Vale Profit Falls After China Slowdown Weighs on Iron-Ore

Vale SA (VALE), the largest iron-ore producer, posted a steeper decline in first-quarter profit than analysts expected after selling the steel ingredient 25 percent cheaper than a market reference price. Shares fell.

Net income declined 19 percent to $2.52 billion, or 49 cents a share, from $3.11 billion, or 60 cents, a year earlier, the Rio de Janeiro-based miner said today. Vale was expected to post per-share profit of 53 cents excluding some items, the average of 14 analysts’ estimates compiled by Bloomberg.

Mounting concern that economic growth is slowing in China, Vale’s biggest buyer, is pushing down iron-ore prices and holding the miner’s shares close to a five-year low. The net income decline for the quarter follows a 99 percent profit slump last year as Chief Executive Officer Murilo Ferreira oversees sales and writedowns of unprofitable projects and faces a multi billion-dollar tax dispute in Brazil.

Vale’s iron ore selling prices during the quarter were “materially below our and consensus estimates,” Andreas Bokkenheuser, an equity analyst at UBS AG, said in a note to clients. “As iron-ore prices continue their decline, we expect Vale’s earnings and share price to come under further pressure in the coming quarters”.

Photographer: Dado Galdieri

A dump truck carries mined iron ore at the terraces at Vale SA's Brucutu mine in Barao de Cocais, Brazil. Close

A dump truck carries mined iron ore at the terraces at Vale SA's Brucutu mine in Barao de Cocais, Brazil.

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Photographer: Dado Galdieri

A dump truck carries mined iron ore at the terraces at Vale SA's Brucutu mine in Barao de Cocais, Brazil.

Vale fell 1.2 percent to 26.42 reais in Sao Paulo, the lowest closing price since March 17. Shares are down 19 percent this year while BHP Billiton (BHP) Ltd., the world’s biggest miner, declined 0.6 percent.

$110 Support

The price of ore with 62 percent iron content delivered to the Chinese port of Tianjin has dropped 21 percent this year to $105.4 a metric ton.

While policies put in place by China to curtail monetary expansion are driving recent declines in iron-ore prices, the effect probably will be temporary, Vale Executive Director for Ferrous and Strategy Jose Carlos Martins said.

“We expect that the price in the second half would be better than the first half,” he told investors in an earnings conference call today. “Nothing is for sure but the price will not fall below $110 on a sustainable basis.”

Vale’s average realized iron-ore price fell to $90.52 a ton from $112.97 in the fourth quarter, 25 percent lower than the average of the index and missing a $101.1 estimate in a Bloomberg survey. The company’s selling price of its main product in the quarter was lower than all 11 estimates.

Price Provisions

Vale sells 41 percent of its iron ore at so-called provisional prices, where the price paid by customers is adjusted at delivery from a initial estimate before departure of shipments from Brazil. Vale had to adjust some late-December shipments as the price on delivery was lower than originally provisioned, resulting in a negative impact of $9.5 per ton.

“The main reason for the sharper drop was the negative effect of the reversal of price provisions recorded at the end of 4Q13,” the company said in today’s statement.

Sales fell 11 percent to $9.5 billion in the quarter, missing an $11.2 billion average estimate of 14 analysts’ estimate compiled by Bloomberg. Adjusted earnings before interest, taxes, depreciation and amortization declined 22 percent to $4.06 billion, also missing the analysts’ estimate.

Excluding output from the Samarco joint venture, Vale’s iron-ore production in the quarter rose 9.6 percent from a year ago to 71.1 million tons. That compares with the 71.5 million-ton average estimate.

Nickel Boost

Pellet output rose 8.6 percent to 9.93 million tons, nickel production increased 3.7 percent to 67,500 tons and copper output fell 1.2 percent to 88,400 tons.

Vale shipped 67.8 million tons of iron ore and pellets in the quarter, 4.2 percent more than a year earlier. Pellets are a processed form of iron ore used by the steel industry.

While Chinese economic growth slowed in the first quarter, “demand is expected to absorb the incremental seaborne iron ore supply for the coming years with some partial dislocation of marginal iron-ore producers from the cost curve,” Vale said.

Nickel sale volumes climbed 3.2 percent to 65,000 tons in the quarter, while the average selling price for the base metal dropped 17 percent, Vale said. The company is the biggest nickel producer after Moscow-based OAO GMK Norilsk Nickel.

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: James Attwood at jattwood3@bloomberg.net Carlos Caminada

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