Vale mulls hedge tactic – by Reuters and Star Staff (Sudbury Star – August 9, 2013)

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

As they continue to work on making their nickel operations more efficient, Vale officials say they may adopt hedge-accounting rules to smooth out the impact of currency fluctuations like those that slammed the company’s second-quarter earnings. Chief Executive Murilo Ferreira made the comments Thursday as the company discussed its second quarter results with analysts and reporters.

Under hedge accounting, companies set aside some dollar-denominated export proceeds to compensate for the impact of exchange-rate moves on the local-currency value of debt, spreading currency gains and losses over several years. The practice is allowed under the International Financial Reporting Standards of the IFRS Foundation, the accounting rule-book used by Vale.

As Brazil’s real currency has weakened, companies have seen the local currency value of dollar debts soar and the cost of servicing the debt rise. Staterun oil company Petroleo Brasileiro SA, Brazil’s largest company by revenue, last month said it had begun to use hedge accounting in May.

“We had a strong financial performance in a challenging environment,” Ferreira said in a conference call with analysts and journalists. “The financial impact of forex does not reflect our true operations.”

On Wednesday, Vale said second-quarter profit plunged 84% due to a $2.78-billion charge related to foreign exchange losses on currency derivatives and debt.

Still, Vale shares rose on Thursday, a sign that many investors consider its efforts to control costs in a tight world-commodities market more important than a weak bottom line caused by non-cash financial losses.

Vale’s preferred shares, the company’s most-traded class of stock, rose 2.89% in Sao Paulo midday trading on Thursday. Common shares rose 3.84%. The preferred shares are at their highest levels since early June, the common shares their highest since mid-May.

Without the extraordinary charges, Vale said underlying profit was $3.29 billion. Hedge accounting would approximate that result, Vale said, allowing investors to judge it on its mining operations rather than often unavoidable and temporary swings in the value of assets and liabilities caused by the exchange rate.

Vale said the declines in the real against the dollar that led to the financial charges on derivatives and debt will likely help it in the third quarter as a stronger dollar will make buying Brazilian goods and services cheaper.

Nearly all of Vale’s revenue is in the U.S. dollar and most of its expenses are in Brazilian reais.

Vale also said Thursday it is moving ahead with plans to focus more on its core iron ore business and improve the return from money-losing nickel and copper mines.

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