Vale Output Disappointment Signals Market Loss: Corporate Brazil

Vale SA, the world’s third-largest mining company, posted iron-ore production that missed analysts’ estimates for the first time in four quarters, hurting efforts to recover market share from its Australian rivals.

First-quarter output declined 3.5 percent to 67.5 million metric tons from 70 million tons a year earlier, the Rio de Janeiro-based company said in a statement after the close of trading yesterday. Results trailed the 68.3 million-ton average of seven analysts’ estimates compiled by Bloomberg and contrasted the 6 percent quarterly iron-ore output increase achieved by BHP Billiton Ltd. and Rio Tinto Group, the world’s largest mining companies, which are expanding Australian mines.

Vale is selling assets and slowing spending to focus on its most profitable iron-ore business after $5.66 billion in nickel, coal and steel writedowns, slumping commodity prices and Brazilian tax disputes sent its shares to the lowest in almost four years this week. Seeking to shore up investor confidence, the company has sold $1.5 billion in assets since early 2012, suspended projects in Argentina, Canada and Guinea and reduced the minimum dividend payment for this year.

“It will be a complicated year for Vale and for the other mining companies,” Leonardo Brito, an analyst at hedge fund Teorica Investimentos, said by telephone from Rio after results were released. “They’re doing what they need to do by cutting costs and reducing investments. Vale has gigantic projects but are more longer term.”

Cheapest Major

Vale fell 1.7 percent to 30.45 reais in Sao Paulo today, its lowest close since July 17, 2009. The stock is down 28 percent in the past year, more than London-based Rio’s 19 percent decline and BHP’s 13 percent loss in Sydney over the same span.

The Brazilian miner trades at 6.9 times estimated 2013 profit, the cheapest among 15 global peers tracked by Bloomberg. Rio fetches 9.7 and Melbourne-based BHP’s ratio is 13, the data show.

Vale, the world’s second-largest nickel producer, said output for the metal rose 3.2 percent in the quarter to 65,000 tons, beating a 62,800-ton average forecast by seven analysts surveyed by Bloomberg. Copper production gained 23 percent in the first quarter to a record 90,000 tons while total coal output increased 17 percent to 1.75 million tons.

‘Operational Issues’

“Production dropped on a year-on-year basis, this time influenced by constraints related to permits and other operational issues,” Vale said in yesterday’s statement. “Rainfall in our iron-ore mining sites in Brazil was in line with its seasonal pattern, being more concentrated on the coastal regions, raising challenges for the operation of our maritime terminals.”

Output at Carajas, the world’s biggest iron-ore complex, decreased 0.5 percent in the quarter, which is usually the company’s weakest of the year due to rains, while production at Vale’s mines in southeastern Brazil dropped 7.4 percent. Volumes of pellets, a processed form of iron ore used by the steel industry, declined 12 percent to 11.7 million tons after the company shut down three plants last year due to slower European demand for premium iron-ore products.

Vale forecasts iron-ore production of 306 million tons this year, excluding output from its Samarco Mineracao SA joint venture with BHP. Vale’s press office in Rio declined to comment further on production results.

The company will struggle to boost iron-ore production this year amid spending cuts, said Mariana Bertone, an equity analyst at GBM Grupo Bursatil Mexicano SA.

‘Growing Seriously’

“Production will start growing seriously between 2015 and 2016 when new projects commence,” she said by telephone from Sao Paulo before yesterday’s output release. “Iron-ore output is likely to fall in 2013.”

First-quarter earnings before interest, taxes, depreciation and amortization, or Ebitda, probably will increase 12 percent to $5.49 billion, the highest since the fourth quarter of 2011, according to the average estimate of seven analysts in a Bloomberg survey. Net income excluding some items is forecast to drop 12 percent to $3.34 billion.

Rising nickel and copper output is unlikely to offset Vale’s “poor” iron-ore performance, Goldman Sachs Group Inc. analysts Marcelo Aguiar and Diogo Miura said.

“We see Vale’s production report as negative,” the Sao Paulo-based analysts wrote in a research note. “The risk to market consensus estimates is to the downside.”

Tax Concerns

Vale is engaged in a decade-long challenge of a government claim that it owes $15.5 billion in taxes for profits generated by foreign subsidiaries. President Dilma Rousseff’s government is also considering raising royalty payments for miners.

Iron-ore prices have recovered 61 percent from a three-year low in September as demand from China, the biggest metals consumer, accelerates. 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 Ltd.

Rio said April 16 its quarterly iron-ore production gained 6 percent to 48.3 million tons, topping analyst forecasts. BHP said output of the steel-making raw material rose a less-than-estimated 6 percent to 40.2 million tons.

“Vale will really start improving with its new projects,” Teorica’s Brito said. “For the moment, it remains in a bit more of a complicated situation.”

Before it's here, it's on the Bloomberg Terminal.