Vale Financials Disappoint; Iron Ore Prices, Currency Cited

Brazil's Vale posted a surprise loss of $1.44 billion on Thursday, hurt by a fall in the price of iron ore, higher production costs and a weakening Brazilian currency.

Analysts said the results were disappointing and suggested Vale might find it harder than expected to fund expansion projects over the next two years and its dividend could be cut.

The performance will be taken as an ominous sign by some as Vale competes with Australian rivals Rio Tinto and BHP Billiton to increase production and cut costs in the face of an iron ore price near five-year-lows.

The world's largest producer of iron ore mined a record amount of the steel-making ingredient during the quarter, but Vale's slight rise in production was not enough to offset the plunge in price. The rise was also below rivals Rio and BHP who have successfully increased production and cut costs in recent years.

Iron ore cash costs were also higher than analysts had expected, while Vale said the weakening Brazilian real wiped nearly $2 billion off its earnings by increasing the cost of dollar-denominated debt.

The quarterly loss contrasted with a net profit of $3.5 billion in the same period last year. A Reuters poll of seven analysts had forecast net profit of $956 million.

The spot price of iron ore <.IO62-CNI=SI> has fallen more than 40 percent this year as vast new production from Australia coincided with slower growth in China. In the third quarter alone, prices fell 18 percent.

The extent of the price drop has taken miners by surprise. As recently as April, Vale's iron ore chief Jose Carlos Martins said the price would recover in the "coming months" from $105 per tonne at the time.

Instead it kept falling and is now $78.60/tonne. Analysts and executives increasingly accept lower prices are here to stay. The impact on Vale is massive, with iron ore usually accounting for about 85 percent of the company's profits.

The miner reported earnings before interest, taxes, depreciation and amortization, or EBITDA, of $3 billion on net revenue of $9.1 billion.

"We believe a dividend cut in 2015 looks increasingly likely, with costs and capex unlikely to be cut sufficiently to offset the impact of lower iron ore prices," analysts at Barclays wrote in a note.

The Brazilian real fell 11.3 percent against the dollar during the quarter and was on average 11 percent lower than a year earlier. It was, however, only 2 percent weaker on average than the previous quarter when Vale made a $1.4 billion net profit.

A protest on the railway tracks connecting its Amazonian Carajas mine to the coast also hit shipments.

Alex Hacking, analyst at Citi, said in a note: "Vale's funding challenge in 2015-16 may be steeper than expected."

By Stephen Eisenhammer