Vale beats on Q3 earnings

Mining giant Vale S.A. (VALE) recently released improved financial results for third-quarter 2013. In the quarter, underlying earnings per ADR (American Depositary Receipt) came in at 72 cents (on a fully-diluted basis), up 58.8% year over year and 12.9% sequentially.

Results beat the Zacks Consensus Estimate of 64 cents per ADR by 12.5%. Improvement in the company’s revenues and cost structure was responsible for the boost in earnings.

Revenues: Operating revenues rose 10.8% year over year and 14.5% sequentially to $12.9 billion. Revenues were in line with the Zacks Consensus Estimate of $12.9 billion. The year-over-year increase in revenues was attributable to higher production volumes and prices, mainly of iron ore.

Of Vale’s total revenue, sales of ferrous minerals accounted for 73.5%; coal sales 1.6%; base metals sales 14.4%; fertilizer nutrients sales 6.3%; logistics services sales 3.1%; and the remaining 1.1% came from the sale of miscellaneous sources.

On a geographic basis, 18.2% of revenues were generated from South America, 56.5% from Asia, 4.2% from North America, 17.4% from Europe, 2.5% from the Middle East and 1.2% from Rest of the World.

Production Status: In the third quarter of 2013, Vale experienced record production volumes of copper, coal, phosphate rock and gold. Gold production soared to 76,000 ounces, increasing 66.2% year over year. Coal production was 2.4 million tons, flat with the previous quarter, which had reached an all-time high. While the production of iron ore, phosphate rock, gold, coal, nickel and copper improved; potash, pellets, ferroalloys and manganese ore experienced a year-over-year decline.

Expenses: In the third quarter, cost of goods sold totaled $6.6 billion, down 3.4% year over year. Selling, general and administrative (SG&A) expenditures were $315.0 million, while Research and Development (R&D) expenses were $205.0 million; declining 39.3% and 43.1% year over year, respectively. Vale’s efforts to initiate the divestiture of unproductive projects by reducing its geographical presence, led to this decline.

Balance Sheet/Cash Flow: Exiting the third quarter of 2013, Vale’s cash and cash equivalents were recorded at $7.1 billion versus $5.9 billion in the previous quarter. Long-term liabilities were flat sequentially at $43.7 billion.

In the reported quarter, net cash generated from operating activities was $4.3 billion compared with $5.6 billion in the year-ago quarter, while capital spending came in at $3.1 billion versus $5.0 billion in the third quarter of 2012.

Post the quarter-end, the company entered into an agreement to sell 35.9% of its stake in VLI S.A.

Outlook: In the coming quarters, management expects to increase production volumes with enhanced mining operations in Carajas. Also, Vale’s cost-saving strategies are expected to succeed, which in turn will increase the company’s earnings. 

Other Stocks to Consider

Vale currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the industry include Cliffs Natural Resources Inc. (CLF), Alderon Iron Ore Corp. (AXX) and Denison Mines Corp. (DNN). All these hold a Zacks Rank #2.

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