Vale Profit Misses Estimates as Supply Glut Sinks Iron Price

Jul 31, 2014 1:30 pm ET

(Updates with comment from BofA in 13th paragraph.)

July 31 (Bloomberg) -- Vale SA, the world’s largest iron- ore producer, posted second-quarter profit that rose less than analysts estimated after writing down the value of two projects and as prices for the steel ingredient slumped.

Net income climbed to $1.43 billion, or 28 cents a share, from $424 million, or 8 cents a share, a year earlier, Vale said today in a statement. The Rio de Janeiro-based company was expected to post per-share profit of 42 cents, excluding some items, the average of 13 estimates compiled by Bloomberg. Adjusted earnings before interest, tax, depreciation, and amortization, or Ebitda, fell to $4.1 billion, in line with the average estimate of 10 analysts.

Iron-ore prices entered a bear market in March and last month dropped to the lowest since September 2012 as Vale, Rio Tinto Group and BHP Billiton Ltd., the largest producers, flooded the market with additional output. Benchmark prices have stayed below $110 per ton, a level that Vale has indicated as sustainable, since April 28 as gains in supply outstrip demand.

“Vale’s strong iron-ore production could only partially offset the impact of lower prices,” Sanford C. Bernstein analysts led by Paul Gait said in a note to clients today. “Cash flows from operating activities were positively impacted by the use of tax credits.”

Vale dropped 0.1 percent to 28.89 reais in Sao Paulo at 2:23 p.m. The stock’s 12 percent drop this year compares with a 1.8 percent increase by BHP’s Sydney-traded shares.

Simandou Writedown

Net sales declined 7.1 percent to $9.9 billion in the quarter, beating the $9.8 billion average estimate of eight analysts compiled by Bloomberg. The company invested $5.1 billion in the first half of the year, 34 percent of the $14.8 billion budged for 2014, as project execution costs decreased.

Vale wrote down by $774 million the value of its Simandou project in Guinea and its Integra coal mine in Australia, it said in today’s statement. The miner is advancing in negotiations with the government of Guinea to receive compensation for Vale’s investments in the project.

The company shipped 76.9 million tons of iron ore and pellets in the quarter, 6.6 percent more than a year earlier, after posting July 24 record iron-ore production for a second quarter. Pellets are a processed form of iron ore used by the steel industry.

“The increase in supply from the majors has pressured prices downward and has led to the closure of high-cost iron-ore miners,” Vale said in today’s filing. “Worldwide apparent steel demand is expected to grow from 3 percent to 3.5 percent in 2014 and drive iron-ore demand.”

‘Challenging Environment’

The company’s average realized iron-ore price declined to $84.60 a ton from $102.66 a year earlier, above a $80.31 estimate in a Bloomberg survey. The price of ore with 62 percent iron content delivered to the Chinese port of Tianjin has dropped 29 percent this year to $95.90 a ton yesterday.

“It was a very challenging environment, whereas the price of our most important product has dropped by 15 percent,” Chief Financial Officer Luciano Siani said in a video posted on the company’s website. “We had a very meaningful increase in our iron-ore production, basically due to the ramp up of our new projects.”

Surplus Forecast

Nickel sale volumes rose 3.1 percent to 67,000 tons in the quarter, while the average selling price for the base metal advanced 17 percent, Vale said. The company is the biggest nickel producer after Moscow-based OAO GMK Norilsk Nickel. Shipments of copper declined 1.3 percent to 76,000 tons.

The performance of Vale’s base metals unit continued to improve despite maintenance stoppages as the company starts new copper projects, according to Bank of America Corp.

“Base metals posted solid results,” Bank of America analysts Thiago Lofiego and Karel Luketic said in a note today. “We expect base metals results to remain on a positive trend, sustained by the full ramp-up of Salobo I and Salobo II.”

Global iron-ore supply excluding projects that haven’t secured financing and require approvals is expected to grow 6.9 percent this year to 1.33 billion tons as producers in Australia and Brazil ramp up projects, according to research by Bloomberg Intelligence. The market is expected to have a surplus of 10 million tons, expanding to 79 million tons next year, in the researchers’ base-case scenario.