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Vale (VALE) Q2 Earnings Beat, Rise Y/Y on High Iron Prices

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Vale S.A. (VALE - Free Report) reported second-quarter 2021 adjusted earnings per share of $1.59, which surpassed the Zacks Consensus Estimate of $1.48. The bottom line improved massively from 22 cents reported in the prior-year quarter. This can primarily be attributed to strong performance of the Ferrous Minerals business, aided by higher volumes and iron ore prices.

Revenues

Net operating revenues improved 122% year over year to around $16.7 billion but missed the Zacks Consensus Estimate of $16.8 billion. Net operating revenues from Ferrous Minerals soared 143% year over year to $14.3 billion. Base Metals’ net operating revenues climbed 54% to $2.2 billion. The Coal segment’s revenues surged 71% year on year to $161 million.
 
Iron ore prices were on an uptrend through the reported quarter and breached $200 per ton mark aided by a constrained iron ore supply and strong demand in China. Coal prices were higher owing to tightening supply of spot cargoes from Australia. Nickel and copper prices were also higher compared to the prior-year quarter. While sales volumes for iron ore, nickel and metallurgical coal were higher than year-ago levels, volumes for thermal coal and copper declined.

VALE S.A. Price, Consensus and EPS Surprise VALE S.A. Price, Consensus and EPS Surprise

VALE S.A. price-consensus-eps-surprise-chart | VALE S.A. Quote

Operating Performance

In second-quarter 2021, cost of goods sold totaled $5.8 bllion, up 38% year over year. Gross profit soared 229% year over year to $10.9 billion. Gross margin was 65.2%, up from 44% in the prior-year quarter.

Selling, general and administrative expenditure rose 7% year over year to $133 million. Research and evaluation expenses increased 57% to $141 million compared with year-ago quarter.

Adjusted operating income was $10.2 billion in the reported quarter, reflecting an impressive upsurge of 297% from the prior-year quarter. Adjusted EBITDA was $11 billion in the reported quarter compared with $3.4 billion in the prior-year quarter.

Pro-forma adjusted EBITDA (excluding expenses related to Brumadinho and COVID-19) advanced 213% year over year to $11.2 billion. It marked a record for the second quarter, driven by higher iron ore and pellets realized prices and sales volumes. This was partially offset by certain costs and expenses that are linked to the iron ore price, such as purchases from third-parties and royalties, elevated freight costs and higher maintenance and services costs.

Ferrous Minerals’ EBITDA soared 205% year over year to $10.7 billion on higher iron prices. Base Metals EBITDA improved 42% to $866 million from the last-year quarter. Coal EBITDA was a negative $164 million compared with a negative $269 million in second-quarter 2020.

Balance Sheet & Cash Flow

Vale exited the second quarter of 2021 with cash and cash equivalents of $13.6 billion compared with $12 billion at the end of the last-year quarter. Gross debt at the quarter-end was $12.1 billion compared with $16.9 billion at the end of the last-year quarter. In the reported quarter, net cash generated from operating activities totaled $7.7 billion compared with $1.3 billion in the prior-year quarter.

Trims 2021 Production Capacity Guidance

Vale trimmed its guidance for year-end iron ore production capacity to 343 million tons (MT) per annum from the earlier stated target of 350 Mt. The company cited licensing issues at its Sistema Norte and Mutuca assets in Brazil, as well as temporary restrictions on the disposal of mining waste at its Itabira mine for the guidance cut. Executives also warned about an ongoing strike at its operations in Sudbury, Canada, that might impact third-quarter production. Despite the setbacks, the company remains confident regarding reaching its annual production guidance of 315-335 MT of iron ore set for 2021.

Outlook

Per the company, even though iron ore volumes are likely to pick up in the second half of the year, production cuts due to environmental restrictions in China are likely to weigh on demand. However, apart from China, the steel sector has been improving at a rapid pace with all major markets resuming pre-pandemic levels. This will continue to support iron ore demand. The resurgence of COVID-19 cases due to the Delta variant remains a concern.

Improvement in global steel production should benefit seaborne coking coal demand. Supply from Australia should improve by the end of the ongoing quarter as some suspended mines resume production and maintenance programs are completed. It remains uncertain as to how long Australian coal will be restricted in China and remains the key factor that will impact prices. Prices for thermal coal market will be supported in the third quarter by demand and supply imbalance. Forecast of a hotter-than-normal summer in North East Asia, recovering industrial activity and high gas prices should keep thermal coal demand solid. China may again ease import quota restrictions, which would generally help sustain seaborne prices.

For nickel, the company anticipates a small surplus in 2021. Growth in stainless steel production and a shift toward the electrification of the world economies will continue to support demand for the metal. Copper market is expected to show a deficit this year and prices are expected ride on robust demand and persisting supply issues.

Price Performance

In the past year, shares of Vale have gained 96.5%, compared with the industry’s rally of 91.1%.

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Zacks Rank & Other Stocks to Consider

Vale currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some other top-ranked stocks in the basic materials space are Nucor Corporation (NUE - Free Report) , Cabot Corporation (CBT - Free Report) and Dow Inc. (DOW - Free Report) . All of these stocks flaunt a Zacks Rank #1.

Nucor has a projected earnings growth rate of around 455.4% for the current year. The company’s shares have soared 147% in a year.

Cabot has an expected earnings growth rate of around 137.5% for the current fiscal. The company’s shares have surged 51% in the past year.

Dow has an expected earnings growth rate of around 403% for the current year. The company’s shares have gained 52% in the past year.


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