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Vale back in the black on higher iron ore prices, currency

Vale is favouring higher-grade production to reduce costs and plans to start mining at its $14 billion S11D mine in the second half of this year. (Image from archives)

Brazil’s Vale (NYSE:VALE), the world’s No. 1 iron ore miner, returned to profit in the first quarter, posting net income of $1.8 billion compared to a jaw-dropping $8.6bn loss in the last three months of 2015.

The Rio de Janeiro-based company’ recovery — first profit in three consecutive quarters — came despite a sustained deterioration in revenues: net operating revenues decreased to $5.7bn from $5.9bn in the fourth quarter.

While cheaper inputs and a recovery in iron ore prices is helping Vale, net debt climbed to $28 billion from $25 billion a year ago.

“Vale enters the second quarter with a fair amount of optimism, but we won’t let down our guard,” Chief Financial Officer Luciano Siani said in a video posted on company’s website.

Vale attributed the turn round to higher iron ore prices, which climbed about 25% during the quarter, combined with lower freight rates. The firm said it was also helped by an 8.7% appreciation of the real against the dollar during the quarter.

While cheaper inputs and a recovery in prices is helping Vale’s efforts to preserve margins, net debt climbed to $27.7 billion from $24.8 billion a year ago.

Iron ore demand to remain strong

Vale expects demand for iron ore to remain strong this quarter thanks to stimulus from the Chinese government.

“We acknowledge the recent improvement in iron ore prices but are cognizant of market volatility, thus remaining fully committed to strengthening our balance sheet through the reduction of our net debt as previously informed,” it said in the statement.

Vale also said it expects cash flow to exceed capital spending once the company finishes work on a major expansion project at its $14 billion S11D mine in Brazil’s Amazon, to be completed in the second half of this year.

The company also note it slashed its costs and expenses by $880 million between the fourth and first quarters to $3.7bn while it also cut capital expenditure by $744m to $1.4bn.

Vale, which is looking to restart of its Rio Colorado potash project in Argentina, noted it wouldn’t be able to bring it into production without a partner to share the $1.5 billion investment required.