expected stoppage of Fazendao mine in February owing to depletion of the licensed mining area also impacted production.

Pellets production was 7.1 Mt in the reported quarter, reflecting a decline of 22% year over year. Sales volumes of iron ore fines and pellets were 61.6 Mt in the quarter, down 11% from the prior-year quarter.

Nickel production reached 59.4 kt, up 32% year over year driven by the strong performance in North Atlantic refineries, increased Matsusaka and PTVI site production after routine maintenance in the first quarter and higher production from New Caledonia operation. Nickel sales volumes were 42.4 kt in the quarter, 26.3% lower than the prior-year quarter on weak demand amid the pandemic.

Copper production was 84.5 Kt in the quarter, 14% lower year over year primarily due to the impact of the pandemic. Sales volumes of copper were 83.5Kt, down 12% year over year reflecting Voisey’s Bay mine being placed in care and maintenance during the quarter due to the pandemic. Cobalt production reached 1,318 metric tons in the quarter under review, up 28% from the prior-year quarter.

Manganese ore production totaled 149kt, 53% lower than the prior-year quarter. This can be attribute to suspension of operations at the Azul mine. Manganese ore sales volumes were 270kt, which marked a year-over-year increase of 194%.

Coal production came in at 1.3 Mt in the second quarter, down 46% from the prior-year quarter. Coal sales in the quarter totaled around 1.4 Kt, highlighting a decline of 34% year over year. Both reflect the effects of the COVID-19 pandemic. Gold production was down 4% year over year to 114,000 troy ounces in second-quarter 2020.

Guidance for 2020

Vale maintained iron ore fines production guidance for 2020 at 310-330 Mt.  This will be driven by solid production in the Northern System, which includes production at Norther Range (Serra Norte), solid performance at S11D and Eastern Range (Serra Leste) restart and operational enhancements in the Itabira Complex and the resumption of Fazendão site. However, the company cautioned that production is likely to come in at the lower end of the guidance.

Vale’s pellet production guidance is 30-35 Mt, down from the previous guidance of 35-40 Mt due to production adjustments reflecting pellet feed availability at Itabira site, postponement of the resumption of Vargem Grande pellet plant to 2021 and weak market demand.

The guidance for copper production has been affirmed at 360-380 kt. A stronger performance is expected in the second half of the year at South Atlantic operations owing to the end of the rainy season in Brazil and the resumption of Voisey’s Bay operations. The company anticipates producing nickel between 180 kt and 195 kt in 2020.

Vale strives to sustain margins by focusing on product line, improving productivity and cutting costs. It is likely to gain from investment in projects, lower debt, efforts to ramp up coal business and transforming base metals business and introducing more high-quality ore in the market. Iron-ore prices are currently trending above $100 per ton as the alarming spread of coronavirus in Brazil has triggered supply concerns while demand in China remains strong. Copper prices are also gaining on the signs of economic recovery in China and supply concerns. This bodes well for Vale.

Price Performance

Shares of the company have fallen 17.8% in a year, compared with the industry’s decline of 18.9%.

Zacks Rank & Other Stocks to Consider

Vale currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some other top-ranked stocks in the basic materials space include DAQO New Energy Corp. DQ, Clearwater Paper Corporation CLW and The Scotts MiracleGro Company SMG. All of these stocks carry a Zacks Rank of 1, at present.

DAQO New Energy has an estimated earnings growth rate of 207% for the ongoing year. The company’s shares have rallied 160% in the past year.

Clearwater Paper has a projected earnings growth rate of 1043% for 2020. The company’s shares have appreciated 109% in the past year.

The Scotts MiracleGro has an expected earnings growth rate of 30% for 2020. The stock has gained 40% in a year’s time.

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