Bloomberg News

Vale Postpones Spending, Boosts Dividend on Project Delays

July 29, 2011

(Updates with closing share price in ninth paragraph.)

July 29 (Bloomberg) -- Vale SA, the world’s largest iron- ore producer, said it will postpone some of its planned $24 billion of investments for this year into 2012 and return more cash to investors as projects face delays.

Vale will complete the investment plan for 2011 by the end of the first quarter of next year after straying “very far” from its targeted spending, Chief Executive Officer Murilo Ferreira said today on a conference call with investors. The company said late yesterday that its second-quarter net income rose 74 percent, less than analysts expected.

“We don’t worry about supply overcoming demand in the next five years for sure,” Ferreira said in his first earnings conference call since replacing Roger Agnelli as CEO on May 22.

In the first six months of the year, Vale spent about 28 percent of the record $24 billion investment program for 2011. The company, which also announced in a separate statement yesterday it plans an extra dividend of $3 billion, is joining rivals BHP Billiton Ltd. and Rio Tinto Group in returning capital to investors as it faces projects delays and cost increases. Vale plans as much as $11 billion of buybacks and dividends in 2011.

Vale’s investments will still disappoint in the second half because the company is unlikely to spend more than $10 billion, Banco BTG Pactual SA analysts led by Edmo Chagas in Rio de Janeiro said in a note to clients today. “Vale would probably return more cash to shareholders if it refrains from entering into any major M&A deals,” they wrote.

Quarterly Profit

Net income rose to $6.45 billion, or $1.22 a share, from $3.71 billion, or 70 cents, a year earlier, Vale said late yesterday in a regulatory filing. The company was expected to post profit on an adjusted basis of $1.39 a share, the average of 13 estimates compiled by Bloomberg. The result came in below Espirito Santo Investment Bank’s $1.28 forecast, the lowest of the estimates.

A weaker dollar combined with higher engineering and construction costs prompted Vale to boost its capital- expenditure budget for three projects, the company said. Vale increased planned spending by 12 percent to $3.17 billion for its Onca Puma nickel mine, 29 percent to $2.33 billion for its Salobo copper project and 25 percent to $878 million for its Estreito hydroelectric plant.

Project ‘Challenges’

“We continue to face challenges to implement our projects, such as delays in environmental licensing, project development and civil engineering works,” Vale said.

Vale fell 66 centavos, or 1.4 percent, to 45.61 reais in Sao Paulo trading today, its lowest level almost in three weeks. The stock has fallen 6 percent so far this year, less than the 15 percent loss for the Brazilian benchmark Bovespa index.

The company will make a $3.8 billion legal payment in Brazil related to a tax dispute with the government, Vale said in yesterday’s statement, adding that the charge won’t hurt profit as it was previously set aside.

Vale is profiting from higher iron-ore prices as China, the biggest consumer of the steelmaking raw material, invests in projects including low-income housing. Chinese demand and startup production difficulties at iron-ore projects will cause a market imbalance for as many as seven years, Vale Chief Financial Officer Guilherme Cavalcanti said July 5.

Government Criticism

CEO Ferreira, 58, replaced Agnelli after the Brazilian government criticized the company over the past two years for not spending more on domestic steel projects and for buying ships in China when the country was setting up its own yards. Since taking over, Ferreira scrapped a plan to sell shares of the fertilizer unit in an initial public offering and cut its long-term iron-ore output forecast by 10 percent.

It’s “extremely important” for Vale to regain market share in Brazil and investing in steel projects in the Latin American country can create “captive demand” for its products, Ferreira said in the call today.

“Steel producers in Brazil are not doing any investments in steel, they are trying to be a mining company,” he said, adding that the authorities “are not happy” with the situation. “With the lack of investments in steel, we can see good opportunities in the future.”

Net sales surged 55 percent to $15 billion in the quarter, helped by iron-ore, nickel and copper output increases, Vale said. Vale produced 80.3 million metric tons of iron ore in the three months through June 30, 5.8 percent more than a year earlier. Nickel production climbed by more than half to about 56,000 tons and copper output rose 57 percent to 63,000 tons.

‘Disappointed’ With Prices

Iron-ore prices may increase in the fourth quarter after remaining stable in the third quarter due to a seasonable increase in demand, Jose Carlos Martins, director for marketing and sales, said today on the same call.

“We don’t see big changes in the market in the second half,” he said.

Prices for iron-ore sold by Vale averaged $145.30 a ton in the period, an increase of 58 percent from 2010. The price of ore with 62 percent iron content delivered to China, which has almost doubled in the past two years, rose 0.1 percent to $175.5 a ton today, according to Steel Business Briefing Commodities Research.

“We were disappointed with the iron-ore price realization in the quarter,” Leonardo Correa, an analyst at Barclays Capital in Sao Paulo, said in a note to clients late yesterday. “Negative carryover effects, mix and quality adjustments should explain the difference.”

BHP, the world’s largest mining company, boosted its iron- ore output by 14 percent to 35.5 million tons in the quarter, the company said July 20. Rio Tinto, the world’s third-largest mining company by market value after BHP and Vale, said July 14 that its iron-ore output climbed 12 percent to 48.9 million tons in the quarter.

--Editors: Jessica Brice, Dale Crofts, Robin Saponar

To contact the reporter on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net.


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