Vale Snaps Two-Year Profit Slump as Iron-Ore Sales Rise

Vale SA, the largest iron-ore producer, saw profit rise for the first time in more than two years in the third-quarter, beating analysts’ estimates, as Chinese demand for the steelmaking material pushed up prices.

Net income more than doubled to $3.5 billion, or 68 cents a share, from $1.64 billion, or 32 cents, a year earlier, Rio de Janeiro-based Vale said yesterday. That was the first year-on-year profit increase since the second-quarter of 2011. Vale was expected to earn 60 cents a share, the average of eight analysts’ estimates compiled by Bloomberg. Per-share earnings excluding items beat the average estimate by 18 percent, the data show.

The world’s third-largest mining company is delivering higher profit as rising purchases from steel mills in China, the biggest buyer of metals, follow the company’s cost cuts and asset sales in past quarters. Its shares are trading at the highest level in eight months as investors expect Vale to profit the most among global peers from rising iron-ore demand.

“We knew their volumes were going to be strong but the shipments even came in above our estimates,” Garrett Nelson, an equity analyst at BB&T Capital Markets, said by telephone from Richmond, Virginia. “It was a very strong release.”

Estimates for a 96 percent year-on-year jump in earnings per share at Vale were the most bullish among 14 global peers, according to Bloomberg Industries. The increase reported yesterday was 112 percent.

Vale shares fell 3.3 to close at 33.32 reais in Sao Paulo today, the most since Oct. 18. They’re up 28 percent from a four-year low on July 3, compared with a 17 percent increase for the benchmark Ibovespa in the same span.

Price Increase

Net sales rose 11 percent to $12.7 billion after Vale sold its iron ore at an average $105.58 a metric ton, an increase from $93.90 last year. That beat an $102-a-ton estimate by Banco Santander SA. Nickel’s average sales price declined 16 percent and copper slid 3.2 percent, the company said.

The company sold about 50 percent of its iron ore and pellet shipments to Chinese customers in the third quarter, up from 49 percent a year earlier. Europe’s share of the sales fell to about 17 percent from 18 percent. China accounted for more than 40 percent of Vale’s operating revenue in the quarter, up from a third a year earlier.

Iron ore entered a bull market in July as users in China replenished stockpiles that shrank in March to the lowest level since 2009. Prices at Tianjin measured by The Steel Index Ltd. have rallied 24 percent from this year’s low on May 31 to $137.10 a ton yesterday, the highest level since Sept. 5.

‘Upside’ Surprise

The prices have “surprised on the upside” because of low inventories and stronger demand for steel in China, Vale said, adding that the Asian country’s mills are likely to build up stockpiles in coming months.

“We expect iron-ore prices to remain resilient over the next few months, hovering around $130 per metric ton,” Vale said. “Current iron-ore inventories at the Chinese mills are low and they need to stock up in order to minimize the risks of supply disruptions.”

Vale’s rising output and a $2 billion reduction in costs in the first three quarters helped the company boost cash generation, Chief Financial Officer Luciano Siani said in a video presentation posted on the company’s website.

“The company is extremely well positioned even in a challenging and uncertain environment to continue generating good results,” he said.

BHP Forecast

BHP Billiton Ltd., the world’s largest mining company, raised its full-year iron-ore production forecast on Oct. 22 after first-quarter output from its biggest earning unit jumped 23 percent. Rio Tinto Group, the biggest iron-ore shipper after Vale, on Oct. 15 reported record ore production at its mines in Australia’s Pilbara region.

Vale’s adjusted earnings before interest, taxes, depreciation and amortization rose to $5.88 billion in the quarter from $4.28 billion a year earlier. Iron-ore output climbed 2.3 percent to 85.9 million metric tons, the second-highest on record. Net debt as of Sept. 30 dropped to $22.6 billion from $23.6 in the previous quarter.

For the full year, Vale’s net income will total $11.2 billion, according to the average of 14 analysts’ estimates compiled by Bloomberg. That would be more than double last year’s profit. Rio Tinto is forecast to post $7.5 billion net income in the year while BHP’s fiscal-year profit is estimated at $14.4 billion, according to the data.

Vale paid $4.5 billion in dividends this year, 13 percent more than initially planned, as prices for iron ore remain above analysts’ consensus on expanding Chinese consumption. The company paid $6 billion in dividends last year, half the record $12 billion returned to shareholders in 2011, which included share buybacks.

Tax Dispute

Foreign investors will likely wait for further improvements in earnings before increasing holdings of Vale’s shares, Elad Revi, an analyst at brokerage Spinelli SA, said. A 30.5 billion-real ($13.3 billion) tax dispute with the Brazilian government over profits from its foreign subsidiaries is also a key overhang on the stock, he said.

“There is more than a 50 percent chance that they will end up paying something, even if it’s with discounts and in installments,” he said by telephone from Sao Paulo today. “That would have an important impact on their cash position.”

The company is still analyzing whether to accept a settlement offer by the Brazilian government and has enough time to decide before a Nov. 29 deadline, Chief Executive Officer Murilo Ferreira said today during a conference call.

“It’s not an easy decision,” he told reporters.

Chinese Steel

As for iron-ore demand, Chinese steel production rates have remained firm and aren’t showing signs of the weakening usually expected for this time of year, which may be a boon for Vale, Andreas Bokkenheuser, a UBS AG equity analyst with a neutral recommendation on the stock, said in e-mailed comments from New York before yesterday’s release.

“As restocking is likely to materialize in the fourth and first quarter, iron-ore prices are at risk of remaining elevated in the event Chinese steel production rates remain strong,” he said. That “would be a positive impact on Vale’s profits.”

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