UPDATE 2-Vale profit dives on FX charge; cost-cutting continues – by Jeb Blount (Reuters U.S. – August 7, 2013)

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RIO DE JANEIRO, Aug 7 (Reuters) – Brazilian miner Vale SA said on Wednesday its second-quarter profit plunged after the company recorded a surprise $2.78 billion in foreign exchange losses on currency derivatives and debt, one of its worst bottom-line results in a decade.

In the three months ending June 30, net income fell 84 percent to $424 million, compared with a profit of $2.6 billion in the year-ago quarter, Vale said in a statement. The result was below market expectations. The average estimate of 18 analysts surveyed by Reuters was for profit to fall 7.63 percent to $2.46 billion.

Vale said the losses resulted from extraordinary, one-time, non-cash, financial charges that do not reflect its improved operational results. The Rio de Janeiro-based company is the world’s largest iron ore producer, No. 2 nickel miner, and a major producer of copper and fertilizers.

While a stronger dollar led to financial losses and lower profit, it also helped Chief Executive Murilo Ferreira to cut $736 million from the cost of salaries, research, equipment, construction and other goods and services.

Nearly all Vale revenue is in dollars, which gained an average 5.61 percent in the quarter against the Brazilian currency, compared with a year earlier. But most of its costs are in reais, helping limit a decline in operating profit to 9.1 percent even as the price of iron ore , its main product, fell 12 percent, and China, its main market, slowed.

“Thus the Brazilian real’s depreciation generates positive effects on our cash-flow, which is the real source of value creation despite the opposite non-cash accounting impact on (bottom-line) profit,” the company said in a statement.

When the non-cash losses are excluded, “underlying” second-quarter profit was $3.29 billion, Vale said.

While most revenue and debt is in dollars, the company’s main accounting currency is the real and a weaker dollar means the local currency value of debt and debt payments will rise, requiring it to take a financial charge, Vale said.

“Profit came in below expectations but it’s non-cash, I don’t think the investor will look at this because the immediate impact doesn’t affect Vale,” said Marcos Assumpção, metals and mining analyst with Banco Itau-BBA in São Paulo.

“In the third quarter, the real’s weakening will help the company a lot on Vale’s operational side,” he added.

Still, while cost-cutting has limited declines in operating results and the bulk of the financial charges have no immediate cash impact, the operating results showed that after a decade of nearly constant growth the world metals and minerals market is getting tougher.

“Thanks to internal efforts to make the company more competitive, Vale has been sustaining its results in a challenging environment with China slowing down and commodities prices falling,” Luciano Siani, Vale’s chief financial officer, said in a taped message that was posted on the company’s website after the results were announced.

Net sales fell 11.5 percent to $11.03 billion from $12.47 billion a year ago, compared with analysts’ average expectation of $11.6 billion.

Earnings before interest, tax, depreciation and amortization (EBITDA) fell 10 percent to $4.96 billion from $5.5 billion a year ago. It was also below the $5.28 billion average EBITDA expectation in the Reuters survey.

Both sales and EBITDA were unaffected by the one-time currency related charges.

Results were tight even as output of some of the company’s least profitable mines, those for nickel and copper, showed some of their best production improvements in recent years.

The output of nickel, used to make steel resistant to rust, rose 6.9 percent to 65,000 tonnes. Copper, a reddish metal used in nearly all electrical and electronic goods, rose 30.3 percent to 91,000 tonnes.

Prices for those products, though, fell. Nickel dropped an average 38 percent and copper 8.2 percent compared with a year ago.

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