UPDATE 2-Vale quarterly loss more than doubles after tax payment

Wed Feb 26, 2014 7:42pm EST

By Jeb Blount

RIO DE JANEIRO Feb 26 (Reuters) - Vale SA, the world's No. 3 mining company by market value, said on Wednesday its net loss more than doubled in the fourth quarter after it took a $6.5 billion charge for an income-tax settlement with the Brazilian government and wrote off part of a failed potash investment.

Vale lost $6.45 billion in the three months ended Dec. 31 compared with a loss of $2.62 billion in the fourth quarter of 2012. The loss was well above the $3.83 billion average loss forecast of seven analysts in a Reuters poll and its worst quarterly since at least 1997 when Brazil's government sold the company to private investors.

Vale's full-year profit was $584 million in 2013, the worst annual result in more than a decade.

While the tax settlement resulted in one of the company's worst ever losses, Vale continues to dispute the payments, which it considers double taxation of its overseas operations. By making the payment in November it was able to cut its potential liability in half. If a protest against the charges prevails in Brazil's Supreme Court, the company has said it expects a rebate.

Losses were also boosted by a $2.38 billion quarterly charge related to its decision to give up on development of its Rio Colorado potash mine in 2013.

And despite the tax charges, which came as a financial loss, Rio de Janeiro-based Vale and its Chief Executive Officer Murilo Ferreira continued the company's adjustment to slowing growth in China, the company's main market.

For both the quarter and the year, Ferreira managed to cut costs, write off bad investments and wring more cash from operations while focusing more on Vale's main iron-ore business. Cash flow from its iron-ore and ferrous metals business rose 50 percent in the quarter from a year earlier, far more than the rise in iron ore prices.

"It was a year in which our continued cost-cutting efforts, investment discipline and focus on our core business became more evident," said Vale in a statement. "It was also a period in which we established the foundation on which to deliver more volume growth and free cash flow in the future."

Vale is the world's No. 1 producer of the iron ore, the main ingredient in steel and the No. 2 producer of nickel, used to make steel rust-resistant. It is also a major producer of coal, copper and fertilizers.

Sales, general and administrative expenses fell 37 percent to $362 million in the quarter and by 39 percent in the year to $1.375 billion. Prospecting and other research and development costs fell 40 percent to $276 million in the quarter and 45 percent on the year to $815 million.

As a result, the company turned an operating profit of $2.34 billion in the fourth quarter, reversing a $1.18 billion loss in the year earlier quarter. Annual operating profit jumped 35 percent to $14.82 billion.

Much of the turn around in the quarter was the result of world spot iron-ore prices that averaged $134.86 a tonne in the quarter, 12 percent more than a year earlier.

Iron ore, responsible for nearly three-quarters of Vale sales, helped boost net revenue, or sales minus sales taxes, 8.5 percent to $13.61 billion beating the average analyst estimate of $12.63 billion.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, rose 50 percent to $6.64 billion, beating the average analyst estimate of $5.85 billion.

Vale paid about $2.5 billion of the disputed taxes on overseas operations in November. It will pay the rest in 179 monthly payments.

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