UPDATE 3-Brazil's Vale profit falls on lower iron ore prices

Wed Apr 30, 2014 12:22pm EDT

(Adds analyst comment, additional Vale results, updates prices)

By Jeb Blount

RIO DE JANEIRO, April 30 (Reuters) - Brazilian miner Vale SA said on Wednesday that first-quarter profit fell by nearly a fifth, a result in line with expectations, after the price of iron ore, its main product, fell sharply.

Net income fell 19 percent to $2.52 billion, compared with $3.11 billion in the same quarter of 2013, according to a securities filing. The result was near the $2.59 billion average estimate in a Reuters survey of 13 analysts and comes after a $6.54 billion fourth-quarter loss.

Vale Chief Executive Officer Murilo Ferreira has been working to slash costs and unload unprofitable businesses for more than a year as a slowdown in Chinese growth limits demand for iron ore and other metals. China, the world's largest steel producer, is the biggest market for iron ore, the main ingredient in steel.

Vale is the world's largest iron ore producer and a major miner of nickel, copper and fertilizers.

The average spot iron ore price in the quarter .IO62-CNI=SI fell 23 percent to $120.43 a tonne from $148.20 a year earlier, according to Steel Intelligence and Thomson Reuters. Worse, in the opinion of analysts, was the lower than expected price Vale received for its ore under contracts with its main clients.

"Vale surprisingly reported iron ore selling prices of only $90.50 dollars a tonne," said Adriano Yamamoto, mining company analyst at UBS AG in Sao Paulo. "As iron ore prices continue their decline, we expected Vale's earnings and share price to come under further pressure in the coming quarters."

Yamamoto had expected Vale to report selling prices of as much as $103 a tonne, or 14 percent more than what Vale actually earned. He says there is risk that Vale shares could extend their 17 percent decline so far this year.

Vale's preferred shares fell more than 3 percent at the start of trading in Sao Paulo on Wednesday but trimmed losses to fall 1.1 percent in early afternoon trading. Vale was responsible for about a quarter of the 0.24 percent decline in Brazil's benchmark Bovespa stock index after mid-day.

Citigroup mining company analysts Alexander Hacking in New York and Thiago Ojea in Sao Paulo wrote on Wednesday that the lower than expected iron ore price Vale received is likely to be temporary and reiterated their "buy" recommendation on the stock.

"The headline result is not as bad as it looks," they wrote. "Effectively, Vale over-estimated prices in the fourth quarter and are backing them out in the first quarter."

CURRENCY, COST FACTORS

The decline in iron ore prices caused net sales, or total sales minus sales taxes, to fall 11 percent to $9.50 billion, 15 percent below the survey's expectation of $11.13 billion. Iron ore makes up more than 75 percent of Vale's revenue.

Revenue would have fallen further if it were not for growth in iron ore output. A stronger Brazilian real against the dollar also helped bolster sales and profit by increasing the amount of Brazilian currency it can buy with its mostly dollar-based sales to pay its mostly real-based costs.

Vale hopes to maintain profit in the face of the Chinese slowdown by using low mining costs and iron ore production expansion to gain market share at the expense of smaller, higher-cost producers.

Vale can produce a tonne of ore for $22. Some Chinese miners have per-tonne costs of $100.

The company's iron ore output rose 9.6 percent to 71.1 million tonnes, the highest first-quarter result since 2008, but fell 13 percent from the previous quarter. First-quarter production is usually lower than in the fourth quarter as seasonal rains limit mining and damage transport systems.

This year, a drought in Brazil's south and southeast allowed Vale to boost output from the fourth quarter at its southern system mines in Minas Gerais. Heavier-than-normal rain in Brazil's Amazon saw output fall 26 percent from its giant Carajas mine in Para.

Nickel output of 67,500 tonnes and coal output of 1.8 million tonnes were first-quarter records, Vale said. Higher prices for nickel and copper also bolstered profit and cut iron ore's share of net income to 88 percent in the first quarter from 100 percent in the fourth quarter, Yamamoto said.

Cost cutting also helped limit the profit decline, but failed to make up for lower sales. Even though total expenses fell 14 percent, earnings before interest, taxes, depreciation and amortization, or EBITDA, fell 22 percent to $4.06 billion, 15 percent below the $4.78 billion EBITDA estimated by analysts.

EBITDA is a measure of a company's ability to generate cash from operations. (Reporting by Jeb Blount and Walter Brandimarte; Editing by Meredith Mazzilli and Cynthia Osterman)

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