UPDATE 2-Vale Q1 profit falls despite big cost cuts

Wed Apr 24, 2013 10:33pm EDT

* Net profit was $3.11 bln, net sales $10.94 bln

* Cut in operating costs ahead of expectations

* Vale says still more work to do on cost structure

By Jeb Blount

RIO DE JANEIRO, April 24 (Reuters) - Brazil's Vale SA , the world's second-largest mining company, reported an 18 percent slide in first-quarter net profit as bigger-than-expected cuts in operating costs failed to offset lower sales and a hit from taxes and foreign exchange.

Despite the drop, the result beat analysts expectations and may help boost Vale's stock as the company responds to investor calls for a tighter reign on spending amid concerns over weaker metals prices as growth in China slows.

Net income of $3.11 billion in the three months ending March 31 beat the $2.71 billion average estimate of eight analysts surveyed by Reuters and reversed a fourth-quarter loss, Vale's first quarterly loss in a decade.

The result was still down on $3.79 billion a year earlier, and 25 percent below the average $4 billion quarterly profit the world's largest producer of iron ore has recorded for the previous 11 quarters.

The lackluster outcome may add to nervousness that a decade-long mining boom led by ravenous Chinese demand for steel and other metals is ending, despite a rebound in iron ore prices after a steep drop last year.

Like rivals BHP Billiton and Rio Tinto , who have been cutting costs and shunning expensive acquisitions, Vale slashed planned 2013 investment 24 percent in December.

"Despite the progress achieved, there is still a long road ahead to reformulate our cost structure to be able to create value for shareholders through the whole of the business cycle and reduce the influence of price volatility," Vale said in a statement.

China, Vale's principal market, grew only 7.7 percent in the first quarter compared with a year earlier, below expectations and below the 10 percent growth rates enjoyed at the height of the boom. With Vale far and away Brazil's biggest net exporter, an end to this "iron ore rush" could spell leaner times for the world's seventh-largest economy.

Vale preferred shares, the company's most-traded class of stock, have lost 19 percent so far this year, as concern mounted about Chinese growth.

'EXTRAORDINARY' CUTS

Vale's profit fell despite what Chief Financial Officer Luciano Siani called "extraordinary" cost cuts. The $900 million that Vale cut from its operating costs in the quarter exceeded its sales drop by 46 percent, yet profits still fell.

Net sales, or sales minus sales taxes, fell 5.3 percent to $10.94 billion compared with $11.55 billion in the first quarter of 2012, and came in well below the average analyst estimate.

Lower sales came even as prices for iron ore, its principle product, rose. Unlike most other minerals, the price of iron ore has gained in the last year, alleviating a 3.5 percent year-on-year decline in Vale iron ore output.

Output from its nickel division is growing and copper production reached a record high.

The mix of cost-cutting, higher iron ore prices, and better nickel and copper production helped operating profit rise 6.8 percent from a year ago. But non-operations results trimmed the gains.

Current social security and income taxes of $1.1 billion in the quarter were nearly $300 million more than a year ago. Gains from exchange rate variations and derivatives were $436 million, or 70 percent, less than a year ago.

MARKET MAY APPLAUD

Investors are likely to applaud Vale for beating expectations and doing a better job preparing for lean times than many expected, said Catarina Pedrosa, metals and mining company analyst with Espirito Santo Investment bank in Sao Paulo.

Espirito Santo had expected a 23 percent rise in the so-called cost of goods sold -- a measure of material, labor, fuel and other expenses incurred to produce Vale's minerals and metals. Actual cost of goods sold fell 6.92 percent to $5.72 billion from $6.15 billion a year ago.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, a measure of the company's ability to generate cash from operations, was $4.16 billion, 6.76 percent more than $3.89 billion a year ago.

The figure missed the average analysts' estimate of $4.93 billion.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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