Vale Rallies as Chinese-Led Iron Ore Demand Boosts Earnings – by Juan Pablo Spinetto (Bloomberg News – February 27, 2014)

Vale SA (VALE), the world’s largest iron-ore producer, rallied the most in three weeks after fourth-quarter earnings before taxes and other items beat estimates on rising prices for the steel-making material.

Vale rose as much as 2.7 percent to 29.81 reais in Sao Paulo today, the most intraday since Feb. 6, before closing at 29.31 reais. The gain pared its loss this year to 10 percent. The benchmark Ibovespa index of Brazilian shares rose 2.2 percent.

The world’s third-largest mining company is increasing cash generation after Asian-led demand pushed up average iron-ore prices 12 percent in the fourth quarter. While iron ore declined this quarter because of rising supplies and monetary constraints in China, it will remain at profitable levels for Vale for a sustained period of time, Executive Director for Ferrous and Strategy Jose Carlos Martins said.

“The price will continue to be very favorable and very profitable for Vale,” Martins told analysts on an earnings conference call today. “There is a very strong resistance in price in the range of local Chinese iron-ore costs.”

Iron-ore traded at an average $134.9 a ton in the fourth quarter, 56 percent higher than a three-year low of $86.7 in Sept. 5, 2012, according to data compiled by The Steel Index Ltd.

This year rising stockpiles in China led the price to drop 12 percent, to $118 a ton today. Still, it’s unlikely to fall bellow $110, Martins said.

Price Outlook

“I don’t see a large possibility for ore prices to fall below $110 in a sustained way,” he said. “This is the scenario we are seeing.”

Vale, based in Rio de Janeiro, said yesterday earnings before interest, taxes, depreciation and amortization, or adjusted Ebitda, rose to $6.64 billion, beating a $5.9 billion average estimate of 17 analysts compiled by Bloomberg.

The rising iron-ore prices helped the miner exceed expectations, Goldman Sachs Group Inc. said. Reduced costs and capital expenditures, or capex, are helping Vale increase cash generation, according to Banco Itau BBA SA.

“The 2013 results prove that management is doing its homework,” Itau BBA analysts led by Marcos Assumpcao wrote in a note to clients. “Cutting costs and capex, and divesting from non-core assets led to improving free cash flow and the maintenance of attractive shareholder returns.”

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