Bloomberg News

Vale Third-Quarter Profit Falls 18% on Declining Currency

October 26, 2011

(Updates with UBS analyst comment in fourth paragraph.)

Oct. 26 (Bloomberg) -- Vale SA, the world’s largest iron- ore producer, posted third-quarter profit that missed analysts’ expectations after a slumping Brazilian real boosted dollar- denominated debt.

Net income dropped 18 percent 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 today in a regulatory filing. 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 currency slide, 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 China, the biggest user of the raw material, is slowing expansion amid tighter credit conditions and fear the European debt crisis will spread. Brazil’s real slumped 17 percent in the third quarter, the second-worst emerging market performer after Poland in the period, increasing the value of Vale’s dollar-denominated debt in local currency.

“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 yesterday. “From a reporting numbers standpoint it means your net income gets dragged back.” He rates the stock a “buy.”

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 today, in a report after Sao Paulo trading closed, that 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, stemming from the economic development and structural transformation of emerging market economies and the constraints to supply growth,” Vale said in the statement. “The main reason for the decline in the net income was the depreciation of the real against the dollar.”

Record at Carajas

This is the first time in two years, since the third quarter of 2009, that Vale’s quarterly net income declined compared with the year-earlier period.

Vale said 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 production increased 30 percent to 58,000 metric tons, while copper output climbed 46 percent in the quarter to a record 84,000 metric tons, the company said. Potash production rose about 7.3 percent to 166,000 tons, it 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, the company said today, about 19 percent of its $24 billion spending plan until 2012’s first quarter.

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 forecasted 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 today. 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 today, 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 today. Europe represented 20 percent of the company’s shipments.

Vale gained 99 centavos, or 2.5 percent, to 40.73 reais in Sao Paulo, and has declined about 16 percent this year, compared with an 18 percent for the benchmark Bovespa Index.

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

--Editors: Robin Saponar, Dale Crofts

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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