Vale Ends Losses as Oil Rout Helps Get Iron to China Cheaper

  • Miner reported a surprise increase in Ebitda from year ago
  • Sales of $5.72 billion beat $5.61 billion average estimate

Vale SA had its first profit in three quarters as the best-performing major iron-ore miner this year benefited from cost cuts, rebounding prices and a stronger local currency. Shares gained.

Net income in the first three months of the year was $1.78 billion compared with a $3.12 billion loss a year ago, the Rio de Janeiro-based company said Thursday in a statement. Adjusted earnings before interest, taxes, depreciation and amortization rose to $2 billion from $1.6 billion, beating the $1.5 billion average of 12 dollar-based estimates compiled by Bloomberg.

Vale, which makes most of its money from iron ore, is beating more diversified rivals BHP Billiton Ltd. and Rio Tinto Group in equity and debt markets this year as the raw material surges 49 percent to $61.09 a metric ton. The Brazilian miner is also getting a boost from lower freight costs thanks to oil’s collapse, which reduces its disadvantage to Australian producers that are closer to China. From a year ago, Vale reported a 32 percent cost reduction in delivering iron to its Chinese customers.

While cheaper inputs and a recovery in prices is helping Vale’s efforts to preserve margins, net debt rose to $27.7 billion from $24.8 billion a year ago.

“The quarter has ended in a good mood in March with prices recovering,” Chief Financial Officer Luciano Siani Pires said in a video posted on the company’s website. “But that doesn’t mean we are going to be caught off guard or that we are going to relax in our relentless quest towards building a more competitive company.”

Pires also said Vale’s return to profitability was partly attributed to the appreciation of the Brazilian real, positively impacting its debt position in U.S. dollars.

Vale’s New York-listed shares had risen for a third consecutive day, trading 4.4 percent higher at 12:50 p.m.

Goldman Bearish

While the price of iron ore has jumped this year, it was still 22 percent lower than in the first quarter last year, on average, and some bears are sticking to their guns. Goldman Sachs Group Inc. is forecasting prices will probably slump to $35 a ton by the end of 2016.

Company sales of $5.72 billion beat the $5.61 billion average dollar estimate. Vale’s average sales price in the quarter rose to $46.50 a wet metric ton from $37.18 in the fourth quarter and $45.71 a year ago.

The company said in February it was open to selling what it described as “core assets.” This marked a shift from a previous streamlining strategy that focused on selling peripheral units, including seven iron-ore carriers and a stake in a bauxite operation in northern Brazil. Standard & Poor’s, Moody’s Investors Service and Fitch Ratings have negative outlooks on Vale’s ratings.

2Q Prospects

Vale expects demand for iron ore to remain strong this quarter amid stimulus from the Chinese government, helping offset a higher seasonal rebound in shipments.

“We acknowledge the recent improvement in iron ore prices but are cognizant of market volatility, thus remaining fully committed to strengthening our balance sheet through the reduction of our net debt as previously informed,” Vale said in today’s statement.

Vale is also favoring higher-grade production to reduce costs and plans to start mining at S11D, the industry’s biggest development project, in the second half of this year. The company predicts its northern system, which includes S11D, to produce 175 million tons and 185 million tons of iron ore in 2017 and 2018 respectively.

The combination of more lower-cost output and surging prices has prompted analysts to increase their annual earnings estimates by an average of 103 percent in the past three months for Vale, while profit expectations for Rio and BHP have dimmed slightly in that period, according to data compiled by Bloomberg.

Record Output

Vale churned out 77.5 million metric tons of iron ore in the first quarter, putting it on course to meet its annual target range, albeit at the lower end, it said last week. The company also set first-quarter records in nickel and copper production.

Shares in the Brazilian miner rebounded 49 percent this year compared with BHP’s 10 percent gain and Rio Tinto’s 13 percent advance. Vale’s $2.25 billion of notes due in 2022 are trading at a yield gap of 3.3 percentage points compared with similar Rio Tinto bonds, down from a spread of 5.3 percentage points at the end of last year.

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