Vale Q3 profit doubles on higher iron ore sales, prices

Reuters

By Jeb Blount and Sabrina Lorenzi

RIO DE JANEIRO, Nov 6 (Reuters) - Brazil's Vale SA, the world's second-largest mining company, reportedon Wednesday that its third-quarter net income more than doubledfrom a year earlier, beating analysts' expectations as iron oreprices and sales volumes rose.

Net income for the three months ended Sept. 30 soared 114percent to $3.50 billion from $1.64 billion in the same period ayear earlier, the company said. The result was 6 percent higherthan the $3.3 billion average profit estimate of seven analystssurveyed by Reuters.

Iron ore prices averaged about a fifth higher in the thirdquarter of this year than in the same quarter of 2012, accordingto Thomson Reuters.

Net sales, or total sales minus sales taxes, rose 11 percentfrom a year earlier to $12.7 billion, beating the averageanalyst estimate of $12.5 billion. The volume of iron ore salesrose 11 percent to 73.4 million tonnes.

"We expected strong volumes, given the robust Brazilian ironore export figures for July-September, but shipments stillexceeded our expectations," mining analysts Garrett S. Nelson,Mark A. Levin and Nathan P. Martin of BB&T capital markets inRichmond, Virginia said in a report to investors.

"Vale's results were largely a reflection of iron ore pricesthat have remained 'higher for longer' in the face of widespreadoversupply concerns," they added.

Vale's preferred shares, the company's most-traded class ofstock, closed at an eight-month high of 34.44 reais in Sao Pauloon Wednesday before the results were announced.

The result comes a year after Vale moved to sharply cutcosts and refocus expansion on its main iron-ore business. Thespending diet came in the face of flagging demand and plungingprices in China for the raw material, the main ingredient insteel. China was responsible for 50.2 percent of Vale iron-oresales in the period.

China is the world's biggest steel producer and largestimporter of iron ore. Vale is the world's largest producer ofthe mineral, accounting for between a quarter and a third ofworld's seaborne iron ore exports. It is also the No. 2 producerof nickel and a major miner of copper, gold, coal and potash.

While iron ore prices have recovered from the three-yearlows of August 2012, executives of Vale and its main rivals, Australia's BHP Billiton Ltd and Rio Tinto Ltd, have said that a decade-long, China-led commoditiesboom is likely over. Resulting lower growth expectationsprompted them to rein in investment and prospecting budgets.

The effort led to the mothballing or cancelling of newprojects, the closing of money-losing mines and sale of assetsor stakes in existing businesses. Investment in the first ninemonths of 2013 was $11 billion, 9.8 percent less than in thesame period of 2012.

China's strong housing market, though, is keeping demand forsteel and iron ore strong, Vale said in the statement. It willkeep it strong in the near term as steelmakers and distributorshave cut their stocks in the face of China's otherwise slowingeconomy.

"The Chinese economy should grow more moderately than it didin the third quarter, but despite this we expect the price ofiron ore to remain stable," Vale said. It added that iron oreshould average about $130 a tonne in the coming months.

On Wednesday, iron ore rose 0.2 percent inthe Chinese spot market to $137.10 a tonne, 58 percent above theAugust 2012 lows that prompted Vale's cost-cutting efforts.

ACROSS THE BOARD COST CUTS

That retrenchment helped boost results even more. Vale cutcosts across the board in the quarter. Sales, general andadministrative costs fell 39 percent to 315 million reais whileresearch and development fell 43 percent to 205 million.

The cost of goods sold, a category that includes salariesand equipment used to mine Vale's products, fell 3.4 percent to$6.55 billion despite rising output and sales.

This helped boost adjusted earnings before interest, taxes,depreciation and amortization (EBITDA) by 37 percent to $5.88billion, beating the average analyst's estimate of $5.71billion. EBITDA is a measure of a company's ability to generatecash profits from operations.

Lower costs, though were also aided by a 10 percent declinein the value of Brazil's real against the U.S. dollar in thethird quarter compared to the same quarter in 2012.

The weaker real meant that each 100 reais of Vale'sBrazilian expenses cost $5.16 dollars less in the quarter thisyear than last year.

While its main mines and operations are in Brazil, nearlyall of Vale's sales are in dollars and most of its expenses arein reais.

Most other products sold by Vale also saw increases in salesvolumes.

Metallurgical coal output jumped 51 percent to 1.73 milliontonnes. Nickel output rose 13 percent to 62,000 tonnes. Copperjumped 17 percent to 103,000 tonnes. Gold output surged 77percent to 85,000 ounces while silver output rose 18 percent to483,000 ounces.

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