Vale Seen Deepening Investment Cuts in Profit Quest

Vale SA is set to cut spending next year to the lowest since 2010 in a bid to recover from two years of profit declines on output disappointments and lower prices.

The world’s largest iron-ore miner probably will announce on Dec. 2 a $14.5 billion business plan for 2014, according to the average of 11 analyst estimates compiled by Bloomberg News. That’s 11 percent below the $16.3 billion budgeted for this year and would be Vale’s smallest annual spend in four years.

Trimming investments would be the Rio de Janeiro-based company’s latest tactic to boost margins after selling at least $3 billion of assets this year and reducing costs by $2 billion. Vale, the worst-performer among the top three mining company stocks this year, is seeking to shore up investor confidence by focusing on its most profitable iron-ore operations and settling a decade-long tax dispute.

“We are expecting a rationalization of the capex on the downside,” Marcel Kussaba, who helps manage 14 billion reais ($6 billion) of assets, including Vale shares, as head of research at Quantitas Asset Management, said by phone from Porto Alegre, Brazil. “The return to an iron-ore focus makes sense.”

The company is reducing investments outside the iron-ore business while completing some projects, Kussaba said.

Vale shares, which fell to a four-year low in July, surged the most in six weeks yesterday after the company agreed to pay 22.3 billion reais to settle a decade-long tax dispute with Brazil over profits of its foreign units. They extended gains today in Sao Paulo, advancing 1.5 percent to 32.79 reais, closing at the highest since Nov. 18.

Profit Pickup

The stock is down 20 percent this year while BHP Billiton Ltd., the world’s largest miner, advanced 0.8 percent and Rio Tinto Group, the second-biggest, fell 7.1 percent in London.

Vale reported on Nov. 6 its first quarterly profit increase in more than two years, beating analyst estimates, as Chinese demand for the steel-making material pushed up prices.

The company’s trailing 12-month earnings before interest, taxes, depreciation and amortization margin recovered to 41 percent in the third quarter, the highest in five quarters, after dropping to a three-year low 36 percent in late 2012, according to data compiled by Bloomberg.

The company is scheduled to disclose its spending plans on Dec. 2 before the start of trading in Sao Paulo and discuss its strategy, including output targets, in a meeting with investors at the New York Stock Exchange. Vale will host a similar event in London on Dec. 5.

The company’s press department declined to comment on investment plans before the release.

Under Budget

Vale may surprise investors with an even deeper 2014 budget cut, Credit Suisse Group AG analysts led by Ivano Westin in Sao Paulo said in a Nov. 24 research note.

“We expect management to maintain its qualitative guidance indicating that there is room for additional cost reductions in the coming quarters,” the analysts wrote, forecasting capital expenditure of $12 billion.

Vale is poised to spend less than its budgeted plan for the fifth consecutive year in 2013. The company will be “slightly below” its $16.3 billion spending plan this year, Chief Financial Officer Luciano Siani said on a Nov. 7 conference call. That follows $17.7 billion spent in 2012, or 17 percent less than the $21.4 billion budget.

Mining companies are cutting costs after a decade-long boom in prices waned, crimping revenue. Rio Tinto, the largest iron-ore producer after Vale, said yesterday it will cost $3 billion less than previously expected to meet its goal of boosting output capacity in Western Australia by about 25 percent.

“All the global players are reducing capex,” Quantitas’ Kussaba said. “It’s prudent and even healthy for the mining business to have rationalization.”

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