Vale SA (ADR) (VALE 1.31%) posted more red ink in the first quarter of 2015, with a loss of $0.13, a penny worse than the consensus estimate. Revenue also missed, coming in at about $6.4 billion against the expectation of $7.4 billion, and the shares fell on the news. While this wasn't the greatest quarter financially, it hasn't changed Vale's direction on the operations front.
More red
The first-quarter loss makes three in a row for the giant South American miner. It's far from alone in these struggles, however, thanks to weak commodity prices. Unfortunately for Vale, it's getting hit on all fronts.
For example, iron ore, which accounted for roughly 62% of the company's top line in the quarter, saw prices fall 16% between the end of December and the end of March. The numbers were even worse compared to the year-ago period, with the price of some iron products falling nearly 50%. Weakening demand for steel from China was a big part of the issue.
| First-Quarter Iron Ore and Pellet Sales by Region | |
| China | 50.1% |
| Europe | 16.3% |
| Rest of Asia | 15.9% |
| Americas | 13.8% |
| Middle East | 3.3% |
| Rest of World | 0.5% |
Source: Vale SA Earnings Release.
While iron ore is the company's core, Vale felt pricing pressure in other areas, too, like its base metals group, which accounted for 27% of the top line. The two big metals here are copper (7% of sales) and nickle (15%). Like iron ore, sales prices for these metals continued to fall through the quarter. The pattern bled over to the smaller operations in this segment as well, with silver, gold, platinum, and cobalt all experiencing similar weakness. Slowing demand from China was also the main culprit here.
The company's fertilizer (8% of sales) and coal (2%) businesses weren't any better. Coal prices were lower for both thermal and metallurgical varieties. Again, Asian weakness was a big part of that. Pricing for fertilizers was generally weak, but the products here are more regional in nature. Low agricultural prices, seasonality, and currency depreciation in Brazil were all issues on the sales price front in this segment. China was a problem, too, but because fertilizer exports from the country added to the supply/demand imbalance.
Out of Vale's control
The thing is, pricing is largely out of Vale's control. The more interesting question is how Vale is dealing with low prices. The answer: by increasing production of its key commodities. For example, the lead paragraph in the company's earnings release boasted of record first-quarter production of iron ore, copper, nickle, and gold. Although that might seem at odds with weak pricing, selling more at lower prices ultimately helps support the top line even if it does nothing to bolster commodity prices.
Increasing production also leverages Vale for a top- and bottom-line rebound once commodity prices start to move higher again. Low prices shaking out marginal competitors with higher operating costs will likely be a key catalyst. So low prices are bad, but over the longer term they will help to clear the market.
Vale Rio de Janeiro, one of the largest bulk carriers in the world. Source: Robert Smith, via Wikimedia Commons.
Like its competitors, Vale is also working to reduce costs to help preserve margins. On that front it's doing reasonably well. For example, Vale reduced its cost of goods sold by 7.5% year over year. Sales, general, and administrative expenses and research and development costs also fell, by 36% and 49%, respectively. So Vale is working hard to keep itself lean and mean while, at the same time, increasing production. This is what good miners do in bad times. When commodity prices do move higher again, it should be well positioned to benefit.
Surviving the gale
Vale is suffering under the same pricing constraints as its competitors, but like other industry leaders it is cutting costs where it can and moving forward on production in key businesses. It has also managed to cut debt by nearly $2 billion year over year -- another good thing since it's losing money. The quarter was weak, there's no getting around that fact. However, there are still positive things going on at Vale that should set it up for a rebound when supply and demand come into balance in the commodity markets.
