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Vale iron ore production 'bottomed' following January dam disaster

Vale SA's iron ore production "bottomed" in the wake of the deadly tailings dam failure in January at the Feijao mine in Brumadinho, Brazil, CFO Luciano Pires said on an Aug. 1 earnings call.

Pires said the group's iron ore production fell to about 300 million tonnes on an annualized basis following mine suspensions after the dam failure but had returned to between 340 million and 345 million tonnes with the restart of some operations, most notably Brucutu. Vale cut about 90 million tonnes of capacity following the disaster as regulators scrutinized the safety of similar operations and tailings dams in Brazil.

The production rate will grow through the second half as additional capacity comes back on stream, Pires said. The company produced 64.1 million tonnes of iron ore in the second quarter, decreasing 33.8% year over year.

Meanwhile, Vale management reiterated that it was confident in its assessment of what cash provisions will be needed for reparations and other expenses ⁠ranging from settlements with communities to the cost of environmental remediation related to the Brumadinho disaster. Vale has so far provisioned US$5.7 billion for the disaster, Pires said.

"This is very comprehensive," Pires said.

While analysts have flagged uncertainty over the final cost of the disaster, management underscored strong cash flow as giving it flexibility. Some analysts on the call were curious if that might mean a return to shareholder distributions. But Vale CEO Eduardo Bartolomeo said the company's focus remained on Brumadinho reparations.

"We're not discussing dividends now," Bartolomeo said. Ensuring the safety of workers at its operations and nearby communities "is our obsession," the CEO added.

Still, Pires pointed to cash flow accumulation in coming quarters, noting that Vale did not have large capital expenditure plans.

"If you think of our US$10 billion target [for] net debt, when you put this all together, we're not there yet," Pires said, including other liabilities other than straight debt. "But on the other hand, once the cash starts coming in, there's no alternative use for it in projects, or whatever, rather than manage the balance sheet and perhaps make a nest egg for future distributions."

While Brumadinho has increased Vale's iron ore cost in the short term, Pires said Vale expects the cost drag to fade in the next couple of quarters. "Impacts on the cost structure will be marginal in the longer term."

Pires also said Vale expects the additional costs to be more than offset by other cost reduction initiatives. Vale forecast iron ore cash costs to decrease by about US$2.50/t in the third quarter.

Analysts said Vale's second-quarter earnings were in line with expectations. Bernstein Research analyst Paul Gait noted that quarterly EBITDA returned to positive territory after a negative showing in the first quarter. "But provisions related to Brumadinho keep net earnings below zero at [negative] US$133 million." The loss came on the back of a US$2.14 billion write-down related to dam failures.

Vale also beat consensus on net debt reductions, Gait noted. "Net debt of US$9.7 billion was down 19% quarter over quarter and 16% year over year as the deleveraging of the balance sheet resumes post Brumadinho."

Gait has an US$18.90 target share price on Vale, with an "outperform" rating. BMO Capital Markets analyst Colin Hamilton maintained a "hold" on Vale and a US$15-per-share target price in an Aug. 1 note.