Vale (VALE) Misses Q2 Earnings Estimates on Reduced Revenues

Zacks

Mining giant, Vale S.A. (VALE) reported weak financial results for second-quarter 2014. Underlying earnings per ADR (American Depositary Receipt) came in at 38 cents (on a fully-diluted basis), down 15.4% year over year and 4.2% sequentially. Earnings missed the Zacks Consensus Estimate of 44 cents per ADR by 13.6%. Reduction in revenues was the primary reason behind the earnings decline.

Revenues

Net operating revenues slipped 7.1% year over year while increasing 4.2% sequentially to $9.9 billion. Revenues came in lower than the Zacks Consensus Estimate of $10.4 billion. The quarter-on-quarter improvement was attributable to an increase in iron ore volumes as well as base metal prices, partially offset by lower iron ore sales prices.

Of Vale’s total gross revenue of $10.1 billion, sales of ferrous minerals accounted for 70.0%; coal 2.0%; base metals 18.7%; fertilizer nutrients 6.6%; and the remaining 2.7% came from miscellaneous sources.

Geographically, 18.2% of revenues were generated from South America, 53.5% from Asia, 6.4% from North America, 17.4% from Europe, 2.8% from the Middle East and 1.8% from Rest of the World.

Expenses

In the second quarter, cost of goods sold totaled $6.1 billion, up 2.8% year over year. Selling, general and administrative expenditures stood at $237.0 million, while research and development expenses were $160.0 million; declining 24.0% and increasing 2.6% year over year, respectively. Vale’s efforts to divest unproductive projects by reducing its geographical presence prompted the decline in costs.

Balance Sheet/Cash Flow

Exiting the second quarter of 2014, Vale had cash and cash equivalents of $7.1 billion versus $7.2 billion in the previous quarter. Long-term liabilities came in at $50.9 billion, up marginally from $50.8 billion in the preceding quarter.

In the reported quarter, net cash generated from operating activities was $4.6 billion compared with $4.9 billion in the year-ago quarter; while capital spending was $2.7 billion versus $3.1 billion in the second quarter of 2013.

Outlook

Management believes that demand for steel will increase by 3%–3.5% in 2014, thereby driving the demand for iron ore. Also, nickel prices are expected to grow due to a rise in the demand, mainly in Europe and the U.S.  However, metallurgical coal requirement is expected to decline in the coming quarters, owing to a weakening demand in China.

Other Stocks to Consider

Vale currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include U.S. Silica Holdings, Inc. (SLCA), Dominion Diamond Corporation (DDC) and Hi-Crush Partners LP (HCLP). While U.S. Silica Holdings sports a Zacks Rank #1 (Strong Buy), Dominion Diamond Corporation and Hi-Crush Partners have a Zacks Rank #2 (Buy).

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