Vale Lead Over Rio Narrowing on Slowing Output: Corporate Brazil

Vale SA (VALE), the world’s largest iron-ore producer, is losing ground to Rio Tinto Group after its output growth stalled because of aging mines and licensing delays.

Vale’s production of the main raw material used to make steel slid 0.8 percent to 320 million metric tons last year, compared with a 3.7 percent gain for Rio Tinto to 198.9 million tons. Vale’s lead over Rio Tinto narrowed to 121 million tons, the smallest in three years, data compiled by Bloomberg show.

The Brazilian company, which already ceded its title as the world’s second-largest miner by market value to Rio Tinto last year, is shedding logistic and oil assets and refocusing on its core iron-ore business after losing market share. Producers in Australia, where the bulk of Rio Tinto (RIO)’s iron-ore operations are, will be responsible for almost all of the global supply growth of as much as 6 percent this year, while Vale will be little changed, said Garrett Nelson, an equity analyst at BB&T Capital Markets.

“If Vale is flattish to up single digits, they will lose market share,” Nelson, who rates the stock a hold, said by telephone from Richmond, Virginia. “A lot of the Australian producers -- BHP, Rio, Fortescue -- they have been growing over the last few years whereas Vale’s production growth still lies ahead of it.”

Vale has boosted production 5.5 percent since 2007, compared with a 37 percent increase for London-based Rio Tinto and a 43 percent gain for BHP Billiton Ltd. (BHP), the world’s largest mining company and third-largest iron-ore producer. Fortescue Metals Group Ltd. (FMG) is Australia’s third-largest iron-ore producer.

Vale dropped 1.1 percent to 38.75 reais at the close in Sao Paulo today, the first decline in three days.

Falling Further

Output at Vale will decline further. The Rio de Janeiro- based company said Dec. 3 it’s forecasting iron-ore production, excluding a stake in a joint venture with BHP, to fall 1 percent to 306 million tons this year. Rio Tinto said Jan. 15 it’s targeting a 21 percent expansion at its mines in Australia’s Pilbara region this year to 290 million metric tons, without specifying how much of the output belongs to partners.

The expected production decline this year is a consequence of the aging of some of the companies’ mines in southeastern Brazil, Vale’s press office said in an e-mailed reply to questions. The company obtained 212 environmental licenses last year and expects that new projects will boost production to 326 million tons next year and 364 million tons in 2015 without counting output from its Samarco Mineracao SA joint venture with BHP, it said.

Waning Demand

Last year, Vale suspended projects, announced asset sales and cut output of premium pellet products as demand waned in China and Europe, its two biggest markets. The drop, coupled with production delays, pared Vale’s share of the global seaborne iron-ore market to about 27 percent in the first nine months of 2012 from almost 28 percent a year earlier, according to data compiled by Bloomberg Industries.

Melbourne-based BHP’s stake climbed to 15 percent from 14 percent, while Rio Tinto’s share was little changed at about 18 percent, the data show.

Rio Tinto is worth $4.08 billion more than Vale based on Feb. 1 closing prices of its New York-listed shares.

Vale’s American depositary receipts, the equivalent of one ordinary share, have gained 7.3 percent since mid-May, underperforming the 25 percent rally for Rio Tinto and the 21 percent gain for BHP through Feb. 1.

‘Latent Value’

“Why does Rio Tinto have a higher market value than Vale if its iron-ore production is much lower?,” Chief Financial Officer Luciano Siani asked investors at a Jan. 29 event in Rio de Janeiro. “Because Rio Tinto has delivered iron-ore growth and we haven’t. Vale has an incredible latent value and its management is absolutely committed to delivering and revealing that value.”

The company is “confident” it can deliver on its expansion plans and ease investors’ doubts, he said. The company aims to boost its iron-ore output to 402 million tons by 2017 and recover lost market share as it develops ventures including its $8.04 billion Serra Sul project in Northern Brazil.

Vale is expected to post the lowest annual profit in three years when it releases fourth-quarter results on Feb. 27. Net income excluding some items probably fell to $9.7 billion last year from $22.6 billion in 2011, according to the average of eight analysts’ estimates compiled by Bloomberg in the past 28 days.

Rebound

Mining stocks have rebounded as iron-ore prices rallied 77 percent from a three-year low in September, and growth accelerated in China, the world’s biggest consumer of metals.

Fifteen analysts give Vale’s ADRs a buy rating, 13 recommend holding the stock and two advise selling. Twenty-five analysts recommend buying Rio stock, five recommend holding and one says to sell.

Rio Tinto declined to comment on increasing its market share, the company said in an e-mail. Fiona Hadley, a spokeswoman for BHP Billiton, also declined to comment.

Vale is likely to start recovering market share next year when two iron-ore projects ramp up operations, said Rafael Weber, who helps manage about 5.5 billion reais ($2.8 billion) including Vale shares at Geracao Futuro Corretora.

“Vale will still be well positioned in iron ore,” he said by telephone from Porto Alegre, Brazil. “We almost doubled our position in Vale since December. That’s an indication that we are confident.”

Production Surprise

Vale surprised analysts last week by posting a bigger-than- expected gain in production in the final three months of the year. Output rose 3.1 percent to 85.5 million metric tons, a record for a fourth quarter, topping the average estimated gain of 0.6 percent from six analysts surveyed by Bloomberg.

While the company expanded quarterly output faster than Rio Tinto and BHP, most of the gain was caused by favorable weather conditions that allowed Vale to run Carajas, the world’s largest iron-ore mine, at a higher capacity.

The output increase “is more a factor of favorable weather,” said BB&T’s Nelson.

To contact the reporter on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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