Mining company Vale (VALE, Financial) posted not-so-impressive results for the second-quarter due to the sharp decline in the prices of iron ore to a four-year low. However, the slump in prices was partially offset by the growing volume for the quarter as the company recorded a rise of almost 13% to $79.5 million metric tons of iron ore, produced for the quarter and the base metal prices that continue to remain favorable for the company.
Brazilian iron-ore producer Vale reported revenue of $9.9 billion, a dip of about 7.1% year-on-year basis, missing the analysts’ forecasts of $10.4 billion in revenue for the quarter. However the company has realized an improvement of 4.2% in its revenue sequentially. Value’s EBITDA came in at $4.1 billion for the second quarter, beating the consensus estimates of $3.8 billion, but earnings of $0.38 per share failed to meet the $0.40 forecasted by the consensus for the second-quarter.
Expecting a turnaround
Looking ahead, Vale remains confident of taking the benefits of the growing demand for steel, which is estimated to accelerate about 3.00% to 3.5% in 2014. The increase in demand for steel should lead to an increase in the prices for nickel in the United States and Europe. In addition, the company should benefit from the increased iron imports to China despite low demand as the Chinese mills are consuming more steel from Brazil and Australia due to lower prices and low cost iron-ore creation that continue to offset higher-cost iron ore production in China. The iron ore imports accelerated 11% to 85.2 million tons in July, higher than the previous month. The data also reflects a rise of about 19% in the imports of iron ore in the first half of 2014 compared to the first half of 2013. The imports from Brazil have accelerated 14.5% and that of from Australia increased about 33.3% this year so far due to the lower prices that are fueling sales though the domestic steel demand remains relatively weak in China.
Vale is also ramping up the production for iron ore at most of its facilities. The company has built two million tons stored in Malaysia that should assist the company to facilitate its supply chain with greater elasticity that should support its sales in the second half of the year. Its iron-ore production has reached nearly 80 million tons, which is estimated to reach 120 million tons with the inclusion of 40 million tons produced in Conceicao Itabiritos.
In addition, the company is really excited about its base metals business that is gaining tremendous traction in the market. The base metal segment reported an improvement of approximately 96% to $1.9 billion, higher than the first-quarter of 2014 accompanied by strong sales price. The company further plans to accelerate volumes as the maintenance work at its Sudbury facility is almost over now that should drive its production this quarter, leading an improvement in the overall margins.
Making the right moves
Vale is also focusing on two of its other plants such as Salobo and Onça Puma to meaningfully contribute to its EBITDA in the second half of the year. Vale is also looking forward to its Salobo II production facility that has recently been completed at the expense of $1.22 billion during the second-quarter 2014 to supplement the production of copper operation along with Salobo projects. Additionally, Long Harbor has recently produced its first ever nickel in July and Vale is expecting a total contribution of about $4.0 billion in medium term from this project to its EBITDA.
Vale’s coal segment is expected to deliver a handsome return in the second-half of the year as the company has gotten rid of the logistic difficulties at its Nacala Corridor with potential initiatives that have helped the company to accomplish about 77% progress in the Greenfield sections. Besides, Vale expects the first train to run in the fourth-quarter of 2014 and anticipates first shipment from the project in the first quarter of 2015. Vale also looks forward to its other coal plant, Moatize to ramp up production in the second half of the year that should drive growth for its coal segment going forward.
Meanwhile, Vale is busy reducing the costs, capital expenditures, SG&A expenses, while concentrating on the productivity and ramping up of critical operations that should help the company increase margins in the second half of the year. Vale is additionally expected to save a handsome amount from scope maximization, commercial concession and project implementation. Vale reported nearly $250 million in savings during the first half of 2014 as compared to the first half of 2013. Moreover, Vale’s Capital Expenditure for the first half of 2014 was at $5.1 billion, a decline of about $2.1 billion from $7.2 billion in the first half of 2013.
Despite lower iron ore prices, Vale generated strong cash flows and paid $2.1 billion in dividends and maintained its gross debt and cash position at similar levels to the first quarter 2014. Cost expenses reduced approximately $150 million as compared to the first half of the last year 2013.
Conclusion
Vale has a strategic plan in place that is helping the company to remain strong with the changing environment in the industry should sustain its growth going forward. Also, Vale is engaged in minimizing costs and expenses with lower capital expenditure forecast for the year with potential project negotiation that should help the company deliver strong value for the stock in the long run. Moreover, its operating profit yield for the trailing twelve months remains strong with the yield of 35.64%. However its profit yield of 2.12% for the trailing twelve months is pressurized due to declining sales for the iron ore that is projected to be corrected in the long run. Besides, the analysts have estimated CAGR of 1.80% for Vale against negative CAGR of 1.30% for the average industry for next year reflects a better performance of the stock in next year.
