Bloomberg News

Vale May Fall on Iron-Ore Output Cuts, JPMorgan Says

December 01, 2008

Cia. Vale do Rio Doce, the world’s biggest iron-ore producer, may fall as larger-than-expected production cuts in the next two quarters spur analysts to reduce profit estimates, JPMorgan Chase & Co. said.

Vale may slash iron-ore production by as much as 30 million tons a quarter to support prices amid falling demand, analyst Rodolfo De Angele wrote in a note today. That’s a larger reduction than the 30 million tons a year that Vale has announced, and implies a cut of as much as a 40 percent of the company’s total capacity, he wrote.

“While our models already reflect a more aggressive shutdown, consensus is not there yet,” De Angele wrote. “We believe this will surprise investors and cause a series of downward earnings revision from the sell side.”

Vale dropped 1.62 reais, or 6.6 percent, to 22.89 reais in Sao Paulo trading.

After the cuts, earnings before interest, taxes, depreciation and amortization likely will reach $13.7 billion for 2009, compared with consensus estimates of $18.5 billion, De Angele wrote.

The company’s shares should rebound in the long term as the lower production supports ore prices, he wrote. Vale is still “cheap” and is the top pick for Latin American metals and mining stocks, the Sao Paulo-based analyst wrote.

“Current prices discount an extreme scenario of collapsing prices in the short and long term as well,” he wrote. “We would have to assume our full iron-ore price curve declines by 28 percent” for Vale shares not to rise.

The production cuts will keep operating costs at their lowest levels, and Vale will stop buying ore from other companies, reducing cash costs, De Angele wrote.

To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net.

To contact the editor responsible for this story: Chris Nagi at at chrisnagi@bloomberg.net.


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