Vale third quarter profit doubles on higher iron ore sales, prices

RIO DE JANEIRO Wed Nov 6, 2013 7:29pm EST

An overview of Ferro Carajas mine, the world's largest iron ore mine, operated by Brazil's Companhia Vale do Rio Doce, in the Carajas National Forest in Parauapebas, Para State, May 29, 2012. REUTERS/Lunae Parracho

An overview of Ferro Carajas mine, the world's largest iron ore mine, operated by Brazil's Companhia Vale do Rio Doce, in the Carajas National Forest in Parauapebas, Para State, May 29, 2012.

Credit: Reuters/Lunae Parracho

RIO DE JANEIRO (Reuters) - Brazil's Vale SA (VALE5.SA), the world's second-largest mining company, reported on Wednesday that its third-quarter net income more than doubled from a year earlier, beating analysts' expectations as iron ore prices and sales volumes rose.

Net income for the three months ended September 30 soared 114 percent to $3.50 billion compared with $1.64 billion in the same period a year earlier, the company said. The result was 6 percent higher than the $3.3 billion average profit estimate of seven analysts surveyed by Reuters.

Iron ore prices averaged about a fifth higher in the third quarter of this year than in the same quarter of 2012, according to Thomson Reuters.

Net sales, or total sales minus sales taxes, rose 11 percent from a year earlier to $12.7 billion, beating the average analyst estimate of $12.5 billion. Iron ore sales volumes rose 11 percent to 73.4 million tons.

"The hoped for recovery of iron ore and iron ore pellet loadings ... and higher prices for them, were the principal reasons for the result in the third quarter," Vale said in a statement. "The combination of high quality and low operational costs remains one of our most important competitive advantages in the global market."

Vale stock closed at an eight-month high of 34.44 reais in Sao Paulo on Wednesday before the results were announced.

The result comes a year after Vale moved to sharply cut costs and re-focus expansion on its main iron-ore business. The spending diet came in the face of flagging demand and plunging prices in China for the raw material, the main ingredient in steel.

China is the world's biggest steel producer and largest importer of iron ore. Vale is the world's largest producer of the mineral, accounting for between a quarter and a third of world's sea-borne iron ore exports. It is also the No. 2 producer of nickel and a major miner of copper, gold, coal and potash.

While iron ore prices have recovered from the three-year lows of August 2012, executives of Vale and its main rivals, Australia's BHP Billiton Ltd (BHP.AX) and Rio Tinto Ltd (RIO.AX), have said that a decade long China-led commodities boom is likely over. Resulting lower growth expectations prompted them to rein in investment and prospecting budgets.

The effort led to the mothballing or cancelling of new projects, the closing of money-losing mines and sale of assets or stakes in existing businesses.

ACROSS THE BOARD COST CUTS

So far, Vale has managed to cut costs across the board. Sales, general and administrative costs fell 39 percent to 315 million reais while research and development fell 43 percent to 205 million.

The cost of goods sold, a category that includes salaries and equipment used to mine Vale's products, fell 3.4 percent to $6.55 billion despite rising output and sales.

This helped boost adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by 37 percent to $5.88 billion, beating the average analyst's estimate of $5.71 billion. EBITDA is a measure of a company's ability to generate cash profits from operations.

Lower costs, though were also aided by a 10 percent decline in the value of Brazil's real against the U.S. dollar in the third quarter compared to the same quarter in 2012.

The weaker real meant that each 100 reais of Vale's Brazilian expenses cost $5.16 dollars less in the quarter this year than last year.

While its main mines and operations are in Brazil, nearly all of Vale's sales are in dollars, most of its expenses are in reais.

Most other products sold by Vale also saw increases in sales volumes.

Metallurgical coal output jumped 51 percent to 1.73 million tons. Nickel output rose 13 percent to 62,000 tons. Copper jumped 17 percent to 103,000 tons. Gold output surged 77 percent to 85,000 ounces while silver output rose 18 percent to 483,000 ounces.

(Reporting by Jeb Blount; Editing by Bernard Orr, G Crosse and Lisa Shumaker)

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