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Vale (VALE) Tops Q2 Earnings Amid Challenging Price Scenario

Mining giant, Vale S.A.’s VALE second-quarter 2017 adjusted earnings of 18 cents per share surpassed the Zacks Consensus Estimate by a penny. The bottom line also came in higher than the year-ago tally of 14 cents per share.

Share price of the stock was up nearly 2.8% on Jul 28, reflecting investors’ optimistic sentiments toward the better-than-expected quarterly earnings performance.

Inside the Headlines

Net operating revenue increased 17.4% year over year to $7,235 million.

Of the total net operating revenue, sales of ferrous minerals accounted for 70.7%, coal contributed 6.6%, base metals comprised 20.9%, and the remaining 1.8% was sourced miscellaneously.

Geographically, 12.6% of revenues were generated from South America, 56.2% from Asia, 7.3% from North America, 18.4% from Europe, 2.9% from the Middle East and 2.6% from Rest of the World.

However, quarterly revenues dipped 15% on a sequential basis, due to dismal pricing conditions experienced by the company’s Base Metals and Ferrous Minerals businesses. Notably, quarterly bottom-line performance plummeted 56.1% on a sequential basis.

VALE S.A. Price, Consensus and EPS Surprise

 

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

Expenses

In the second quarter, cost of goods sold totaled $5,102 million, up 18.3% year over year. The upside was stemmed by elevated freight costs in pellets and iron ore fines, higher material and services costs, and greater leasing expenses from the pelletizing facilities. Gross profit margin came in at 29.5%, contracting 50 basis points (bps) year over year.

Selling, general and administrative expenditure increased 3.9% to $132 million, while research and development expenses went up 11.1% to $805 million, both on a year-over-year basis.

Balance Sheet/Cash Flow

Vale exited the second quarter with cash and cash equivalents of $5,720 million compared with $4,168 million in the prior-year period. Non-current liabilities came in at $1,089 million, up from $80 million recorded in the prior year.

In the reported quarter, net cash provided from operating activities came in at $3,443 million, as against $2,069 million recorded in the year-ago quarter. Capital spending summed $890 million, as against $1,164 million in second-quarter 2016.

Outlook

Vale anticipates to improve its financial fundamentals on the back of specialized cost-saving plans, productivity enhancement schemes, growth projects and superior mining yield. Moreover, the company is aimed at stabilizing its absolute debt level in the coming quarters through efficient disinvestment programs and suitable capital-deployment strategies. However, on the other hand, we believe that further decline in iron-ore prices might hurt the company’s bottom-line performance in the near term.

Our Take

Declining iron ore prices have been hurting the revenues and profits of mining companies like Vale, BHP Billiton Limited BHP, Rio Tinto plc RIO and Cliffs Natural Resources Inc. CLF.

Over the last three months, prices of this major steel making component have dipped nearly 3.13% to $63.61 per ton as of Jul 28, 2017. An excess supply situation in the market is currently weighing over the prices of iron ore. Further downside in price level would continue to dent Vale's near-term results.

Vale currently carries a Zacks Rank #4 (Sell).

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

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Cliffs Natural Resources Inc. (CLF): Free Stock Analysis Report
 
VALE S.A. (VALE): Free Stock Analysis Report
 
BHP Billiton Limited (BHP): Free Stock Analysis Report
 
Rio Tinto PLC (RIO): Free Stock Analysis Report
 
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