Vale S.A (VALE - Free Report) recently announced that it expects to finish paying most of the expenses related to the Brumadinho dam rupture by 2021. The company also provided some estimates for halted operations, costs of the iron ore business, and guidance for earnings before interest, tax, depreciation and amortization (EBITDA) and free cash flow for 2019.
On Jan 25, 2019, a tailings dam failed at Vale’s Córrego do Feijão mine, in the city of Brumadinho, state of Minas Gerais, leading to 300 casualties, and extensive property and environmental damage. Vale faces a variety of legal actions which include lawsuits in Brazil, U.S. class actions and Brazilian exchange regulator probes.
Vale provided fresh estimates for stoppage expenses related to Brumadinho at $3-$4 per ton and $2.5-$3.5 per ton in the third quarter and the fourth quarter of 2019, respectively. The company projects C1 cash cost of the iron ore business between $15 per ton and $16 per ton in the third quarter of 2019 and between $13 per ton and $14 per ton in the fourth quarter.
For the ongoing year, disbursements related to the Brumadinho tragedy are estimated at $0.9 to $1.15 billion and $1.5-$2.1 billion for the next. The cash outflow is expected to decline to $1-$1.5 billion in 2021 and $200-500 million in 2022.
The company expects to generate free cash flow between $6.5 billion and $9.4 billion in 2019, after capital expenditures of $3.6-$3.8 billion. Adjusted EBITDA is expected to range between $10.8 billion and $12.9 billion.
Vale’s assumes benchmark iron ore prices in the international market to remain within $80 and $100 per ton in the fourth quarter of 2019. Nickel prices are anticipated in the range of $16,000 to $20,000 per ton.
Vale Reviews Pellet Production Guidance
Vale revised pellet production guidance for 2019 from 45 Mt to 43 Mt to adapt its product portfolio to temporary market conditions. However, the company maintained iron ore and pellet sales guidance of 307-332 million tons in 2019, with sales estimated to be around the mid-point of the range.
This decision is in line with the margin over volume strategy and efficient capital allocation to adapt the value chain and meet prevailing market conditions.
The company is focusing on maintaining its ‘”value over volume” approach for the iron ore business. Vale remains committed to delivering the highest possible margins by managing extensive supply chain and flexible product portfolio. The company is striving for better price realization based on adjustments to product portfolio according to market demand and supply chain optimization.
The company is also focusing on product line to capture industry trends, improving quality and productivity, and controlling costs. It is also strengthening logistics infrastructure of railroads, ports, shipping and distribution centers, and strengthening relationships with customers. Vale’s diversified portfolio of high-quality products, strong technical marketing strategy, efficient logistics and long-standing relationships with major customers will help it counter the immediate challenges and achieve this goal.
Vale to Supply New Iron Ore Product in Q1
Vale will launch a new iron ore product ‘GF88’, hematite or ground fines used for pelletizing, in the first quarter of 2020.
The company expects the pellet percentage in China’s blast furnaces increase from 14% in 2018 to 19% in 2025, resulting in a requirement of 50 million tons pellets and pellet feed annually. Vale has plans to supply approximately 30 mt of GF88 annually in the medium term.
Vale along with BHP Group (BHP - Free Report) , Rio Tinto PLC (RIO - Free Report) and Fortescue Metals Group Ltd. (FSUGY - Free Report) dominate global iron ore production. Together these companies control more than 70% of the iron ore export market.
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