Vale to Lower Output at Brucutu for 2 Months, Cuts Q1 Guidance

Vale S.A VALE will lower the output at its Brucutu mine for one-two months, while it assesses the stability of the adjoining Laranjeiras dam.

Major part of the mine’s waste is normally disposed at the Laranjeiras dam. The company will undergo assessment of its geotechnical characteristic or rather the dam’s stability. Vale will adopt a Level 1 emergency protocol at the dam, which is the lowest level of alert and does not call for evacuation of the surrounding area.

During the shutdown of the dam, the Brucutu plant will operate at around 40% of its capacity through wet processing with tailings filtration and dry stacking. This will cut the output of the Brucutu mine by 1.5 million tons per month. Brucutu is Vale’s second largest iron-ore operation in Brazil after the 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.

Vale guides production and sales at 68-73 million tons for the first quarter of 2019, lower than the previous expectation of 70-75 million tons. This also reflects weather-related seasonality. Vale, however, maintained its iron-ore and pellet-sales guidance for 2019 at 307-312 million tons. For the fourth quarter of 2019, the guidance is 83-88 million tons.

Iron-Ore Production to Pick Up Gradually

The company also provided guidance for the next few years at its Investors’ Day in New York. Vale projects iron-ore production at 340-355Mt in 2020 and 375-395Mt in 2021. For both 2022 and 2023, the company has guided iron-ore production at 390-400 Mt. Copper production is estimated at 400 kt for 2020. Thereafter, copper production is expected to swell up to 430 kt, 460 kt and 480 kt in 2021, 2022 and 2023, respectively.

Vale expects cash costs of $15 per ton of iron ore in 2019, and between $13 per ton and $13.50 per ton in 2024. Unitary freight costs are projected at $18 per ton for 2019 and $16.3 per ton for 2024. The company is anticipated to generate EBITDA at $15.5-$23.5 billion in 2022.

Over the past year, Vale's shares have declined 13.8%, while its industry has dipped 16.5%.

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 lines, 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 a projected earnings growth rate of 96.3% for 2019. The company’s shares have soared around 93% in the past year.

Agnico Eagle has an expected earnings growth rate of a whopping 168.6% for the current year. The company’s shares have rallied roughly 68% in the past year.

Franco-Nevada has an estimated earnings growth rate of 46.2% for the ongoing year. Over the past year, the company’s shares have surged around 43%.

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