UPDATE 3-Vale Q3 profit doubles on higher iron ore sales, prices

Thu Nov 7, 2013 3:04am GMT

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By Jeb Blount and Sabrina Lorenzi

RIO DE JANEIRO Nov 6 (Reuters) - Brazil's Vale SA , the world's second-largest mining company, reported on Wednesday that its third-quarter net income more than doubled from a year earlier, beating analysts' expectations as iron ore prices and sales volumes rose.

Net income for the three months ended Sept. 30 soared 114 percent to $3.50 billion from $1.64 billion in the same period a year earlier, the company said. The result was 6 percent higher than the $3.3 billion average profit estimate of seven analysts surveyed by Reuters.

Iron ore prices averaged about a fifth higher in the third quarter of this year than in the same quarter of 2012, according to Thomson Reuters.

Net sales, or total sales minus sales taxes, rose 11 percent from a year earlier to $12.7 billion, beating the average analyst estimate of $12.5 billion. The volume of iron ore sales rose 11 percent to 73.4 million tonnes.

"We expected strong volumes, given the robust Brazilian iron ore export figures for July-September, but shipments still exceeded our expectations," mining analysts Garrett S. Nelson, Mark A. Levin and Nathan P. Martin of BB&T capital markets in Richmond, Virginia said in a report to investors.

"Vale's results were largely a reflection of iron ore prices that have remained 'higher for longer' in the face of widespread oversupply concerns," they added.

Vale's preferred shares, the company's most-traded class of stock, closed at an eight-month high of 34.44 reais in Sao Paulo on Wednesday before the results were announced.

The result comes a year after Vale moved to sharply cut costs and refocus expansion on its main iron-ore business. The spending diet came in the face of flagging demand and plunging prices in China for the raw material, the main ingredient in steel. China was responsible for 50.2 percent of Vale iron-ore sales in the period.

China is the world's biggest steel producer and largest importer of iron ore. Vale is the world's largest producer of the mineral, accounting for between a quarter and a third of world's seaborne iron ore exports. It is also the No. 2 producer of nickel and a major miner of copper, gold, coal and potash.

While iron ore prices have recovered from the three-year lows of August 2012, executives of Vale and its main rivals, Australia's BHP Billiton Ltd and Rio Tinto Ltd , have said that a decade-long, China-led commodities boom is likely over. Resulting lower growth expectations prompted them to rein in investment and prospecting budgets.

The effort led to the mothballing or cancelling of new projects, the closing of money-losing mines and sale of assets or stakes in existing businesses. Investment in the first nine months of 2013 was $11 billion, 9.8 percent less than in the same period of 2012.

China's strong housing market, though, is keeping demand for steel and iron ore strong, Vale said in the statement. It will keep it strong in the near term as steelmakers and distributors have cut their stocks in the face of China's otherwise slowing economy.

"The Chinese economy should grow more moderately than it did in the third quarter, but despite this we expect the price of iron ore to remain stable," Vale said. It added that iron ore should average about $130 a tonne in the coming months.

On Wednesday, iron ore rose 0.2 percent in the Chinese spot market to $137.10 a tonne, 58 percent above the August 2012 lows that prompted Vale's cost-cutting efforts.

ACROSS THE BOARD COST CUTS

That retrenchment helped boost results even more. Vale cut costs across the board in the quarter. Sales, general and administrative costs fell 39 percent to 315 million reais while research and development fell 43 percent to 205 million.

The cost of goods sold, a category that includes salaries and equipment used to mine Vale's products, fell 3.4 percent to $6.55 billion despite rising output and sales.

This helped boost adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by 37 percent to $5.88 billion, beating the average analyst's estimate of $5.71 billion. EBITDA is a measure of a company's ability to generate cash profits from operations.

Lower costs, though were also aided by a 10 percent decline in the value of Brazil's real against the U.S. dollar in the third quarter compared to the same quarter in 2012.

The weaker real meant that each 100 reais of Vale's Brazilian expenses cost $5.16 dollars less in the quarter this year than last year.

While its main mines and operations are in Brazil, nearly all of Vale's sales are in dollars and most of its expenses are in reais.

Most other products sold by Vale also saw increases in sales volumes.

Metallurgical coal output jumped 51 percent to 1.73 million tonnes. Nickel output rose 13 percent to 62,000 tonnes. Copper jumped 17 percent to 103,000 tonnes. Gold output surged 77 percent to 85,000 ounces while silver output rose 18 percent to 483,000 ounces.