In Commodity News 31/07/2015
Vale SA’s efforts to shore up its balance sheet in response to falling commodity prices is starting to pay off as the world’s biggest iron-ore producer beat most analysts’ earnings estimates. Shares surged.
Adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, was $2.21 billion for the second quarter, the Rio de Janeiro-based company said Thursday in a filing. While that was 46 percent down from a year earlier, it beat 12 of 13 dollar-based estimates compiled by Bloomberg. The average forecast was $1.83 billion. On a net basis, Vale had a 17 percent gain in profit to $1.68 billion from a year earlier.
Increased iron-ore production that coincided with a decline in Chinese demand sent prices of the steelmaking ingredient to six-year lows, eroding profit. In response, Brazil’s biggest exporter is reducing investments, selling stakes in assets, halting unprofitable projects and swapping sales of lower-quality ore for higher-margin products.
“Vale has posted a substantial profit that shows the company is strong even in face of the challenging pricing environment,” Chief Financial Officer Luciano Siani said in a video posted on the miner’s website.
After three straight quarterly net losses driven by exchange rate effects, Vale is returning to profit with costs and expenses in the quarter declining 14 percent to $5.93 billion. Sales fell 30 percent to $6.97 billion.
Shares Rally
Vale also said Thursday that it agreed to sell a 34 percent stake in its MBR iron-ore subsidiary to a fund of Banco Bradesco BBI SA for 4 billion reais ($1.2 billion). And the company expects to receive $448 million after closing the sale of four iron-ore vessels to China Merchants Energy Shipping Co. upon delivery of the ships, expected in September, it said.
Shares rose as much as 6.2 percent in Sao Paulo Thursday, leading gains on Brazil’s benchmark index. At 10:47 a.m., Vale was trading at 15.63 reais, up 3.4 percent. The stock has slumped 46 percent in the past 12 months.
Vale sold its iron-ore fines at an average $50.62 a metric ton, down from $84.60 a year earlier, the company said. Benchmark iron-ore prices dropped 0.5 percent to $55.64 a dry ton on Thursday, according to an index compiled by Metal Bulletin. The price has increased 25 percent since reaching a six-year low of $44.59 on July 8.
Vale shipped 67.2 million tons of iron ore fines a in the quarter, 5.5 percent more than a year earlier, after posting last week record output for the second quarter. Shipments of pellets, a processed form of iron ore used by the steel industry, rose 29 percent to 12.2 million tons.
Outlook Improves
The company said “weak demand” from the Chinese downstream sectors and “strong supply” in the seaborne market explains the decline in the mineral’s price, adding that it expects some recovery in the Asian country’s real-estate industry later in the year.
Vale sees 110 million tons of new iron-ore capacity being added globally by major producers in 2015, which would lead to the closing of 90 million tons of high-cost mines.
While Vale’s production next year is expected to be higher than 2015’s 340 million-ton forecast, it probably will be lower than the 376 million-ton estimate given in December, Peter Poppinga, executive director for ferrous and strategy, said on conference call Thursday. Official 2016 guidance will be disclosed at the end of this year.
Copper Gains
Vale, also the largest nickel producer, said shipments of the base metal were stable at 67,000 tons in the second quarter while copper volumes jumped to 97,000 tons. The company sold copper at a discount of more than $1,000 a ton compared with benchmark prices due to treatment and refining charges and the impact of provisional pricing, leading to a 33 percent drop in the Ebitda of its base metals business.
“Despite the operational improvements, we still see a challenging scenario ahead for Vale,” Rafael Ohmachi, an analyst at brokerage Guide Investimentos, said by phone from Sao Paulo before the earnings release. “While in the short term the company’s outlook doesn’t change, we see improvements in efficiency, costs and logistics.”
