Vale Gains as Cuts End Two Years of Profit Disappointment

Vale SA (VALE) rose the most among major iron-ore producers after profit beat analysts’ estimates for the first time in two years on cost reductions and higher copper sales that offset lower prices for the steel ingredient.

Shares in the world’s third-largest mining company rose for a fifth straight day, gaining 1.8 percent to 32.69 reais at 4:37 p.m. in Sao Paulo, heading towards its highest close since April 12. BHP Billiton Ltd. and Rio Tinto Group, the largest miners, both rose 1.7 percent and 1.4 respectively in London.

First-quarter net income of $3.11 billion, or 60 cents a share, compared with a loss of $2.7 billion, or 52 cents, in the previous three-month period, according to a statement after the close of trading yesterday. Vale was expected to post per-share profit excluding items of 55.8 cents, the average of 13 analysts’ estimates compiled by Bloomberg. Vale, the worst- performing major mining stock this year, is seeking to bolster investor confidence by putting lower-return projects on hold, selling assets and cutting costs.

“Vale reported a much stronger-than-expected 1Q13, driven by lower costs and expenses and a stronger performance from the base metals business,” Goldman Sachs Group Inc. analysts Marcelo Aguiar and Diogo Miura wrote in a note to clients today. “These drivers should provide a strong catalyst to consensus earnings upgrades and reduce the bearish sentiment towards Vale.”

Iron Prices

The company’s profit, boosted by the partial booking of a gold deal with Silver Wheaton Corp. (SLW) in February, is the first quarter-on-quarter increase since the first three months of 2011. Net income fell from $3.79 billion, or 74 cents, in the year-ago period.

Net sales fell 5.3 percent to $10.9 billion in the period after Vale sold its iron ore at an average $111.69 per metric ton, 5.4 percent less than a year earlier. That was below the $121 per ton average of three estimates compiled by Bloomberg. Vale shipped 65.1 million metric tons of iron ore and pellets, a processed form of the mineral, during the quarter, little changed from the previous year.

Costs and expenses shrank by $900 million in the quarter compared to a year ago and by $2.5 billion versus the fourth quarter of 2012, Chief Financial Officer Luciano Siani said in a video posted on the company’s website yesterday.

Costs, Expenses

“For the first time in more than 40 quarters, costs and expenses was the main driver of improvement,” Chief Executive Officer Murilo Ferreira told analysts today during a conference call to discuss the results. “This is not a one-off event.”

Vale lost 23 percent in the 12 months through yesterday, compared with an 11 percent decrease in Brazil’s benchmark Ibovespa Index. BHP Billiton and Rio Tinto lost 9.6 percent and 12 percent, respectively, during the same period.

Net income surpassed analysts’ expectations by 20 percent, the first positive surprise in eight quarters, according to data compiled by Bloomberg. The company booked $244 million in pretax profits following a $1.9 billion gold deal with Silver Wheaton in February, it said.

The first-quarter result “creates a potentially positive momentum on earnings estimates,” Bank of America Corp. analysts led by Felipe Hirai said in a note to clients. “Even without higher iron ore prices, Vale’s earnings might be revised upwards, while its competitors’ could be declining.”

Better Prices

Iron-ore prices have recovered 56 percent from a three-year low in September on accelerating demand from China, the biggest metals consumer. While prices may weaken in the second half of this year, iron ore traded at an average of $148.1 a ton in the first quarter, 4.4 percent more than last year, according to data from the Steel Index (IBOV) Ltd.

Producers is Australia, the largest iron-ore exporter, are likely to boost supply by as much as 40 million metric tons during the second half of the year, putting some downward pressure on prices, Vale’s head of ferrous and strategy Jose Carlos Martins said today.

“We don’t believe that the price of iron ore can suffer too much,” he said during the same analysts call. “I don’t believe that the price can go below $110 per ton on a sustainable basis.”

Nickel Partnership

Vale sold 34 percent of its iron ore in the first quarter at spot prices on delivery at the port, compared to 2 percent last year, the company said in a presentation today. Clients in China are increasingly buying at future prices to avoid the steelmaking ingredient’s fluctuations, Martins said.

Vale, the world’s biggest nickel producer after Moscow- based OAO GMK Norilsk Nickel, shipped 63,000 metric tons of the metal in the quarter at an average selling price 13 percent lower than in 2012. While copper shipments rose 24 percent to 72,000 metric tons, average realized prices also decreased 13 percent, the company said.

Vale also said in yesterday’s statement that it’s considering a “strategic partnership” at its Thompson nickel operation in Canada to finance the expansion of existing mines. The company’s VNC nickel project in New Caledonia continues to accelerate production and is expected to reach 45,000 metric tons of output next year, it said.

Vale, which expects to pay at least $4 billion in dividends this year, is not considering boosting its 2013 shareholders’ compensation at this point, CEO Ferreira said today. Renato Gomes, the head of investors relations at shareholder Bradespar SA, said April 19 that there was a “reasonable possibility” that Vale would be able to pay more than the $4 billion after enjoying better-than-expected iron-ore prices. Bradespar holds a 5.9 stake percent in Vale.

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

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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