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Vale profit expected to rise 7.5 per cent: poll

Workers walk past an iron ore storage site at Yingkou Port, one of China's biggest ports for the import of the commodity.


Profit at Brazilian mining giant Vale SA probably rose 7.5 per cent in the third quarter from a year earlier as a jump in iron ore prices lifted revenue.

Vale, the world's largest iron ore miner, probably earned $6.49-billion (U.S.) in the third quarter, compared with $6.04-billion in the same period of last year, according to the median estimate of nine analysts in a Reuters poll.

Profit likely rose a meagre 0.6 per cent from the previous quarter, the slowest sequential gain in at least a year, the poll found. Sales volumes lost traction and prices receded from near-record levels in the second quarter, analysts said.

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Results are expected to be released after the market close on Wednesday.

Third-quarter performance will be key to assessing whether Vale is prepared to withstand a slowdown in China, its biggest customer, and counter a decline in iron ore prices that began in late August. A recent tumble in Brazil's currency, the real, could also spark sizable one-off gains in operational profit and boost dollar-denominated debt, the poll found.

Vale chief executive officer Murilo Ferreira will probably reassure investors of his focus on execution and cost controls to weather adverse global economic conditions and stave off fears that output goals could be revised down.

"Market sentiment has been suggesting China may be slowing down, and with Vale's exposure to both China and a heavy dependence on the price of iron ore, any malcontent production guidance could weigh heavy on Vale's share price," Jordi Dominguez, an analyst with Société Générale in New York, wrote in a report.

Spot prices for iron ore have dropped 27 per cent since August to $131.70 a tonne as tighter margins for Chinese steel makers have contributed to a slackening in demand.

Marcos Assumpcao, an analyst with Itau BBA, also added that investors will focus on Vale's investment execution during the quarter, which has been below target this year, and management comments about future iron ore price trends.

"The most important thing will be to hear the company's view about what's going on in the iron ore market for the fourth quarter," he said.

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Analysts said that earnings before interest, taxes, depreciation and amortization, a key gauge of cash generation known as EBITDA, probably rose 17.7 per cent from the year earlier to reach a record $10.38-billion.

EBITDA likely posted a 14.4-per-cent increase from the second quarter, as a stronger dollar weighed on real-denominated wage and operation costs in Brazil, some analysts noted.

The 10-per-cent tumble in the real in the quarter ended Sept. 30 could lift not only the value of Vale's debt but also revenue and EBITDA. Analysts will be looking for clues on where EBITDA is headed after rising at double-digit rates almost every quarter over the past two years.

The iron selloff has left Vale and other global miners offering steel mills in China lower prices for the fourth quarter than they would have paid under their quarterly contracts.

The situation suggests iron ore pricing may go through another round of changes less than two years after miners created the quarterly pricing system to replace the aging benchmark system based on annual negotiations.

Many analysts expect the industry to move toward monthly pricing, which proponents say would create greater transparency and boost liquidity. Vale last week reiterated its support to the quarterly pricing system.

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Signs of a slowdown in the steel market have become increasingly evident. South Korea's Posco, the world's third-biggest steel maker, this month cut its 2011 investment plan and offered a grim outlook, while Chinese crude steel production in September fell to its lowest point in seven months.

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