Vale SA (VALE3) is poised to deliver the biggest earnings surprise this year among the world’s top three mining companies as analysts raise profit projections, while lowering forecasts for BHP Billiton Ltd. (BHP) and Rio Tinto Group.
Analysts increased estimates for Vale’s adjusted net income for this year by 7.7 percent in the past four weeks to $16.7 billion, according to data compiled by Bloomberg. Forecasts for BHP, the world’s largest mining company, and Rio Tinto fell 1.3 percent and 6.6 percent, respectively, the data show.
The Brazilian real’s 23 percent decline against the U.S. dollar in the past year means cheaper labor and operational costs for Rio de Janeiro-based Vale, which gets about half its sales from exports to Asia. The bulk of BHP and Rio’s operations are in Australia, whose dollar fell 3.5 percent. Vale will benefit from China’s steps to stimulate its economy, said Jonathan Brandt, an analyst at HSBC Holdings Plc.
“Given stimulus measures that we have seen in China, there is a greater risk for a positive surprise than a negative surprise,” Brandt said in a July 20 telephone interview from New York. “The weaker real will help Vale with their cost pressure.”
Before today, shares in Vale, the world’s largest iron-ore producer, gained 0.2 percent this year, compared with an 8.9 percent decline for Melbourne-based BHP and a 7.5 percent drop for Rio Tinto (RIO), based in London. Vale fell 2.6 percent to close at 36.88 reais in Sao Paulo today.
Vale probably will report on July 25 that second-quarter earnings per share excluding extraordinary items fell to 75.7 cents from $1.22 a year earlier, according to the average estimate of 11 analysts in a Bloomberg survey. Vale will release earnings after the close of regular trading hours.
The mining company’s earnings are set to strengthen in the second half of the year as Chinese growth regains momentum, said Laurence Balter, who oversees $100 million, including Vale shares, for Fox Island, Washington-based Oracle Investment Research.
The second-quarter will be “the trough in earnings for the year as I see the second half picking up on China stimulus and a strengthening price for iron ore,” Balter said. “If the real weakens further this will boost earnings in the coming quarters.”
Vale said last week that it increased iron-ore production 0.4 percent to 80.5 million metric tons in the second quarter, a record for the period, beating analysts’ estimates after rainfall at its Carajas mine was less than in the past year.
Rio Tinto, the No. 2 iron-ore producer, said output was little changed from a year earlier at 48.6 million tons, while BHP, the third-biggest, reported output increased 15 percent to 40.9 million tons in the three months ended June 30.
For the year, Vale’s adjusted net income will total $16.8 billion, according to the average of 18 analyst estimates compiled by Bloomberg. That would be 26 percent less than a record $22.9 billion in 2011. Rio Tinto is forecast to post adjusted profit of $12 billion in 2012 while BHP’s fiscal-year profit is estimated at $17.4 billion, according to analysts’ estimates.
While benefiting from a weakening real, Vale’s sales may be hurt by declining iron prices, Curt Woodworth, a New-York based analyst with Nomura Securities International Inc., said in a telephone interview July 18.
“In the short run, mills in China will have to cut production to improve inventories so prices will be relatively weak in the third quarter,” Woodworth said.
Officials at Vale’s press office in Rio de Janeiro declined to comment before the earnings report. Rio Tinto spokesman Illtud Harri and BHP spokesman Ruban Yogarajah, both based in London, declined to comment.
China, which accounted for almost 60 percent of global iron-ore demand in the first half of the year, expanded 7.6 percent in the second quarter from a year ago, the sixth straight slowdown. That’s putting pressure on Premier Wen Jiabao to boost stimulus to secure a second-half economic rebound.
The People’s Bank of China cut its benchmark interest rates on July 5 for the second time in a month and analyst expectations for further policy easing rose after China’s consumer price index declined in June.
The stimulus measures will start taking effect, allowing the Chinese economy to improve its performance in the second half of the year, HSBC’s Brandt said.
“There is always the possibility that China takes additional measures,” he said. “The depreciation of the real will help Vale regain some competitiveness.”