Vale’s Terrific Results

Brazil’s largest miner, Vale S.A. (VALE - Analyst Report) reported excellent results of an EPADR of 70 cents for the second quarter of fiscal 2010, a big leap from 15 cents in the year-ago quarter. On a sequential basis, EPADR was also more than double from 30 cents. However, it missed the Zacks Consensus Estimate of 78 cents. Net earnings also increased to $3,705 million from $790 million in the corresponding quarter of 2009 and $1,604 million during the previous quarter. This huge jump was attributable to the new pricing system of iron-ore and pellets.
 
Net operating revenues stretched 45.0% year over year to $9,930 million from $5,084 million in the second quarter of 2009 and $6,848 million in the previous quarter, primarily driven by higher sales prices of iron-ore and pellets based on the new pricing system and also due to the global economic recovery.
 
Vale switched from an annual pricing system to a quarterly one. The quarterly iron ore price is based on a three-month average of price indices for the period ending one month before the onset of the new quarter.
 
During the quarter, the financial performance also includes the Brazilian fertilizer nutrients assets acquired from Bunge Limited (BG - Snapshot Report) including its 42.3% interest in Fertilizantes Fosfatados S.A.  for $3.5 billion.
 
Revenue generated from the sales of ferrous minerals accounted for 73.7% of total revenue, while non-ferrous minerals contributed 19.6%; logistics services 4.1%; coal 1.9% and the rest accounted for 0.7%.
 
Geographically, 48.2% of revenue was generated from Asia, 23.2% from Americas, 24.0% from Europe and 4.6% from the rest of the world.
 
Production of iron ore, responsible for 54.7% of total revenue in the quarter amounted to 75.86 metric tons, up 19.8% from the previous quarter, but up 27.7% from the second quarter of 2009.
 
Gross margin grew to 58.5% from 38.3% in the year-ago quarter and 48.3% in the previous quarter. EBITDA margin grew to 47.9% from 19.7% in the year-ago quarter and 31.2% in the first quarter of 2010. EBITDA more than trebled to $5,577 million from $1,725 million in the second quarter of 2009 and $2,855 million in the previous quarter.
 
Total debt increased to $24.0 billion, with an average maturity of 8.8 years and an average cost of 5.25% per year from $23.6 billion in the previous quarter. Cash and cash equivalents dropped to $6,235 million from $11,136 million in the previous quarter based on various small acquisitions. Thus, net debt reached $17.7 billion from $12.4 billion in the previous quarter.
 
Net cash flow from operating activities increased to US$3,676 million from US$1,406 million in the previous quarter only due to a huge increase in net income compared with the previous quarter.
 
We believe the new pricing system would be beneficial for Vale both in the short and long term. However, we are concerned about the instability in the Chinese market with regard to carbon emissions, which are almost, double that of the U.S. and triple that of Europe .
 
However, we believe that once the inventory in the Chinese market comes to an end, the demand for iron-ore will rebound. China 's steel consumption is expected to increase 6.7% to 579 million tons in 2010. Thus, we maintain our Neutral recommendation on the ADR with a Zacks #3 Rank.

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