Vale Profit Slumps as Heavy Rains Limit Output, Increase Costs

By Juan Pablo Spinetto - Apr 26, 2012
BLOOMBERG
Vale SA (VALE3), the world’s second-largest mining company, reported its third consecutive drop in quarterly profit after iron-ore prices declined and heavy rains curtailed production and raised costs.

First-quarter net income dropped 44 percent to $3.83 billion, or 74 cents a share, from a record $6.83 billion, or $1.29, a year earlier, Rio de Janeiro-based Vale said yesterday in a regulatory filing. Per-share profit, excluding some items, matched the average of 12 analyst estimates compiled by Bloomberg. Net sales fell 16 percent to $11.1 billion.

Vale’s profit margins have declined as China, the biggest steel producer, slows its economic expansion and European nations face a recession. Adjusted earnings before interest, taxation, depreciation and amortization in the quarter declined 46 percent to $4.97 billion, missing a $6.54 billion average estimate of eight analysts in a Bloomberg survey.

“Vale reported very weak results,” Barclays Plc analysts led by Leonardo Correa said in a research note yesterday. “The main driver of the variance was lower realized iron ore prices and seasonally weaker volumes. We can’t remember a quarter with such wide variance in expectations versus actual, which should pressure stock performance in the near term.”

Vale dropped 1.5 percent to 41.09 reais at the close in Sao Paulo yesterday. The stock has fallen 12 percent in the past 12 months, compared with a 7.8 percent decline in the benchmark Bovespa Index.

Force Majeure

The company in January declared force majeure on iron-ore shipments because of severe rains in three Brazilian states, affecting sales. Iron-ore production fell 2.2 percent in the first quarter to 70 million metric tons after operations were impeded in southeastern Brazil, the company said April 17.

“The abnormal rainfall in Brazil has magnified the seasonal effect on revenues and costs, which combined with the reduction in iron ore and pellet prices led to narrower operating margins and lower than expected earnings and cash flow,” Vale said in yesterday’s filing, which was released after the close of regular trading in Brazil.

BHP Billiton Ltd. (BHP), the world’s largest mining company, reported a 14 percent gain in production of the steelmaking raw material in the three months ended March 31first quarter.

Vale sold iron ore at an average $109.26 a metric ton, 13 percent less than a year earlier. Average sale prices for nickel fell 27 percent, while copper prices decreased 19 percent, the company said.

Falling Prices

Iron-ore prices slumped to $116.90 per metric ton in October, the lowest since December 2009, from $191.90 in the first quarter of 2011. The company is the world’s biggest iron- ore producer and the second-biggest for nickel after Moscow- based OAO GMK Norilsk Nickel. (MNOD)

“Given the unfavorable weather conditions at the beginning of the year that created transportation difficulties for the product, the result is in line with our expectations,” Victor Penna, an equity analyst at Banco do Brasil SA, said in a note to clients yesterday.

The cost of goods sold by Vale rose 2 percent to $5.69 billion as the company hired more workers and faced dredging and maintenance charges because of the rains on its open pit mines. Sales, general and administrative expenses grew 26 percent to $529 million, Vale said in yesterday’s statement.

Humidity in Ore

“In the first quarter, the volumes were negatively impacted by the adverse weather conditions,” Daniella Maia, chief analyst at brokerage Ativa SA CTV in Rio de Janeiro, said in a telephone interview yesterday before the earnings release. “Generally when we have a period with heavy rains, there is a higher level of humidity in the iron ore and that ends up reducing prices,” she said.

For the year, Vale’s profit is expected to decline to $18.2 billion from $22.9 billion in 2011, according to the average of 16 estimates compiled by Bloomberg.

Vale shipped 65.2 million tons of iron ore and pellets in the quarter, 4.2 percent less than a year earlier. Pellets are a processed form of iron ore used by the steel industry.

“The demand for our products continues to be strong,” Vale said in the statement, adding that iron ore and pellet shipments in March surged to 31.7 million tons. “There are indications of a good performance for Chinese steel production in April driven by the recovery in the demand for construction and infrastructure,” it said.

Nickel sale volumes declined 3.4 percent to 56,000 tons in the quarter, while copper shipments rose 9.4 percent to 58,000 tons, the company said. Potash sales volumes fell 4.5 percent to 128,000 tons, Vale said.

China Sales

Vale sold 47 percent of its iron ore and pellets to Chinese customers in the first quarter, up from 41 percent a year earlier. Europe bought 16 percent, down from 20 percent a year earlier.

“The impact of the recession in Europe persisted, causing the share of our shipments to the region to continue to trend downward,” Vale said.
Vale invested $3.68 billion in the first quarter excluding acquisitions, or 17 percent of the 21.4 billion spending target for 2011, it said. The company paid $69 million during the quarter to buy an additional 5 percent stake in the controlling company of Carborough Downs, a metallurgical coal operation in Australia’s Bowen Basin, it said. Vale’s total debt as of March 31 increased to $24.9 billion from $23.1 billion at the end of the previous quarter.

The price of ore with 62 percent iron content delivered to the Chinese port of Tianjin has risen 5.9 percent this year, according to a price index (IBOV) compiled by the Steel Index Ltd. The price gained to $146.70 a ton yesterday.