UPDATE 2-Brazil's Vale profit falls; prices undermine record output

Thu Jul 31, 2014 8:55am EDT

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By Stephen Eisenhammer

RIO DE JANEIRO, July 31 (Reuters) - Brazilian miner Vale SA posted a sharp decline in profit from the previous quarter as lower iron ore prices undermined record production of the steel-making ingredient.

Vale, the world's largest producer of iron ore, reported second-quarter net income of $1.43 billion, down 43 percent on the previous quarter and below the average analyst estimate of $1.89 billion in a Reuters survey.

"It was a very challenging environment where the price of our most important product has dropped by 15 percent," Chief Financial Officer Luciano Siani said in a video accompanying results.

Net income was more than three times higher than the year-ago quarter, when a one-time foreign exchange charge slashed profit to $424 million.

Prices for iron ore .IO62-CNI=SI have dropped by nearly 30 percent this year, hitting a 22-month low in June.

Iron ore production rose 12.6 percent to 79.45 million tonnes from a year earlier, as better weather conditions combined with ramp-ups at its two main mine sites in Brazil.

Mega miners Vale and Australia's Rio Tinto Ltd and BHP Billiton Ltd are ramping up output and slashing costs in an attempt to increase market share.

Much of this strategy depends on squeezing out higher-cost producers in places like China and Iran. Vale said that is already happening and should push iron ore prices back above $100 per tonne and keep them there. Iron ore cost $95.60 a tonne on Thursday.

Lower prices were not the only issue weighing on Vale's bottom line. The miner took a $774 million writedown on a coal mine in Australia and its Simandou iron ore project in Guinea.

The bulk of the charge, $500 million, was from Simandou, where the miner was stripped of its concession due to allegations that its project partner, BSG Resources (BSGR), had acquired the asset by corrupt means. BSGR has denied wrongdoing.

The charge only partially covered Vale's investments in the project, which sources at the company estimated came to $1.1 billion. Vale said it hoped to recoup some of the money.

"Discussions with the government of Guinea are advancing towards the recognition of ... some sort of compensation for Vales investments made in the country," the miner said.

NICKEL RELIEF

Vale's results were bolstered by nickel production. The base-metals division contributed $609 million to earnings before interest, taxes, depreciation and amortization (EBITDA), a measure of cash flow.

The price of nickel, used to make steel rust-resistant, rose by about one-quarter over the three months from April due to an export ban on unprocessed ore in Indonesia.

Nickel's contribution was not as high as some analysts expected, however, with output reduced by maintenance at its Sudbury mines in Canada.

Its VNC nickel project on the French Pacific island of New Caledonia also suspended operations after an acid spill in May. Vale said VNC has now resumed its ramp-up.

The company also said it cut costs by $249 million in the first half of 2014, compared to the same period last year. (Editing by Jason Neely, Dale Hudson, Jeb Blount and Jeffrey Benkoe)

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