KIROY Kumba Iron Ore Limited (PK)

Mining giant, Vale S.A. (VALE) reported weak financial results for first-quarter 2014. In the quarter, underlying earnings per ADR (American Depositary Receipt) came in at 40 cents (on a fully-diluted basis), down 33.9% year over year and 36.3% sequentially. Earnings missed the Zacks Consensus Estimate of 52 cents per ADR by 23.1%. Reduction in revenues was the primary reason for the decline in earnings.

Revenues: Net operating revenues dropped 10.7% year over year and 27.6% sequentially to $9.5 billion. Revenues were lower than the Zacks Consensus Estimate of $11.4 billion. The year-over-year decrease in revenues was attributable to lower shipments as well as lower sale prices for most of the commodities including iron ore, coal and pellets.

Of Vale’s total gross revenue of $9.7 billion, sales of ferrous minerals accounted for 71.7%; coal 1.4%; base metals 17.8%; fertilizer nutrients 5.9%; and the remaining 3.2% came from miscellaneous sources.

Geographically, 18.6% of revenues were generated from South America, 50.1% from Asia, 7.6% from North America, 18.7% from Europe, 3.5% from the Middle East and 1.5% from Rest of the World.

Production Status: In the first quarter of 2014, Vale experienced record first-quarter production volumes of iron ore, nickel and coal. Iron ore production reached 71.1 million tons, a record level for first quarter production since 2008. The increase was helped by favorable weather along with the start-up of Conceicao Itabiritos project. Pellets production reached 9.9 million tons, increasing 8.6% year over year, due to favorable weather. Nickel production soared to 67,500 tons — record high for a first quarter. While the production of iron ore, pellets, nickel and coal improved; copper, potash, phosphate rock and manganese experienced a year-over-year decline.

Expenses: In the first quarter, cost of goods sold totaled $5.6 billion, up 3.4% year over year. Selling, general and administrative expenditures were $282.0 million, while research and development expenses were $145.0 million; declining 19.9% and 15.2% year over year, respectively. Vale’s efforts to divest unproductive projects by reducing its geographical presence led to this decline.

Balance Sheet/Cash Flow: Exiting the first quarter of 2014, Vale’s cash and cash equivalents were $7.2 billion versus $5.3 billion in the previous quarter. Long-term liabilities came in at $50.8 billion, up marginally from $50.0 billion in the preceding quarter.

In the reported quarter, net cash generated from operating activities was $4.1 billion compared with $3.9 billion in the year-ago quarter, while capital spending came in at $2.4 billion versus $3.5 billion in the first quarter of 2013.

Outlook: Management believes that demand for iron ore will increase in 2014. Also, iron ore production from Australian miners is expected to increase. Vale’s cost-saving strategies are expected to succeed, which in turn will increase the company’s earnings. 

Other Stocks to Consider

Vale currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the industry include Simpson Manufacturing Co., Inc. (SSD), United Rentals, Inc. (URI) and Kumba Iron Ore Ltd. (KIROY). While Simpson Manufacturing and United Rentals sport a Zacks Rank #1 (Strong Buy), Kumba Iron Ore has a Zacks Rank #2 (Buy).

 
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