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Vale to Spend $471M on Safety Measures, Rebuilding Activity

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Vale S.A (VALE - Free Report) announced that it plans to spend R$1.8 billion ($471 million) by 2023 in several projects to stabilize remaining structures at the Córrego do Feijão mine in Brumadinho following the dam rupture in January. Other projects include reducing tailings flow into the Paraopeba river, ensuring proper disposal of tailings and rebuilding public facilities. Of the total amount, about R$ 400 million to R$ 500 million ($104.7 million- $130.9 million) is earmarked to be spent this year.

At the Córrego do Feijão mine, steps are being taken to strengthen the stability of the remaining structures, such as the B6 dam and the remaining residue in Dam 1 (B1). Vale has also undertaken a project to remove waste from the 10 kilometer stretch between the B1 dam, at the Córrego do Feijão mine, and the confluence of the Ferro-Carvão stream and Paraopeba river. There are 23 integrated structures that aim to significantly reduce the flow into the Paraopeba river. It is estimated between 6 and 7 million cubic meters of tailings that leaked from the B1 Dam are deposited in this area. So far, almost 550,000 cubic meters of tailings have been removed.

The project also includes the construction of impoundment structures, designed to contain the thickest sediments and reduce the speed of water flowing through Ferro-Carvão stream. After flowing through the impoundment structures, the water from the Ferro-Carvão stream will finally be contained in a reservoir and then the water will be pumped to the Fluvial Water Treatment Plant (ETAF). At the ETAF, water goes through sediment removal and filtration processes and is then returned to Paraopeba river through the Casa Branca stream. The plant can treat approximately 2 million liters of water per hour.

Vale is also actively involved in rebuilding infrastructure and public facilities of the affected communities.

Earlier this month, the company announced that it will resume wet processing operations at Brucutu mine as the Superior Court of Justice overruled a previous court ruling that suspended processing at the mine owing to safety concerns regarding a nearby dam. Following the accident, Vale’s Brucutu mine has been producing iron ore at an annual rate of 10 Mt, which is one-third of its total production capacity.

Vale had previously provided iron ore and pellets sales guidance in the range of 307-332 Mt for fiscal 2019. The company now expects current sales volume to be at the mid-point of the range. It had earlier predicted sales volume between the bottom and the middle of the range.  

Following the dam disaster, Vale suspended various operations, which impacted the company’s iron ore annualized production by about 92.8 Mt. Consequently, revenues in fiscal 2019 will be lower. Further, as a result of the suspended operations, Vale may have to purchase iron ore and iron ore pellets from the market to meet its obligations under existing commercial contracts, which may lead to higher costs. The company may have to make investments or adjustments in the operations not impacted by the dam failure to increase production, mitigate the impact of suspended operations or comply with additional safety requirements. It may also have to utilize alternative disposal methods to continue operating certain of its mines and plants, particularly those that rely on tailings dams which may require significant capital investments in mines and plants. As a result, costs are expected to increase, which in turn will dent margins.

Despite production constraints, the company remains committed to delivering the highest possible margins by managing extensive supply chain and flexible product portfolio. It is also focusing on improving quality and productivity, controlling costs, strengthening logistics infrastructure.

The Brumadinho dam breach and the consequent capacity closures, and Cyclone Veronica in Australia negatively impacted iron ore supply. This led to fears of a supply crunch, which in turn aided the surge in iron ore prices. Although Vale’s production has gone down owing to the disaster, it will eventually benefit from rising iron ore prices.

Price Performance


 

Shares of Vale have gained 4.7% over the past year, compared with the industry’s growth of 4.9%.

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the Basic Materials space are Materion Corporation (MTRN - Free Report) , Flexible Solutions International Inc. (FSI - Free Report) and AngloGold Ashanti Limited (AU - Free Report) , all currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Materion has an expected earnings growth rate of 27.3% for 2019. The company’s shares have gained 20.4% in the past year.

Flexible Solutions has a projected earnings growth rate of 342.9% for the current year. The company’s shares have soared 146.7% in a year’s time.

AngloGold has an estimated earnings growth rate of 90.6% for the ongoing year. Its shares have surged 117.7% in the past year.

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