Bloomberg News

Vale Profit Misses Analysts’ Estimates After Slump in Currency

October 26, 2011

Oct. 27 (Bloomberg) -- Vale SA, the world’s largest iron- ore producer, posted its first decline in quarterly profit in two years and missed analysts’ estimates after a weaker Brazilian real boosted dollar-denominated debt.

Third-quarter net income fell to $4.94 billion, or 94 cents a share, from $6.04 billion, or $1.13 a share, a year earlier, Rio de Janeiro-based Vale said late yesterday. The company was expected to post per-share profit of $1.17 excluding some items, the average of 12 analysts in a Bloomberg survey. Vale had a financial loss of $2.19 billion related to the real’s drop, while sales rose 16 percent to $16.4 billion.

Vale dropped to its lowest in more than two months on Oct. 20 after iron-ore prices slumped on concern about slowing demand in China and fear the European debt crisis will spread. ArcelorMittal, the world’s biggest steelmaker, is idling some plants in Europe and South Korea’s Posco will cut spending and reduce costs on weaker demand for the alloy used in cars.

The foreign exchange loss “was a bit higher than originally estimated,” Rafael Weber, an equity analyst at Geracao Futuro Corretora, said in a telephone interview from Porto Alegre, Brazil. “With the appreciation of the real, it will be recovered in the following quarter.”

The real slumped 17 percent in the third quarter, the second-worst emerging market performer after Poland, increasing the value of Vale’s dollar-denominated debt in local currency.

Rising Revenue

Earnings before interest, tax, depreciation and amortization, or Ebitda, climbed 9.2 percent to a record $9.63 billion in the quarter, driven by higher iron-ore, nickel and copper revenue, the company said. Vale said it sold iron ore during the period at an average of $151.30 per metric ton, 18 percent more than the year-earlier period.

The company said it’s confident in the long-term outlook for mineral and metals markets amid global financial turmoil. The recent fall in iron-ore prices is related to higher seasonal supply from Brazil and Australia and China’s credit policy, which affects iron-ore traders by not giving them the option of using their stocks as credit guarantee, it said.

“We foresee prices to remain high for a long period ahead as the global iron-ore market is very likely to continue to show strong fundamentals,” Vale said in the statement. “The main reason for the decline in the net income was the depreciation of the real against the dollar.”

“It’s not that you are taking on more debt, it’s that your liability is going up because of the exchange rate,” Rene Kleyweg, an equity analyst at UBS AG, said in a telephone interview from London Oct. 25. “From a reporting numbers standpoint it means your net income gets dragged back.” He rates the stock a “buy.”

Record at Carajas

This is the first time since the third quarter of 2009 that Vale’s quarterly net income fell from a year earlier.

Third-quarter iron-ore output rose 6.4 percent to a record 87.9 million metric tons, after Carajas, the world’s biggest iron-ore mine, recorded record production of 30.9 million metric tons. Nickel output rose 30 percent to 58,000 metric tons, while copper production climbed 46 percent to a record 84,000 metric tons, the company said. Potash production rose about 7.3 percent to 166,000 tons.

Iron-ore and pellet volumes sold during the quarter fell 1.4 percent to 77.5 million metric tons, the company said, adding that the gap between production and sales was explained by lower iron-ore demand in Brazil, the need to rebuild stocks and the start of a distribution center in Oman.

“Vale needs to continue with its sales at a normal level because accumulating inventories to a high level is bad,” Geracao Futuro’s Weber said.

The company’s net debt as of Sept. 30 rose to $15.4 billion, from $11.2 billion at the end of the previous quarter.

Vale invested $4.53 billion, excluding acquisitions, during the quarter, about 19 percent of its $24 billion spending plan until the first quarter of 2012.

Vale, the world’s second-largest mining company by market value, plans to pay a record $12 billion in dividends and share buybacks this year, boosting capital returns to investors as it faces project delays and cost increases.

Sliding Prices

The company is forecast to post a record $26.5 billion in net income excluding some items during 2011, up from $17.3 billion last year, according to 16 analyst estimates compiled by Bloomberg.

Iron-ore prices for immediate delivery extended their slump this week and fell below $130 for the first time since July 2010 yesterday. The price of ore with 62 percent iron content delivered to the Chinese port of Tianjin declined 3.3 percent to $127.40 a metric ton, its 13th-consecutive drop, according to The Steel Index Ltd.

The cash price fell $10.20 yesterday, or 7.2 percent, its biggest slump since Aug. 20, 2009.

The Chinese economy grew 9.1 percent during the third quarter from a year earlier, the slowest pace since 2009. Vale sold about 45 percent of its iron-ore and pellets to Chinese customers during the third quarter, or about 35 million metric tons, it said yesterday. Europe represented 20 percent of the company’s shipments.

Vale gained 99 centavos, or 2.5 percent, to 40.73 reais in Sao Paulo yesterday. The stock has declined about 16 percent this year, compared with an 18 percent for Brazil’s benchmark Bovespa Index.

(Vale will host two conference calls with investors today in Portuguese and English at 8 a.m. and 10 a.m. New York time.)

--Editors: 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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