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UPDATE 3-Brazil's Vale second-quarter profit falls 34 pct; shares drop

Published 28/07/2016, 11:49 pm
UPDATE 3-Brazil's Vale second-quarter profit falls 34 pct; shares drop
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(Adds explanation of EBITDA and share action)

By Jeb Blount

RIO DE JANEIRO, July 28 (Reuters) - Brazilian mining company Vale SA VALE5.SA VALE.N said on Thursday that second-quarter net income fell 34 percent as provisions for potential losses from the burst dam at its Samarco subsidiary and higher taxes undermined productivity gains.

Vale, the world's largest iron ore producer, reported net income of $1.11 billion in the quarter, beating analysts' estimates but down from $1.68 billion a year earlier.

The average estimate of 10 analysts surveyed by Reuters was for net income of $1.03 billion in the quarter. sales which is minus taxes also fell 5 percent to $6.63 billion as the average cost of iron ore for delivery at the Chinese port of Tianjin .IO62-CNI=SI dropped 5 percent in the second quarter from a year earlier, according to Thomson Reuters.

Preferred shares fell as much as 2.5 percent and were last off 1.1 percent to 14.92 reais.

Vale managed to cut operating costs, helping to boost profit from mining and other operations by 29 percent to $1.27 billion.

It also reduced net debt, or total debt minus cash and marketable securities, from the first quarter, and moved closer to completing a giant new iron ore mine in Brazil's Amazon (NASDAQ:AMZN) that promises to reduce its falling costs even further, the company said.

"Vale is confident that improved competitiveness, the delivery of investment plans and reduction of debt will continue providing more value for shareholders," Chief Financial Officer Luciano Siani said in a taped message on the Vale website.

Net debt fell nearly 1 percent to $27.5 billion, and Vale said the cost of delivering iron ore to China dropped to $30.30 a tonne when capital costs are included and $28.50 a tonne when capital costs are stripped out.

Improved operations helped lift adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, by 8 percent to $2.38 billion. Adjusted EBITDA does not include non-recurring costs and gains or losses from the sale of assets.

Adjusted EBITDA includes dividends from related companies or one-time charges. EBITDA measures a company's ability to generate cash from operations and to pay debt and finance investment.

Improved operational results were undermined by the provision of $1.04 billion against potential losses from the deadly tailings-dam burst at Samarco Mineração SA SAMNE.UL in November. Samarco is a 50-50 joint venture with Australia's BHP Billiton (LON:BLT) Ltd BHP.AX .

Profit was also reduced by higher social and income taxes.

Vale said it has completed 90 percent of the mine and iron ore processing facilities at the giant SD11 mine, also known as Serra Sul, at its Carajas complex in Brazil's Amazon and 92 percent of rail connections to its main line. Operations will start by the end of the year, Siani said.

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