Vale Net Income Rises 22% on Record Iron-Ore Prices

August 7, 2008

August 7th (Bloomberg) – Cia. Vale do Rio Doce, the world’s biggest iron-ore producer, said second-quarter profit climbed 22 percent to the highest ever on record contract prices for supplies sold to steel producers.

Net income rose to $5.01 billion, or $1.02 a share, from $4.095 billion, or 85 cents, a year earlier, Rio de Janeiro-based Vale said today in a statement posted on the Brazilian security regulator’s Web site. The results topped the average estimate of 91 cents a share from eight analysts surveyed by Bloomberg News.

Sales surged 22 percent after Vale won annual price increases of at least 65 percent in supply contracts for iron ore, which accounted for more than half of sales in the quarter. Still, profit was eroded as the average price of nickel, the company’s second-biggest source of revenue, fell 43 percent from a year earlier.

“The market is in a buying mood after this result,” said Daniel Gorayeb, an analyst at Spinelli SA in Sao Paulo. “The company managed to take advantage of market demands by producing more of its higher-value products and focused more on what was of interest, which conveys a positive image.”

Analysts’ Estimates

Vale, led by Chief Executive Officer Roger Agnelli, is spending $59 billion in the five years through 2012 to increase iron-ore capacity by 40 percent to 450 million metric tons a year and double nickel and copper production. Vale raised $12.1 billion in a July share sale, the biggest ever by a Brazilian company, to fund expansion and acquisitions.

The value of Vale’s iron-ore sales climbed 72 percent to $6.12 billion in the quarter, while nickel plunged 41 percent to $1.87 billion.

Vale this year negotiated a sixth annual increase in contract prices for its iron ore, the main raw material used to make steel. Nickel for delivery in three months averaged $25,919.69 a metric ton on the London Metal Exchange during the quarter, down 43 percent from a year earlier.

Vale said profitability at its nickel operations are high because the company is a low-cost producer.

“In the medium term, the combination of a reduced level of stainless-steel stockpiles and a drop in nickel inventories creates a favorable environment for the strong recovery of prices of the metal,” Vale said in the statement.

Copper, Coal

Agnelli is seeking to expand in coal and copper as quarterly profit growth slowed from a 69 percent average in the past four years. In May, Agnelli told business leaders in Rio de Janeiro that “if Vale doesn’t grow, it will be swallowed.”

Net revenue rose to $10.6 billion from $8.69 billion in the second quarter of 2007. Vale was expected to post sales of $11.8 billion, the average of four estimates compiled by Bloomberg.

The results are based on generally accepted accounting principles in the U.S.

Based on Brazilian accounting standards, profit fell 22 percent as a weaker dollar eroded the value of exports when converted back into the local currency. Net income fell to 4.57 billion reais ($2.9 billion), or 94 centavos a share, from 5.84 billion reais, or 1.21 reais a share, a year earlier, Vale said in a statement on its Web site. Sales climbed 3 percent to 18.3 billion reais.

Most of Vale’s sales are priced in dollars. The U.S. currency fell 17 percent against the Brazilian real in the 12 months through the end of the second quarter.

Vale’s American depositary receipts gained 2.3 percent to $27.30 at 7:21 p.m. in after-hours trading in New York.

In regular Sao Paulo trading, Vale rose 1.9 percent to 36.71 reais. The stock has declined 28 percent this year, compared with a 9.9 percent drop for Brazil’s Bovespa stock index.

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