Vale Back to Reality as Shares Slump After Earnings Accelerate

It’s back to reality for the world’s largest iron-ore miner.

Vale SA posted consecutive earnings gains for the first time in six quarters by deepening cost cuts and increasing shipments of the steelmaking ingredient. After gaining as much as 6.2 percent, shares of the Rio de Janeiro-based company lost steam and closed down 4.6 percent, extending the stock’s decline to 50 percent the past 12 months as investors focused on debt and the outlook for further declines in metal prices.

“In spite of the very strong results and good quality, Vale’s intraday share price volatility indicates the market is concerned with ‘other’ items,” Banco BTG Pactual SA analysts Leonardo Correa and Caio Ribeiro said in a research note. “The underperformance today looks somewhat exaggerated, although we maintain our overall cautious stance.”

The second-quarter results show a company pressing ahead with cost cuts and increasing the average quality of its ore, helping underpin profit margins. The report also shows a measure of debt to earnings more than doubled in the past 12 months as sliding metal prices eroded revenue.

The company announced Thursday two deals worth about $1.65 billion as its divestment program started with the arrival of Chief Executive Officer Murilo Ferreira in 2011 is getting closer to conclusion.

Adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, was $2.21 billion for the second quarter, the company said Thursday. While that was down 46 percent from a year earlier, it beat 12 of 13 dollar-based estimates compiled by Bloomberg. The average forecast was $1.83 billion. On a net basis, Vale’s profit gained 17 percent from a year earlier to $1.68 billion.

Dividend Payment

Payment of a $1 billion dividend scheduled for the second half is a decision for the board and will depend on free-cash flow, Ferreira said on a conference call.

Vale said that it agreed to sell a 34 percent stake in its MBR iron-ore subsidiary to a fund managed by Banco Bradesco BBI SA for 4 billion reais ($1.2 billion). MBR owns mines, railway and port assets in Vale’s Southern System, which accounted for about 65 million metric tons of iron-ore output last year, the company said.

“The deal seems reasonable, despite the lack of full disclosure,” the BTG analysts wrote.

The company expects to receive $448 million after closing the sale of four iron-ore vessels to China Merchants Energy Shipping Co. upon delivery of the ships, expected in September, it also said Thursday.

Demand Outlook

Shares dropped 4.6 percent to 14.41 reais at the close in Sao Paulo, the biggest decline since April 29. Bonds rose.

“Investors were anticipating in the past few days the good quarterly results that were announced,” Fernando Goes, an analyst at the brokerage Clear Corretora, said in a telephone interview from Sao Paulo. “After the positive expectations were confirmed, the focus is turning back to the company’s prospects: falling iron-ore prices and declining demand from China.”

While Vale’s production next year is expected to be higher than 340 million tons forecast for 2015, it probably will be lower than the 376 million-ton estimate given in December, Peter Poppinga, executive director for ferrous and strategy, said on conference call Thursday. The official 2016 forecast will be disclosed at the end of this year.

Later this year, the company plans to start reducing the approximately 50 million tons of iron-ore stockpiled at mines, ports and vessels.

Ore Prices

Vale sold its iron-ore fines at an average $50.62 a metric ton, down from $84.60 a year earlier, the company said. Benchmark iron-ore prices dropped 0.5 percent to $55.64 a dry ton on Thursday, according to an index compiled by Metal Bulletin. The price has increased 25 percent since reaching a six-year low of $44.59 on July 8.

Vale shipped 67.2 million tons of iron ore fines in the quarter, 5.5 percent more than a year earlier, after posting last week record output for the second quarter. Shipments of pellets, a processed form of iron ore used by the steel industry, rose 29 percent to 12.2 million tons.

Vale, also the largest nickel producer, said shipments of the base metal were stable at 67,000 tons in the second quarter while copper volumes jumped to 97,000 tons. The company sold copper at a discount of more than $1,000 a ton compared with benchmark prices due to treatment and refining charges and the impact of provisional pricing, leading to a 33 percent drop in the Ebitda of its base metals business.

Total gross debt to Ebitda ratio rose to 3.3 times in the second quarter compared to 1.5 times a year earlier, Vale said.