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Weak Brazilian currency squeezes Vale earnings

Nickel ore is separated from other elements at PT Vale Indonesia's nickel processing plant in Sorowako of Indonesia's South Sulawesi Province. The country's new mining law is aimed at generating more funds for government from the mining sector.

Yusuf Ahmad/Reuters/Yusuf Ahmad/Reuters

Profit at Brazil's Vale hit its lowest level in more than two years in the second quarter as a weakening Brazilian currency and a slowing Chinese economy offset a recovery in shipments of iron ore.

Vale, the world's largest iron ore producer, earned $2.66-billion (U.S.) in the quarter, down 58.7 per cent from $6.45-billion in the year-earlier period, according to a securities filing on Wednesday. Profit slumped 30.4 per cent from the first quarter.

The result came in below the average $2.998-billion estimate of 10 analysts in a Reuters poll. Profit fell to its lowest since the first quarter of 2010, when it hit $1.61-billion.

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An 11-per-cent drop in the Brazilian real helped boost Vale's debt-servicing costs and charges related to fluctuations in currency and derivatives prices, but failed to generate significant revenue gains or cost savings. A tumble in taxes helped limit the impact of such losses, the filing added.

An account measuring the impact of currency and monetary fluctuations on Vale's balance sheet reached $1.693-billion, the highest level for the item since the third quarter of last year, reflecting a jump in the cost of interest-rate and currency derivatives contracts, the filing showed.

Revenue rose 7.2 per cent to $12.15-billion from the first quarter, when heavy rains dampened production and shipments. The result missed analysts' estimates of $12.596-billion in sales.

Earnings before interest, tax, depreciation, amortization and other items, a measure of operational profitability known as adjusted EBITDA, came in at $5.119-billion, below an estimate of $6.265-billion in the poll.

Investors tend to follow Vale's quarterly data more closely than year-on-year numbers because the former helps them visualize operational and sales performance trends.

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