Vale sees halted iron ore output gradually resuming this year

Brazilian mining giant Vale expects part of its iron ore production halted by court orders following the Minas Gerais dam collapse to gradually return to the market during the year, according to the company's top executives.

Chief executive Eduardo Bartolomeo (pictured) and CFO Luciano Siani told a meeting with investment firm XP Investimentos that of the current 90Mt of suspended production, Vale expects Brucutu's 30Mt to resume soon. Some 10Mt from the mine are already being produced through dry processing technology, they said.

Another 30Mt from Vale's Alegria, Vargem Grande and Timbopeba mines are awaiting licensing for dry processing and may resume operations gradually in the second half, XP research analyst Betina Rosso said in a note to clients on Thursday.

Furthermore, the executives confirmed studies to expand the company's flagship Carajás S11D mine to 150Mt from 100Mt. Vale's goal is to increase dry processing and reduce the use of tailings dams at the complex to gain operational and logistical flexibility in premium products and pellet feed production in Brazil.

COMMERCIAL STRATEGY

According to Bartolomeo and Siani, Vale will maintain its focus on margins through the sale of premium iron ore blends and products.

That is because Vale does not regard the current strong iron ore prices as sustainable and believes that keeping production low to prop up prices could encourage new capacity in the medium term and is therefore not the ideal strategy.

DECOMMISSIONING OF DAMS

Vale announced on June 6 that it has earmarked US$1.9bn for the decommissioning of nine of its upstream tailings dams in Minas Gerais state, part of a US$4.5bn provision plan for costs related to the Brumadinho tragedy in January that left over 200 people dead.

However, the figure does not take into account costs related to environmental damage, Vale told XP.

According to the company, the additional provision should be gradual throughout the year and the miner does not expect any further material addition, Rosso said.

SUPPLY IMPACTS

In the meantime, Vale's lower production continues to hit the international iron ore market, impacting prices and stockpiles at Chinese ports.

According to a Thursday note from London-based shipbrokers Simpson, Spence and Young (SSY), iron ore inventories at Chinese ports declined 2.5Mt week-on-week to 122.4Mt on June 6, representing a fifth consecutive drop.

Jefferies analyst Christopher LaFemina told Dow Jones that the decline in supply from Vale has left ports in China with about 40 days of stocks. According to the analyst, stockpiles below 30 days would be a major concern for local steelmakers.

"Iron ore stocks at Chinese ports could reach critically low levels by the end of the third quarter, or sooner if Chinese stimulus levels boost demand, and prices should rise further as inventories fall," LaFemina told the report.

Meanwhile, driven by persistent bullishness, international 62%-Fe benchmark iron ore prices jumped US$3.56 to US$110.16/t on Thursday, the highest in more than five years, Metal Bulletin said.