Vale Rallies as Chinese-Led Iron Ore Demand Boosts Earnings

Vale SA, the world’s largest iron-ore producer, rallied the most in three weeks after fourth-quarter earnings before taxes and other items beat estimates on rising prices for the steel-making material.

Vale rose as much as 2.7 percent to 29.81 reais in Sao Paulo today, the most intraday since Feb. 6, before closing at 29.31 reais. The gain pared its loss this year to 10 percent. The benchmark Ibovespa index of Brazilian shares rose 2.2 percent.

The world’s third-largest mining company is increasing cash generation after Asian-led demand pushed up average iron-ore prices 12 percent in the fourth quarter. While iron ore declined this quarter because of rising supplies and monetary constraints in China, it will remain at profitable levels for Vale for a sustained period of time, Executive Director for Ferrous and Strategy Jose Carlos Martins said.

“The price will continue to be very favorable and very profitable for Vale,” Martins told analysts on an earnings conference call today. “There is a very strong resistance in price in the range of local Chinese iron-ore costs.”

Iron-ore traded at an average $134.9 a ton in the fourth quarter, 56 percent higher than a three-year low of $86.7 in Sept. 5, 2012, according to data compiled by The Steel Index Ltd.

This year rising stockpiles in China led the price to drop 12 percent, to $118 a ton today. Still, it’s unlikely to fall bellow $110, Martins said.

Price Outlook

“I don’t see a large possibility for ore prices to fall below $110 in a sustained way,” he said. “This is the scenario we are seeing.”

Vale, based in Rio de Janeiro, said yesterday earnings before interest, taxes, depreciation and amortization, or adjusted Ebitda, rose to $6.64 billion, beating a $5.9 billion average estimate of 17 analysts compiled by Bloomberg.

The rising iron-ore prices helped the miner exceed expectations, Goldman Sachs Group Inc. said. Reduced costs and capital expenditures, or capex, are helping Vale increase cash generation, according to Banco Itau BBA SA.

“The 2013 results prove that management is doing its homework,” Itau BBA analysts led by Marcos Assumpcao wrote in a note to clients. “Cutting costs and capex, and divesting from non-core assets led to improving free cash flow and the maintenance of attractive shareholder returns.”

Net Loss

The company posted a record quarterly loss after settling a decade-long tax dispute and writing down the value of an asset in Argentina.

Fourth-quarter net loss widened to $6.45 billion, or $1.25 a share, from a net loss of $2.62 billion, or 51 cents, a year earlier, Vale said yesterday in a regulatory filing after markets closed. Earnings per share excluding some items rose to 62 cents, missing a 64-cent average of 14 analysts’ estimates compiled by Bloomberg.

In addition to a tax settlement and writedowns, earnings were also hurt by the Brazilian real’s weakening, Chief Financial Officer Luciano Siani said on a video presentation posted on the company’s website after the quarterly report.

“The result was affected mostly by three one-off events and some of them without cash flow impact,” Siani said. “We laid the ground for a successful future and for our future growth mainly through the reduction of uncertainties.”

Tax Settlement

The miner agreed in November to pay 22.3 billion reais ($9.5 billion) to settle a tax dispute with the Brazilian government over foreign unit profits. Vale said yesterday that the settlement cut 2013 net income by $6.47 billion. The company wrote down the value of assets, including the Rio Colorado potash project in Argentina, by $2.3 billion in the fourth quarter.

Net sales climbed 9.4 percent to $13.4 billion after Vale sold its iron ore at an average $112.97 a metric ton, an increase from $100.43 last year. That beat an $107.8-a-ton average estimate by six analysts compiled by Bloomberg.

Nickel’s average sales price fell 21 percent and copper declined 13 percent, the company said.

Vale shipped 84.8 million tons of iron and pellets in the quarter, little changed from a year earlier. Pellets are a processed form of iron ore used by the steel industry. Nickel sale volumes gained 19 percent to 69,000 tons and copper shipments jumped by 25 percent to 99,000 tons, the company said.

Iron-ore output in the fourth quarter, including a stake in a joint venture with BHP Billiton Ltd., declined 1.7 percent to 84 million metric tons, Vale also said in a separate statement. The company’s annual production of 299.8 million tons was 2 percent short of Vale’s target for 2013 because of excess rainfall and lower output at Carajas, the world’s largest iron-ore complex, it said.

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