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Vale Is About To Become The Lowest Cost Iron Ore Miner

Issued at 2015-10-11



Presumably, Vale (NYSE:VALE) is now the lowest cost iron ore producer. The average exchange rate of the Brazilian real to the US dollar has come down by more than 15% in the third quarter. This development has had a very positive impact on Vale's production costs and capital expenditures which are to a large extent denominated in BRL. Hence, these tailwinds are highly appreciated by a company which struggles to generate sufficient cash flow to fund its capacity expansion.

The downside is since Vale reports its financial performance in US dollars, the currency driven changes in liabilities and assets will lead to a negative financial result which will bring a significant net loss. Although the deficit is cash neutral whereas the improvement of the operating performance is tangible, the market has not responded well to similar losses which were reported for Q4 2014 and Q1 2015.

The Brazilian Real and Cash Costs in Q3

For the first quarter, Vale reported iron ore cash production costs, FOB excluding royalties, of BRL53.4 per metric ton. As a result of cost reductions,Q2 cash unit costs decreased to BRL48.7, an improvement of 9%. In the same period, dollar production costs declined from $18.3 to $15.8, which is 14% less. The 5% difference is primarily a result of the weaker real, and the average exchange rate to the US dollar increased from 2.87 for Q1 to 3.07 for Q2. Q3 saw an accelerated depreciation of the Brazilian currency, ending the quarter at 3.96.


Source: seekingalpha.com



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