Earnings Preview: Vale SA (VALE)

Brazilian miner, Vale S.A. (VALE) is slated to report its second-quarter 2010 results on Wednesday, July 28, 2010, ahead of the opening bell. The company has not released any financial forecast for the quarter or the fiscal year 2010.

The Zacks Consensus Estimate on the company’s earnings is currently pegged at 80 cents per share, more than five times the EPADR of 15 cents reported in the year-ago quarter and more than double of the EPADR of 30 cents in the previous quarter. The Zacks Consensus Sales Estimate of $11,275 million, almost doubled from the second quarter of fiscal 2009 and the previous quarter.

First Quarter Highlights

Vale reported in-line results for the first quarter of fiscal 2010 with an EPADR of 30 cents compared to 26 cents in the year-ago quarter. However, it missed the Zacks Consensus Estimate of 33 cents. Net earnings reached $1,604 million, up 17.7% from $1,363 million in the corresponding quarter of 2009 based on the increase in net operating revenues.

Net operating revenues grew 26.3% year-over-year to $6,848 million from $5,421 million in the first quarter of 2009, primarily driven by higher sales prices based on the global economic recovery.

Production of iron ore, responsible for 54.7% of the total revenues in the quarter amounted to 57.88 metric tons, down 0.5% from the previous quarter but up 13.9% from the first quarter of 2009.

Agreement of Analysts

Just one week before the earnings release only 1 of 10 analysts covering the ADR, has reduced expectation for the immediate quarter. Further, for the fiscal 2010, 1 of 16 analysts reduced his earnings estimate. The negative revision in the estimate was due to the instability in the Chinese market, the largest iron-ore importer, based on price concerns attributable to the new iron-ore pricing system.

Magnitude of Estimate Revisions

For fiscal 2010, estimates went down by a penny to $3.20 from $3.21. However, for the second quarter, insignificant revisions led to estimates remaining unchanged.

With respect to earnings surprises, Vale had a negative track record in the preceding four quarters. The operator produced an average negative earnings surprise of 20.51% over the last four quarters, meaning that Vale has missed the Zacks Consensus Estimate by that measure.

Our Recommendation

We are concerned about the instability in the Chinese market based on price concerns emanating from the new iron-ore pricing system. However, the new system will secure the shareholder’s sentiments and will help tackle the daily volatility in the spot prices of iron ore to a greater extent. Further, we expect a recovery in the global steel demand in 2010 and beyond. The 22% stake in Norsk Hydro will be accretive to earnings based on its access to cheap power, a major cost in aluminum production.

The in-house consumption of iron-ore is the icing on the cake. However, a strong exposure to international markets puts it at a disadvantage in terms of exchange rate fluctuations. Thus, we reiterate our long-term Neutral recommendation and a short-term Zacks #3 Rank (Hold) rating on the company.

VALE RIO DO-ADR (VALE): Free Stock Analysis Report
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