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Vale Earnings Disappoint as Miners Grapple With Stagflation

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(Bloomberg) -- Vale SA struggled more than expected with deteriorating iron ore conditions last quarter, delivering earnings that trailed estimates on rising costs and weaker prices of the steelmaking ingredient.

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Adjusted earnings before items came in at $5.25 billion in the second quarter, the Rio de Janeiro-based company reported Thursday. That was well below the record result of a year ago when miners benefited from a post-pandemic commodity boom and also lagged the $6.32 billion average analyst estimate.

The industry’s enduring a dramatic change of fortunes. Margins that were inflated by surging commodities are now being squeezed as a slump in metal prices collides with inflation and lingering operational and logistical challenges. While iron ore futures have recovered in the past week or so, they’re still down by almost a third from a March peak as recession fears combine with pandemic restrictions and real-estate woes in China.

The Brazilian company’s average iron ore sales price dropped 31% year-on-year, while its free-on-board cash cost was up 11% on exchange-rate swings and pricier logistics and fuel.

“Vale’s financial result mirrors the challenging quarter,” RBC Capital Markets analysts including Tyler Broda wrote in a report. “We expect the market will be disappointed by these results.”

Shares were down slightly before the start of regular trading.

Still, the turbulence wasn’t enough to stop Vale from rewarding investors. The world’s No. 2 iron ore producer said about $3 billion will be paid to shareholders in September. That’s on top of an $8.3 billion buyback program announced in the first quarter.

Vale’s iron ore operations continue to recover from a 2019 dam disaster, which makes it a swing factor on the supply side. The Brazilian firm cut its annual output forecast last week, underscoring the difficulties of ramping up supply and giving a brief respite to iron ore prices.

Vale also lowered its output target for copper by 19% as it grapples with extended maintenance and plant stoppages. A plan to stabilize its copper and nickel operations is taking longer than expected, risking a delay in a possible sale or spin-off of the base-metals division that the firm says may be worth $40 billion.

On a call with analysts Friday, investors will be looking for more insights into metal market conditions including Chinese steel mill demand, as well as capital allocation strategies, inflation and efforts to turn around base-metal operations.

(Adds comment from analyst in fourth paragraph)

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