Should Vale’s Aggressive Debt Reduction Plans Worry Investors?
Nickel and copper production
Vale’s (VALE) nickel production for 4Q15 was a record 82,700 tons. This is an increase of 15.5% quarter-over-quarter and 12.4% year-over-year (or YoY).
Copper production also achieved a record for the fourth quarter at 112,500 tons. This is 7.5% higher YoY. The increase was expected and was driven by the ramp-up of the Salobo operation.
Base metals’ adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) totaled $1.4 million in 2015. This is a decrease of $1.1 billion from 2014. The decrease was unsurprisingly due to lower base metal prices and higher costs. These declines offset the gains through favorable exchange rate variations and higher volumes.
Base metals outlook is weak
Base metals were negatively impacted in 2015 due to weakening Chinese consumption resulting in reduced output of stainless steel. Nickel prices fell by 10.6% quarter-over-quarter in 4Q15 and by 40.3% YoY.
According to Vale, at this rate, more than half of the nickel operations are cash negative. The company, however, maintained that global supply is anticipated to decline in 2016, which together with flat demand outlook, should positively impact the prices in 2016.
Copper prices also touched multiyear lows in 2015. Vale expects the surplus in copper to continue in 2016, which negatively impacts prices. This should be negative for the share price of all copper producers including Freeport-McMoRan (FCX), Southern Copper (SCCO), and Teck Resources (TCK). Freeport-McMoRan currently forms 4.0% of the SPDR S&P Metals and Mining ETF (XME) and 2.8% of the Materials Select Sector SPDR ETF (XLB).
To weather the current commodity downturn, Vale has taken several measures including the sale of non-core assets. In our next article, we’ll discuss other measures that Vale is contemplating to weather this downturn.
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