Vale positive despite $2 billion loss on weak currency
Brazilian mining giant Vale SA on Oct. 22 reported a net loss of $2.117 billion in the third quarter ended Sept. 30, 2015, due largely to weak iron ore prices and sharp declines in nickel and copper prices to multi-year lows and a steep depreciation of the Brazilian real against the U.S. dollar. This compares to a net loss of $1.437 billion in the same period in 2014.
Vale CFO Luciano Siani Pires said the group’s debt, which is mostly denominated in U.S. dollars, when translated into Brazilian reals sharply increased in the reporting period and negatively impacted Vale’s result. He said the group’s total debt in dollars actually decreased over the reporting period. Gross operating revenue over the same period fell 28 percent, to $6.618 billion from $9.249 billion, while cash generation measured by adjusted EBITDA declined 38 percent, to $1.875 billion from $3.004 billion.
Gross revenue from fertilizer sales in the third quarter totalled $747 million, unchanged from the same prior year quarter. Operational margin – measured by adjusted EBIT – for the fertilizer business, which was a negative 2.7 percent in third-quarter 2014, grew to 14 percent in the current period under review, but contracted from the 15.1 percent margin recorded in the second quarter of 2015.
Cash generation, as measured by adjusted EBITDA, for the fertilizer business reached $197 million in the third quarter, more than double the $96 million posted a year earlier. Fertilizer costs, net of depreciation, totalled $444 million in the third quarter, decreasing $110 million from $554 million for the same prior-year period.
When compared to the year-ago quarter, revenue from sales of phosphates was 5 percent higher at $588 million, up from $560 million, while revenue from potash sales was unchanged at $47 million. Revenue from sales of nitrogen fertilizers was 16 percent lower at $92 million from $109 million a year ago, and revenue from sales of other related products fell to $20 million from $31 million.
Sales volumes increased for most fertilizer products in the third quarter from the year-ago quarter. But DCP and “other” phosphates fell 3 percent, to 118,000 mt, and 20 percent, to 74,000 mt, respectively.
Potash sales reached 155,000 mt (up 17 percent from third-quarter 2014). Sales of phosphates amounted to SSP 740,000 mt (up 8 percent); MAP 348,000 mt (up 21 percent); TSP 317,000 mt (up 29 percent); and phosphate rock 769,000 mt (up 6 percent). Urea sales totalled 185,000 mt, against 180,000 mt a year ago.
Capital expenditure in the fertilizer business in the third quarter totalled $55 million, accounting for 2.9 percent of Vale’s total capex during the period. This was 41 percent lower than the $93 million spent in third-quarter 2014. Total group-wide capex was cut 41 percent, to $1.879 million. Vale spent $11 million on fertilizer projects in the quarter under review, down from $14 million a year earlier.
Acknowledging the continuing unbalanced fertilizer market, driven largely by lower consumption in Brazil and India, which was not offset by supply outages and voluntary production cuts, Vale believes fertilizer prices will remain under pressure in the short term. However, looking forward, the mining group says fertilizer prices could be "positively" impacted by the new VAT taxes imposed in China and the beginning of Brazil’s 2015/16 summer planting season.
In response to an analyst’s question in a conference call as to whether Vale would consider spinning off its fertilizer business, Vale Executive Director of Fertilizers and Coal Roger Downey said: "We are working on building a model that works, and catapults our existing operations into a much more robust, and much more profitable business in the fertilizers industry.
"We are in a sweet spot. Brazil is a fast-growing market. We’re