Vale Is Staring At A Q4 Loss On Impairments And Additional Tax Charges – by Trefis Team (December 27, 2012)

Vale (NYSE:VALE) seems all but certain to report a loss in the fourth quarter of the ongoing financial year. The company has suffered two major setbacks in the last few days. Firstly, it announced that it will book a $4.2 billion fourth-quarter pretax charge after lowering the valuation of a nickel mine and its stake in aluminum producer Norsk Hydro ASA. Also, last week the company announced tax losses of nearly $483 million relating to cases in Brazil and Switzerland. Of this, $451 million will be booked in the balance sheet for Q4 and the rest of the amount will be adjusted in the next financial year. [1]

These two setbacks are only recent additions to a long list. Tumbling iron ore prices on a weak demand outlook, failure to begin docking Valemax ships in China due to permission issues, and the shelving of the Simandou project in Guinea due to an uncertain and adverse operating environment are some issues which have been highlighted frequently in the past. The company has been forced to contract its capital expenditure plans for next year and announce sale of non-core assets in order to reduce costs and improve efficiency. However, any gains due to these are certain to be negated due to the latest charges as far as earnings are concerned. [2]

What Is The Reason For A Writedown In The Nickel Business?

Vale will take a $2.85 billion pretax writedown on its Brazilian nickel project Onca Puma. The problems in its nickel business have been festering for some time.

As reported in its third quarter earnings results, lackluster performance of the nickel segment has been one of the largest drags on profit. Vale has been trying to diversify away from iron ore and hopes that nickel would reduce its dependence on iron ore. However, it has had little to show for its $10 billion investment in the business so far. In the last few months, Vale’s nickel mines in Canada have suffered shutdowns. Its Goro nickel-and-cobalt mine on the French Pacific island of New Caledonia, and Onca Puma, in Brazil’s Amazon, are producing far below expected levels because of processing problems. The Goro mine, which was supposed to produce 60,000 tonnes of nickel a year, failed to produce any nickel or cobalt in the third quarter. [3]

Finally, operations stopped at Onco Puma and prices for nickel declined. The writedown on account of the nickel business was therefore inevitable.

Why An Impairment In The Aluminum Business?

In addition to nickel, Vale also said that it will recognize a $1.3 billion pretax impairment on its 22% stake in Oslo-based Norsk Hydro, an aluminum producer. The company blamed the impairment on downward volatility in aluminum prices and macroeconomic uncertainties in the European economy. The rating agency Moody’s cited more or less the same reasons when last week it placed Alcoa‘s (NYSE:AA) rating on review for a potential downgrade. ((Alcoa May Be Cut to Junk by Moody’s on Lower Aluminum, Bloomberg))

We think that aluminum prices are probably being driven not by fundamentals but investor sentiment and macroeconomic factors such as the Euro zone crisis, worries over mounting U.S. debt and the hotly debated fiscal cliff situation, and the slowdown in China.

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