Bloomberg News

Vale Counting on China Rebound as Profit Sinks

July 26, 2012

Vale Counting on China Rebound as Profit Sinks

Vale SA stickers sit stacked at the company's booth at the Prospectors and Developers Association of Canada (PDAC) convention in Toronto. Photographer: Norm Betts/Bloomberg

Vale SA (VALE3), the world’s largest iron- ore miner, is counting on a rebound in Chinese economic growth to boost sales after declining prices caused it to post its lowest quarterly profit in more than two years.

Net income slumped 59 percent in the second quarter to $2.66 billion, or 52 cents a share, from $6.45 billion, or $1.22, a year earlier, Rio de Janeiro-based Vale said late yesterday. Vale was expected to post per-share profit of 73 cents excluding some items, according to the average of 12 analysts’ estimates compiled by Bloomberg.

China, which accounted for about a third of Vale’s sales, grew at 7.6 percent in the second quarter from a year ago, the slowest pace in three years. Vale expects Premier Wen Jiabao’s economic stimulus measures and infrastructure projects to fuel recovery in coming quarters, increasing demand for iron ore and other metals.

“Data released so far show the first signs of recovery in infrastructure investment and housing, two important sectors for the demand of metals,” Vale said in its earnings report. “The demand for housing will continue to be strong in the foreseeable future in the face of rapid economic growth and the urbanization process.”

Vale shares fell 0.2 percent to 35.04 reais at 3:50 p.m. in Sao Paulo, heading to the longest losing streak in 17 years. Vale has fallen 7.3 percent this year, compared with a 10 percent decline for Melbourne-based BHP Billiton Ltd. (BHP), the world’s largest mining company, and a 9.6 percent drop for London-based Rio Tinto Group, the third-largest after Vale.

Ore Prices

Iron ore for immediate delivery declined for the 11th consecutive day yesterday to the lowest since Oct. 31. The price of ore with 62 percent iron content delivered to the Chinese port of Tianjin slipped 3.5 percent to $118.60 a ton, according to data compiled by The Steel Index Ltd.

Vale’s net sales fell 21 percent to $11.9 billion after it sold iron ore at an average $103.29 a metric ton, down from $145.30 last year. That’s less than a $110 per ton estimate by Banco BTG Pactual SA. The average sales price for nickel dropped 31 percent and copper declined 15 percent, Vale said.

Earnings missed analysts’ estimates for the fourth time in the past five quarters. The result was Vale’s fourth consecutive decline in quarterly profit (VALE5) and the lowest net income since the first quarter of 2010.

“Once again, the main driver of the miss was lower iron ore price realizations, which explained the bulk of the variance,” Barclays Plc analysts led by Leonardo Correa wrote in a report yesterday after the earnings release. ‘The probability of an extraordinary dividend for the year is now very low.’’

Profit Outlook

Profit is expected to drop to $16.5 billion this year from $22.9 billion in 2011, according to the average of 19 estimates compiled by Bloomberg.

China will need more stimulus measures in the second half to help accelerate infrastructure projects, said Rafael Weber, who helps manage about 7 billion reais ($3.4 billion) at Geracao Futuro Corretora in Porto Alegre, Brazil.

Vale is “a bit optimistic considering the current scenario,” he said yesterday in a telephone interview. “There are doubts this recovery will happen in the second half.”

Rio Tinto, the second-largest shipper of iron ore behind Vale, said this month it’s closely watching the global economy including Chinese stimulus efforts. It said in June it would reduce its capital spending. BHP Chairman Jac Nasser said in May he expects metal prices to ease further.

Chinese Purchases

Vale sold about 44 percent of its iron ore and pellets to Chinese customers in the second quarter, up from 42 percent a year earlier. Europe bought about 20 percent, little changed from a year ago.

The company shipped 75.3 million metric tons of iron ore and pellets in the quarter, 3.3 percent more than a year earlier. Nickel sale volumes rose 11 percent to 63,000 tons and copper shipments climbed by the same percentage to 61,000 tons, the company said.

Total debt as of June 30 rose to $25.5 billion from $24.9 billion at the end of the previous quarter.

Engineering and construction cost increases and delays in project execution prompted the company to boost its investment budget for four projects in Brazil, Vale said.

Planned spending for the Salobo and Salobo II copper projects was raised by 7.3 percent and 20 percent to $2.51 billion and $1.71 billion, respectively, the company said. Vale also boosted the capital expenditure budget for its logistics CLN 150 project and its Tubarao VIII pellet plant.

Vale, which invested $4.29 billion in the second quarter, approved the Itabiritos Caue iron ore project in the Brazilian state of Minas Gerais. The project will require an investment of $1.5 billion and have capacity to produce 24 million tons of iron ore annually, Vale said.

Rising Output

Iron-ore output rose 0.4 percent in the second quarter to 85 million tons, beating analysts’ estimates, after weather conditions improved at Carajas, its biggest mine, the company said July 18. BHP reported a 15 percent increase in production of the steelmaking raw material in the same period.

The rising volumes, coupled with an outlook for an iron-ore price rebound stemming from Chinese stimulus measures, support Vale’s expectations for improving results, New York-based HSBC Holdings Plc analyst Jonathan Brandt said in a report yesterday.

“Despite the poor results, we continue to believe that stimulus measures recently implemented by the Chinese government are likely to improve macro data,” Brandt said. “This implies improving financial results for Vale in the next two quarters.”

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

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; Jessica Brice at jbrice1@bloomberg.net


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