Demand for minerals and metals boost Vale, Xstrata net

By Stuart Grudgings and Eric Onstad

RIO DE JANEIRO/LONDON (Reuters) - Robust demand for minerals and metals boosted Vale's net income to a record in the second quarter and helped its former takeover target, Xstrata, beat expectations for its first-half earnings.

Both Brazil's Vale and Switzerland's Xstrata (XTA.L) expressed confidence that demand from China would remain strong, despite a global economic downturn that is trimming its growth.

"From our point of view, while this is a fallow seasonal period of the year now. China remains a very strong source of growth for commodities," Xstrata Chief Executive Mick Davis told Reuters.

Vale (VALE5.SA)RIO.N, the world's biggest iron ore producer and one of the top three miners, posted net profit of $5.009 billion in the second quarter, up 22.3 percent from a year ago, helped by a hefty price hike for its iron ore.

Many analysts did not provide forecasts for Vale's second-quarter earnings as banks are restricted from talking about the firm due to its $12.17 billion global share offering last month.

Vale said that despite sharp recent declines in the share prices of metal and mining firms sparked by the U.S. credit crunch, demand for its commodities remained strong. Its iron ore and pellet production rose 7.9 percent in the quarter from a year earlier to a record 78.858 million tonnes.

"In spite of the current risks, we believe that the fundamentals of the mineral and metals markets have not changed, remaining very robust," it said in its earnings statement.

Vale also said on Wednesday that earnings before interest, taxes, depreciation and amortization (EBITDA) -- a key measure of cash flow -- rose 23 percent to $6.218 billion under U.S. Generally Accepted Accounting Principles (US GAAP).

Vale this year tried but failed to acquire Xstrata in a deal some analysts valued as high as $90 billion.

Xstrata, which on Wednesday unveiled a $10 billion takeover bid for the world's third-biggest platinum producer Lonmin (LMI.L), posted a 2 percent rise in first-half attributable net profit of $2.83 billion, higher than a average forecast of 15 analysts polled by the firm of $2.65 billion.

Xstrata, the fifth-biggest mining group by market value, saw record output in many commodities such as coal, ferrochrome and refined nickel, but results were trimmed by falls in nickel and zinc prices of 39 percent and 36 percent respectively.

Analysts were pleased that Xstrata managed to keep a lid on costs, which rose 9 percent after cost savings of $166 million.

"Another sector beating performance and in line with our view that the market fears of cost inflation killing margins are overdone this reporting season," said analyst Michael Rawlinson at Liberum Capital in London.

A ramp-up in production of copper and coal in the second half plus strong commodity prices was expected to lead to a buoyant second six months of the year for the Swiss firm.

The company had recently agreed to contract deals in coal with price hikes of up to 277 percent, but they would mostly flow through to earnings in the second half. Xstrata's operating profit in coal was due to double in the second half compared to the first, Chief Executive Mick Davis said.