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Vale Q1 iron ore output below expectations

Strength in iron ore prices looks set to continue

 Vale’s new tailings filtration plant at its Vargem Grande iron ore complex in Brazil

Vale’s new tailings filtration plant at its Vargem Grande iron ore complex in Brazil

Vale produced 68 million tonnes of iron ore fines in the March quarter, below analysts' expectations of 72Mt.

Output was 19.5% less than the previous quarter, attributed mainly to seasonality, but a 14.2% increase on a year earlier, as the company continues its "operational stabilisation and resumption plan" following the fallout of its fatal tailings dam failure at Brumadinho in January 2019.

Pellet production was 6.3Mt, 9.2% less than the previous corresponding period due to lower feed availability and Vale expected to gradually increase production this year.

Sales of iron ore and pellets were 28.4% and 26.1% lower than in the December quarter, about 59.3Mt and 6.3Mt respectively.

Iron ore production guidance for 2021 was put at 315-335Mt and the company said it had achieved 327Mt per annum capacity during the quarter.

It produced just over 300Mt in 2020 and is aiming for 400Mt capacity within the next two years. 

Copper production was expected to come in around the lower end of guidance of 360,000-380,000t.

Copper output of 76,500t was 18.2% lower than the December quarter and 19% less than a year ago due to COVID-19 and maintenance restrictions.

Iron ore prices are around a 10-year high, above US$170/t, as demand in China continues.

Underlying prices remained the dominant driver for Vale, BMO Capital Markets analysts said, giving the company an outperform rating and putting the price target at $22.

Jefferies analyst Christopher LaFemina said they had trimmed their estimates for Vale to reflect the report and risks to production for the second quarter.

"Vale shares continue to be very inexpensive (2.5x 2021E EV/EBITDA), and consensus estimates are still too low, despite these operational issues," he said.

He reiterate a buy rating on Vale, warning the market was likely to react negatively to this production report in the very near term, and put the price target at $25.

Vale shares last traded at $19.43 in New York, more than double the price of 12 months ago.

Among other iron ore majors, Rio Tinto reported a "solid" first quarter today, while BHP is releasing its operational results for the nine months to March 31 tomorrow.

Franco-Nevada separately announced today it had acquired 14.7% of Vale's outstanding royalty debentures from the Brazilian Development Bank and Brazil government for $538 million.

The debentures provide holders with life-of-mine net sales royalties on Vale's Northern and Southeastern Iron Ore Systems and on certain copper and gold operations, Franco-Nevada said.

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