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By Stephen Eisenhammer
RIO DE JANEIRO, July 31 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
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
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.
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