The Rising Influence of Rising Affluence

[DewDiligence]

VALE Posts Record 1Q11 Results

[1Q11 net profit (excluding a non-recurring after-tax gain of $1.2B) was a record $5.6B, despite the fact that the first calendar quarter is seasonally slow due to rain in Brazil’s mining regions. 1Q11 EPS according was $1.29 according to US GAAP and was $1.06 after excluding the non-recurring gain. The P/E based on annualizing this $1.06 figure is a shockingly low 7.3x.

1Q11 shipments of raw iron ore were 71.5M tonnes, +4% YoY (but down 11% from the seasonally stronger 4Q10). 1Q11 shipments of iron-ore pellets—the product preferred by Asian steelmakers and VALE’s most profitable item—was a record 12.5M tones, +19% YoY. 1Q11 average prices of iron ore and pellets soared to about double the levels seen in 1Q10, and VALE thinks the good times will persist for several years at least.

Why is management so confident? The answer, of course, is The Global Demographic Tailwind. Despite all the talk about an impending slowdown of growth in China, Chinese steelmakers continue to order more iron ore at higher and higher prices, which turns VALE into a cash-generation machine. VALE’s 1Q11 revenue by country was: China 30%, Brazil 19%, Europe 19%, Japan 11%, Asia ex-China/Japan 9%, and all others 11%. (The US accounted for only 3.5%.)

If it were not for the political meddling by the federal government of Brazil (#msg-61715133, #msg-62562611), VALE might be my largest stockholding.]

http://online.wsj.com/article/SB10001424052748703992704576305802284404540.html

›MAY 6, 2011
By DIANA KINCH

RIO DE JANEIRO—Brazilian mining giant Vale SA said its net profit more than quadrupled in the first quarter to $6.826 billion, a new quarterly record for the company as it boosted output in response to higher-than-expected demand for minerals and metals, which pushed up iron ore prices.

The profit was sharply higher than the $1.604 billion reported the same period a year ago, Vale said in a statement Thursday. The result beat analysts' estimates and exceeded Vale's previous quarterly record net profit of $6 billion in the third quarter of 2010, also attributed to higher prices for iron ore, Vale's main product.

Vale said its result was spurred by a "robust increase" in global industrial production levels during the quarter at a rate of nearly 9% annually, which led to higher-than-expected demand for metals and minerals two years after the end of the 2008-09 recession.

"The recovery is broadening, both in terms of sectors and geographically, contributing to the sustainability of the expansion cycle," Vale said.

The performance was bolstered by a nonrecurrent capital gain of $1.5 billion for the sale of aluminum assets, the company said. Even discounting the gain, this was its best-ever performance for a first quarter. Vale completed the sale of most of its Brazilian bauxite and aluminum operations to Norsk Hydro ASA during the quarter.

Analysts polled by Dow Jones Newswires had forecast a net profit of $5.43 billion. Profit typically falls in the first quarter as the rainy season in Brazil inhibits product shipments. Despite weather conditions, Vale said it raised its iron ore production to 71.5 million metric tons in the quarter, 3.7% over the year-ago period.

Higher output of iron ore and other metals contributed to net revenue of $13.213 billion, a record for a first quarter and more than double the year-earlier revenue of $6.604 billion, it said. Prices for iron ore more than doubled over the past year after miners successfully introduced a new quarterly price contract system. Iron ore accounted for 69% of revenue in the quarter, it said.

Demand from China, Vale's biggest customer for the steelmaking ingredient, remained strong. Total imports[from all suppliers] of iron ore by China rose to 177.3 million tons in the quarter, up 10% from the year-earlier period. Vale sold 28.16 million tons of ore to China in the quarter, representing 41.4% of its total iron ore sales these numbers exclude pellets] and contributing 29.7% to its overall revenues.

Vale's iron ore sales price averaged $126.19 a ton in the quarter, double the $64.76 of a year earlier and higher than the $121.34 average of the fourth quarter, it said. [Moreover, the average price of iron-ore *pellets* in 1Q11 reached $181/tonne, up from $179.53 in 4Q10 and $99 in 1Q10.]

Vale said its operating performance improved not only in iron ore but also in all its other products, including pellets, manganese, ferroalloys, coal, nickel, copper and cobalt amid favorable demand.

The company's nickel and copper sales improved after the end of a year-long strike at some of its Canadian operations that hurt output during 2010. Overall, base metals sales grew to $2.749 billion in the first quarter from $1.526 billion in the year-ago period, and accounting for 20.3% of revenue, it said.

Vale said it made gains of $239 million during the quarter with derivatives operations and $221 million with currency and interest rate swaps designed to protect it from exchange rate volatility. However, it lost $5 million on nickel derivatives, it said.

In the first quarter, Vale invested $2.743 billion, mainly on developing its own pipeline of projects designed to boost capacity in all major product areas over the coming years. The board approved three major new projects during the quarter: the 6-million-ton-a-year Serra Leste iron ore mine in Carajas, representing an investment of $455 million; the $1.188 billion Conceicao Itabiritos iron ore processing plant in Minas Gerais state; and the $5.915 billion Rio Colorado potash mine project in Argentina, it said.

While markets for iron ore remain heated—and prices for metals and fertilizer continue firm and will contribute more positively to Vale's results in the future—global growth continues to face turbulences and risks, including from rising incidences of natural disaster, Vale warned.‹