Vale posts record $6.45 billion loss on tax deal, writedown

February 26, 2014 04:13 PM
China uncertainties

Vale SA, the world’s largest iron-ore producer, posted a record quarterly loss after settling a decade-long tax dispute and writing down the value of an asset in Argentina amid slowing Chinese demand.

Vale’s fourth-quarter net loss widened to $6.45 billion, or $1.25 a share, from a net loss of $2.62 billion, or 51 cents, a year earlier, the Rio de Janeiro-based company said yesterday in a regulatory filing after markets closed. Earnings per share excluding some items rose to 62 cents, missing a 64-cent average of 14 analysts’ estimates compiled by Bloomberg.

The world’s third-largest mining company has underperformed its main peers in the stock market for the past year as a tax dispute with Brazil and weakening demand in China, the destination of about half its iron-ore shipments, weighed on investors’ confidence. Vale has sold aluminum, logistics, copper and energy assets since mid-November as it seeks to raise cash and streamline operations to boost profitability.

Having settled the tax dispute, the company still faces uncertainties related to the Chinese economy, said Daniel Rohr, an analyst at Morningstar Inc. in Chicago, by phone. “Vale is coping with substantial headwinds with iron-ore prices falling below $120 per ton,” he said.

The quarterly loss was the largest since at least 1997, when the company went public, exceeding the net loss a year ago after Vale wrote down the value of some nickel, coal and steel assets.

Tax Settlement

“We expect the iron-ore market to remain balanced, as the steel sector grows smoothly, with China remaining the driving force,” Vale said in the statement. “Due to reforms, the Chinese steel industry may become less buoyant, compared to its vigorous growth of 8 percent year-on-year in 2013.”

The miner agreed in November to pay 22.3 billion reais ($9.5 billion) to settle a tax dispute with the Brazilian government over foreign unit profits. Vale said yesterday that the settlement cut 2013 net income by $6.47 billion. The company wrote down the value of assets, including the Rio Colorado potash project in Argentina, by $2.3 billion in the fourth quarter.

In addition to the tax settlement and writedown, earnings were also hurt by the Brazilian real’s weakening, Chief Financial Officer Luciano Siani said on a video presentation posted on the company’s website after the quarterly report.

Three Events

“The result was affected mostly by three one-off events and some of them without cash flow impact,” Siani said. “We laid the ground for a successful future and for our future growth mainly through the reduction of uncertainties.”

BHP Billiton Ltd., the world’s biggest mining company, last week said profit for the first-half increased a more-than- expected 31 percent on stronger iron ore earnings and a decline in costs. Rio Tinto Group, the second-largest, on Feb. 13 boosted its dividend after also beating estimates on second-half profit.

Chinese steel demand may increase between 3 percent and 6 percent this year after expanding more than expected in 2013, Vale Executive Director for Ferrous and Strategy Jose Carlos Martins said on Feb. 17.

China’s growth is likely to slow from estimated levels of 7.5 percent this year amid reforms to control local governments’ debt and produce a cleaner environment, Vale said in yesterday’s statement.

Next page: China Growth

China Growth

“We expect China to grow around 7 percent in the next couple of years, with a gradual deceleration to 6 percent thereafter,” it said. “There will be a deceleration in infrastructure building. On the other hand, the property sector is expected to continue to grow supported by the ongoing urbanization process.”

Iron-ore traded at an average $134.9 a ton in the fourth quarter, 12 percent above a year earlier, according to data compiled by The Steel Index Ltd. Prices have dropped to $117.80 a ton yesterday, the sixth consecutive drop, as China, the biggest consumer of metals, boosted stockpiles to a record.

“We see prices oscillating but we don’t see any chance of prices falling below $110,” Martins told reporters in Rio. “That’s a price that’s quite interesting for us.”

Net sales climbed 9.4 percent to $13.4 billion after Vale sold its iron ore at an average $112.97 a metric ton, an increase from $100.43 last year. That beat an $107.8-a-ton average estimate by six analysts compiled by Bloomberg.

Nickel’s average sales price fell 21 percent and copper declined 13 percent, the company said.

Iron Shipments

Vale shipped 84.8 million tons of iron and pellets in the quarter, little changed from a year earlier. Pellets are a processed form of iron ore used by the steel industry. Nickel sale volumes gained 19 percent to 69,000 tons and copper shipments jumped by 25 percent to 99,000 tons, the company said.

Earnings before interest, taxes, depreciation and amortization, or adjusted Ebitda, rose to $6.64 billion, beating a $5.9 billion average estimate by 17 analysts compiled by Bloomberg. Vale invested $14.2 billion in 2013, below the $16.3 billion initially budgeted for the year. Net debt as of Dec. 30 advanced to $24.4 billion from $22.6 in the previous quarter.

“Management is unlikely to indicate any dividend hike or buyback program, as the company’s 2014 free cash flow generation is unlikely to allow for either, for now,” Credit Suisse Group AG analysts led by Ivano Westin said in a Feb. 11 research note.

Iron-ore output in the fourth quarter, including a stake in a joint venture with BHP, declined 1.7 percent to 84 million metric tons, Vale also said in a separate statement. The company’s annual production of 299.8 million tons was 2 percent short of Vale’s target for 2013 due to abnormal rainfall and lower output at Carajas, the world’s largest iron-ore complex, it said.

Shares of Vale advanced 0.1 percent to 29.02 reais at the close in Sao Paulo yesterday. The stock lost 17 percent in the past 12 months, while BHP rose 6.1 percent and Rio Tinto fell 2.6 percent in London in the same span.

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