(New throughout, updates share price, adds executive comment)
By Stephen Eisenhammer
RIO DE JANEIRO, Oct 30 (Reuters) - Vale posted a surprise $1.44 billion loss, and its shares tumbled to a 5-1/2-year low as investors worried about the cost of the Brazilian miner's expansion plans and a possible cut to its dividend in a new era of lower iron ore prices.
Vale SA cited low iron ore prices and a weak local currency for the third-quarter loss. A Reuters poll of seven analysts had forecast quarterly net profit of $956 million. A year earlier, Vale had a net profit of $3.5 billion.
Shares in Vale, the world's largest producer of iron ore, fell as much as 4 percent on Thursday even as Brazil's benchmark Bovespa stock index rose 2 percent.
Vale is attempting to boost production and cut costs as it competes with Australian rivals Rio Tinto Ltd and BHP Billiton Ltd at a time when slack demand from steel makers has pushed iron ore prices near five-year-lows.
Vale, and Brazil in general, enjoyed years of rapid growth as Chinese demand for commodities boomed. But Chinese growth has begun to slow, pressuring commodity prices and hurting Vale as well as the wider Brazilian economy.
Vale mined a record amount of iron ore during the quarter, but the slight production rise was not enough to offset the plunge in price. Rivals Rio and BHP have added capacity and cut costs more quickly.
Analysts were disappointed by higher iron ore cash costs, while Vale said the weakening Brazilian real wiped nearly $2 billion off its earnings by increasing the cost of dollar-denominated debt.
The spot price of iron ore .IO62-CNI=SI has fallen more than 40 percent this year as vast new production from Australia coincided with slower growth in China. In the third quarter alone, prices fell 18 percent.
The extent of the price drop has taken miners by surprise. As recently as April, Vale's iron ore chief Jose Carlos Martins said the price would recover in the "coming months" from $105 per tonne at the time.
Instead it kept falling and is now $79 a tonne. Analysts and executives increasingly accept that lower prices are here to stay and that a decade-long commodity boom is over.
Speaking to analysts and investors on Thursday, Martins said higher-cost producers were not exiting the market as quickly as expected, keeping the price low.
"We are seeing greater resistance, particularly in China, to the elimination of capacity," he said.
Lower iron ore prices had a big impact on Vale which usually gets about 85 percent of profits from the mineral. The miner reported earnings before interest, taxes, depreciation and amortization, or EBITDA, of $3 billion on net revenue of $9.1 billion.
"We believe a dividend cut in 2015 looks increasingly likely, with costs and capex unlikely to be cut sufficiently to offset the impact of lower iron ore prices," analysts at Barclays wrote in a note.
Vale has undertaken a $20 billion expansion of its giant Carajas project, which should add 90 million tonnes per year of iron ore output. CEO Murilo Ferreira said lower prices would not slow this development.
"Vale's funding challenge in 2015-16 may be steeper than expected," Alex Hacking, analyst at Citi, said in a note.
The Brazilian real fell 11.3 percent against the dollar during the quarter and was on average 11 percent lower than a year earlier. It was, however, only 2 percent weaker on average than the previous quarter when Vale made a $1.4 billion net profit.
A protest on the railway tracks connecting its Amazonian Carajas mine to the coast also hit sales volumes. (Additional reporting by Jeb Blount; Editing by Jason Neely, David Holmes and Chizu Nomiyama)