Vale Balance-Sheet Cleanup Heralds Record Loss: Corporate BrazilJuan Pablo Spinetto
Vale SA, the world’s largest iron-ore producer, probably lost money for the first time in a decade in the fourth quarter after Chief Executive Officer Murilo Ferreira dropped unprofitable projects and wrote down assets.
The Rio de Janeiro-based miner will report tomorrow a record loss of $1.22 billion for the three months ended Dec. 31 under U.S. accounting standards, according to the average of five analysts’ estimates compiled by Bloomberg. That would mark the first loss since the third quarter of 2002, when Vale lost $150 million after a currency slump boosted debt costs.
Ferreira, who took over as CEO in May 2011, is selling assets and cutting spending after a two-year metals boom led by China stalled, causing iron-ore prices to slump 55 percent from a February 2011 peak to a three-year low in September, before rebounding. The decline helped trigger more than $60 billion in writedowns at companies from BHP Billiton Ltd. to Rio Tinto Group. An increasing focus on its core iron-ore business will help Vale restore profit and increase dividends, said Arthur Byrnes at Deltec Asset Management LLC in New York.
“They have to be much more targeted and much more efficient about what they are going to expand into,” Byrnes, who helps manage $1 billion, including Vale shares, at Deltec as a senior managing director, said by telephone. “Dividends would have been a lot nicer having not gone nuts for eight of the last 10 years trying to do everything in the world.”
Vale shares had declined 16 percent in U.S. dollar terms since reaching a nine-month high on Jan. 2, compared with a 4.3 percent drop for Melbourne-based BHP, the world’s largest mining company, and 11 percent for London-based Rio, the second biggest. Vale is trading at 7.25 times estimated earnings, according to data compiled by Bloomberg, compared with a ratio of 13.3 for BHP and 11 for Rio. Vale rose 2.5 percent to 35.15 reais at the close in Sao Paulo today, the most since Feb. 19.
Iron-ore prices have rebounded 75 percent from September to reach a 16-month high on Feb. 20, as growth in China, the biggest metals consumer, accelerates. Prices averaged $120 a ton in the fourth quarter, a 7.2 percent increase from the previous quarter and 15 percent lower than a year earlier, according to a price index compiled by The Steel Index Ltd. Rates may tumble to $70 a ton in the three months ending September, UBS AG analyst Tom Price said by telephone today.
Vale’s earnings before interest, taxes, depreciation, and amortization will drop 37 percent from a year earlier to $4.79 billion, the average of 14 estimates, after iron-ore prices declined. Nickel and copper output also fell. The estimated fourth-quarter loss will be the largest on record since at least 1997, when the company was privatized.
Vale is wrapping up an annual review of asset values. The company said on Dec. 20 it would book a $4.2 billion fourth-quarter pre-tax charge after lowering the valuation of its Onca Puma nickel project in Brazil and its stake in aluminum producer Norsk Hydro ASA. Another writedown of between $50 million and $100 million for several assets will be announced along with the earnings, Chief Financial Officer Luciano Siani said Dec. 6.
“Our intention is to clean up the balance sheet quite soon,” he said in a presentation to investors in London.
Vale’s press office in Rio declined to comment on earnings before the quarterly release.
Failed deals in aluminum and coal caused $14 billion in writedowns at Rio and led CEO Tom Albanese to lose his job last month. Cost overruns at Anglo American Plc’s flagship Minas-Rio iron-ore project in Brazil were followed by Cynthia Carroll’s announced departure as the company’s top executive. Anglo slashed $4 billion from the value of Minas Rio.
At the helm of Vale since 2011, Ferreira is the only CEO of the top five miners who isn’t leaving.
Ferreira began reversing predecessor Roger Agnelli’s acquisition strategy a year after he took charge. Vale announced $1.47 billion of asset sales last year, including a coal mine in Colombia, while putting potash projects on hold in Argentina and Canada.
“Too many acquisitions, too much overspending on capital - - this is something of an industry-wide phenomenon,” Leo Larkin, a metals and mining analyst at S&P Capital IQ, said by telephone from New York. “Companies get carried away.”
Ferreira is also cleaning up liabilities from tax disputes that have led Vale shares to trail those of its main rivals. In December it agreed to pay about $560 million to settle Swiss and Brazilian tax disputes, of which about $460 million will be booked in the fourth quarter.
While analysts anticipate the impact of Vale’s writedowns on its earnings, the company is set to report an improving operating performance, Banco Santander SA analysts Felipe Reis and Alex Sciacio said.
“We expect higher iron-ore sales volume and realized prices to be the main drivers of the operating performance recovery,” the Sao Paulo-based analysts wrote in a Feb. 20 research note. “This trend is set to continue in the first quarter of 2013, as iron-ore spot prices have been surprisingly high since the start of the year.”
Vale on Feb. 1 posted a 3.1 percent increase in fourth quarter iron-ore output, beating analysts’ estimates, because of less rain in Brazil. Nickel and copper production declined compared with the previous year.
After having increased its investments for several years and overpaid for acquisitions, Vale is now adapting to a new reality, S&P Capital IQ’s Larkin said.
“Vale has made it very clear that they are going to be more disciplined about the capital allocation process,” he said. “Everybody is retrenching.”
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