Vale

[bonded]

JPM

 

Latin America Equity Research

Vale (VALE US)

Straight from the Call

Overweight

Price: $11.51

Vale just hosted a conference call to discuss its 3Q19 results. For more details on reported figures, read Vale: 3Q19 Results: Cash is King. Vale remains committed to Brumadinho reparation and should not consider dividend payments until the page is turned. Costs are expected to decrease further in 4Q19 on higher cost dilution as volumes recover. Please see below the main call highlights:

· Committed to Brumadinho reparation. Management reiterated its commitment to repair the damages caused by the Brumadinho dam burst. A number of safety measures have been adopted and agreements have been reached. The company believes the Brumadinho reparation is key to the Vale’s investment case.

· No dividends in the short term. Vale’s leverage decreased to 0.5x ND/EBITDA in the quarter (from 0.8x) on strong operational figures and the release of frozen funds. Management once again highlighted that despite low leverage, the company will not consider dividend payments until the Brumadinho reparation is completed.

· Ferrous: Cost reduction to continue. Vale’s C1 cash costs decreased to $15.3/t from $17.6/t in 2Q19. Management expects costs to further decrease $1.0-1.5/t n 4Q19. Brumadinho-related expenses also decreased to $2.8/t (from $5.7/t), and Vale expects these expenses to range between $2.5-3.5/t in 4Q19 and likely remain stable until YE20.

· New pellet premiums mechanism. Given high iron prices and lower pellet demand, Vale has established a new pellet premium pricing mechanism based on quarterly agreements with customers (vs annually previously), thus explaining lower premiums in the period.

· Sees better iron ore demand in 2020. Higher infrastructure demand in China in 2020 should partially offset real estate slowdown in support of 1% steel production growth. Higher steel production, coupled with lower Chinese iron ore supply, should result in a 2%-3% increase in iron demand.

· Nickel prices hedging. Vale announced it will hedge ~30% of nickel prices given currently high prices. Vale is a price taker when it comes to nickel prices, thus justifying the hedging position. The company should not hedge iron ore prices, mainly as the company has more significant pricing power.

· Onça Puma comeback. Onça Puma activities were authorized to come back following a favorable judicial decision and is expected to start mining production in November. The operation should add ~4.0kt in 4Q19. Cash costs should be slightly higher due to the ramp-up period.