April 27, 2017 / 10:15 AM / a year ago

UPDATE 2-Brazil's Vale slumps as ore price outlook, profit disappoints

(Rewrites with executive and analyst comments, share drop)

By Guillermo Parra-Bernal and Marta Nogueira

SAO PAULO/RIO DE JANEIRO, April 27 (Reuters) - Shares in Vale SA slumped the most in two weeks on Thursday, as executives signaled lackluster trends for iron ore prices this year and investors reacted to a first-quarter profit miss with disappointment.

Preferred shares, world No. 1 iron ore producer Vale’s most widely traded class of stock, shed as much as 4 percent. The decline thwarted a recovery in the stock that had made gains this week on expectations Vale would report a near record quarterly profit.

On a results conference call, company executives said supply and demand of the main ingredient for steel look balanced, helping prices stay at $70 reais per tonne or less. In February, Vale’s head of ferrous minerals Peter Poppinga expected prices hovering around $80 a tonne this year.

While both Poppinga and outgoing Chief Executive Officer Murilo Ferreira gave a rosy outlook for productivity metrics and extraction costs, some investors have questioned Vale’s over reliance on iron ore price behavior to boost profitability and cut debt.

“With a much lower iron ore price nowadays, and a weaker outlook for the second half, in our view, and no conviction on a rebound in base metal prices, we fear first-quarter numbers could have marked a peak for this year,” said Leonardo Correa, a senior mining analyst with Banco BTG Pactual.

Net income totaled $2.490 billion, well below consensus estimate of $3.325 billion, reflecting the impact of heavy rains that slowed output in some Brazilian mines and rising financial expenses. It compared with $525 million in the prior three months and $1.776 billion a year earlier.

Last week, Vale said first-quarter iron ore output fell 6.7 percent as seasonal rainfalls in the so-called northern system, which groups the Carajás, Serra Leste and S11D mines in northern Brazil, hampered extraction. Revenue slipped on a sequential basis, even as realized prices rose 9 percent from the fourth quarter.


Adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, hit $4.308 billion, below a consensus estimate of $4.996 billion compiled by Thomson Reuters.

Despite the profit miss, Vale is taking advantage of higher realized prices on an annual basis to slow the pace of asset sales to cut debt.

Ferreira, who will be replaced by Klabin SA CEO Fabio Schvartsman next month, said cargo vessels and a fertilizer plant are priorities for future divestitures. Leverage metrics improved significantly during the quarter, and Vale managed to earmark less money for capital spending this year.

“We’ll keep deploying more of the free cash flow we generate to cut debt,” Ferreira said, signaling his strategy will be embraced after his planned departure in May.

Higher ore recovery last quarter also helped Vale generate $2.454 billion in free cash flow - the money left for bond and shareholders after all expenses are paid.

Net debt fell to $22.777 billion in March, from $25.042 billion in December. Vale wants the indicator between $15 billion and $17 billion this year. (Additional reporting by Gustavo Bonato and Roberto Samora in São Paulo; Editing by Mark Potter and Grant McCool)

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