(Adds analyst comment, additional Vale results, updates prices)
By Jeb Blount
RIO DE JANEIRO, April 30 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
"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,
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
(Reporting by Jeb Blount and Walter Brandimarte; Editing by
Meredith Mazzilli and Cynthia Osterman)