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Vale (VALE) Reports Loss in Q1, Revenues Lag on Dam Disaster

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Vale S.A. (VALE - Free Report) reported a loss of $1.6 billion or 32 cents per share in first-quarter 2019 against the Zacks Consensus Estimate of earnings of 49 cents primarily owing to the impact of the Brumadinho dam rupture.  Notably, the company reported a profit $1.6 billion or 31 cents in the prior-year quarter.

The company suffered its first quarterly loss since the third quarter of 2015 as a result of the Brumadinho dam disaster. On Jan 25, a tailings dam at the Corrego do Feijao iron ore mine,  5.6 miles east of Brumadinho, Minas Gerais, Brazil, operated by Vale collapsed and killed around 300 people in Brazil's deadliest mining disaster ever.

Revenues

Net operating revenues declined 4.6% year over year to $8,203 million as several key mines were taken offline in the wake of the disaster. The figure fell short of the Zacks Consensus Estimate of $9,609 million.

VALE S.A. Price, Consensus and EPS Surprise

 

Iron ore production was at 72.9 Mt in the first quarter, down 11% year over year mainly as a result of the Brumadinho dam rupture and stronger than usual weather-related seasonality.

Of the total net operating revenues, sales of ferrous minerals accounted for 77.3%, coal contributed 4.1%, base metals comprised 17.7%, and the remaining 0.9% was sourced miscellaneously.

Geographically, 10.9% of revenues were generated from South America, 58.4% from Asia, 6.8% from North America, 15.8% from Europe, 4.3% from the Middle East, and 3.7% from Rest of the World.

Operating Performance

In the first quarter, cost of goods sold totaled $4,701 million, down 10% year over year. Gross profit rose 3.6% year over year to $3,502 million. Gross margin came in at 42.7%, expanding 340 bps year over year.

Selling, general and administrative expenditure decreased 11% to $110 million, while research and development expenses rose 3% to $71 million, both on a year-over-year basis.

Adjusted operating loss was $1,685 million in the reported quarter against the prior-year quarter’s operating profit of $2,965 million. Adjusted EBITDA was a loss of $652 million compared with $3,926 million in the first quarter of 2019. This was the first negative EBITDA in Vale’s history owing to the Brumadinho dam rupture.

The financial impact of the Brumadinho dam rupture on first-quarter EBITDA was $4.954 billion which included $1,855 million for decommissioning of upstream dams and $2,423 million for provisions for the compensation/remediation programs. It also included direct expenses incurred by the company ($104 million), lost volumes ($290 million) and stoppage expenses ($160 million). Further, EBITDA was impacted by lower iron ore and pellets sales volume owing to seasonal factors, production stoppages following the Brumadinho dam rupture, new inventory management procedures at Chinese ports, which impacted the timing of sales revenue recognition, and abnormal rains impacting shipments from the Ponta da Madeira port in the Northern System.

Balance Sheet & Cash Flow

Vale exited the first quarter of 2019 with cash and cash equivalents of $5,008 million compared with $5,784 million at 2018-end. Net debt at first-quarter 2019 end stood at $12,031 million, up from $9,350 million at the end of 2018 as a result of frozen funds in the amount of $3.490 billion, which was set apart from available cash position. Moreover, addition of new credit lines led to the increase.

In the first quarter of 2019, net cash generated from operating activities totaled $3,076 million compared with $2,943 million recorded in the prior-year quarter. Capital spending summed $611 million in the reported quarter compared with $890 million in the first quarter of 2018.

Price Performance

In a year’s time, shares of Vale have fell 15.1% compared with the industry’s decline of 13.7%.

Zacks Rank & Stocks to Consider

Vale currently sports a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Basic Materials space are Israel Chemicals Ltd. (ICL - Free Report) , Arconic Inc. and Arch Coal Inc. (ARCH - Free Report) , each carrying a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Israel Chemicals has an expected earnings growth rate of 13.51% for 2019. The company’s shares have gained 19% in the past year.

Arconic has an estimated earnings growth rate of 3.5% for the current year. The company’s shares have appreciated 22% in a year’s time.

Arch Coal has a projected earnings growth rate of 5.49% for 2019. Its shares have rallied 25% over the past time.

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