Vale profits to drop 61%: Analysts – by Jeb Blount and Sabrina Lorenzi (Reuters/Sudbury Star – October 23, 2012)

The Sudbury Star is the City of Greater Sudbury’s daily newspaper.

RIO DE JANEIRO (Reuters) – Vale SA (VALE5.SA: Quote, Profile, Research, Stock Buzz) the world’s No. 2 mining company, is expected to report that third-quarter profit tumbled 61 percent from a year earlier as output slipped and the price of iron ore and other metals dropped to three-year lows.

Profit is also likely to be hurt by the company’s decision to set aside about $540 million for the possible payment of back royalties in a dispute with Brazil’s government.

Net income likely fell to $1.92 billion in the three months ending September 30 from $4.93 billion the year before, according to the average estimate of 19 analysts in a Reuters poll.

If results expected late on Wednesday confirm the estimate, it will mark the company’s worst quarterly profit in 33 months. Falling prices and weak demand in China, Vale’s largest market, have led the Rio de Janeiro-based company to delay spending, close operations and consider cuts to investments and dividends.

“Third quarter results are likely to suffer from a steep drop in prices,” BTG Pactual Group analysts Edmo Chagas, Antonio Heluany and Gregory Goldfinger wrote in a Monday report.

Iron ore .IO62-CNI=SI, responsible for about 90 percent of Vale profit, averaged $112.12 a tonne in the quarter, 36 percent less than a year earlier. The price of iron ore, the main steel ingredient fell to a three-year low of $86.70 a tonne on September 5.

Vale iron ore output fell 4.5 percent.

Vale produces more than a quarter of world sea-borne iron-ore exports of about 1 billion tonnes a year. Lower prices are expected to lower sales to $10.4 billion, nearly $6 billion, or 36 percent, less than a year ago.

The expected sales drop hurt the outlook for earnings before interest, taxes, depreciation and amortization, or EBITDA, a gauge of operational profitability. With EBITDA expected to fall 58 percent, the impact of weaker sales could be large.

“Management has guided for capital spending and dividend cuts in 2013,” BTG Pactual’s Chagas, Heluany and Goldfinger said.

The trio expect profit of $1.78 billion in the quarter.

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