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More on Vale (VALE): Q2 misses badly as net profit slides nearly 60% Y/Y as lower iron-ore...

More on Vale (VALE): Q2 misses badly as net profit slides nearly 60% Y/Y as lower iron-ore prices offset record output. Operating revenue for the quarter also tumbled 21% to $12.2B. Shares -2% AH.
Comments (5)
  • Herr Hansa
    , contributor
    Comments (3079) | Send Message
     
    Without the accounting charges, the numbers are better than 1Q 2012. Looks like currency exchange and derivative positions had some impact.

     

    Last year was an oddity in iron ore prices due to severe flooding in Australia restricting exports. So with the combination of high demand and less supply, iron ore prices were elevated in 2011. Now that are closer to 2010 levels.

     

    All things considered, after reading the 37 page report, I'm considering adding to my long position. VALE are still quite profitable.
    25 Jul 2012, 06:14 PM Reply Like
  • PeterScriabin
    , contributor
    Comments (189) | Send Message
     
    HH - Thanks for your comments above, informative as always.

     

    Have you heard any kind of news, analysis or comment about the still-pending tax case before the Brazilian Supreme Court? Worry about this (essentially the old double-taxation issue) case going against Vale is holding me back from buying more VALE.

     

    I would also love to know your opinion of FRO these days, after the Frontline 2012 split, and the limits placed on the possible profitability of old Frontline. You do not seem to comment on FRO anymore, but if you ever have time, I would be most interested to hear...
    25 Jul 2012, 07:33 PM Reply Like
  • Herr Hansa
    , contributor
    Comments (3079) | Send Message
     
    I'm researching VALE at the moment, with a few issues, and that might make it into an article. The company may have a few options on how to handle any tax issue, so I would expect a deal with the Brazilian government to eventually emerge. I would worry more about a short term impact on dividends, rather than a major hit on earnings. Also, VALE do not only own mining interests in Brazil, so some of their other assets are still producing nicely. Even an unfavorable decision would not be a long term impact. It may not be bad to wait on investing in VALE, but what they produce is something I feel is more important than impact of any litigation.

     

    FRO is my worst performer. Shares really got hammered last year, and have not recovered yet. My feeling is that a recovery may not happen until early 2014. If they reinstate the dividend, then the wait until then would not be so bad. Remember that this is Fredriksen's original big money making company, so I doubt he would just let it fall by the wayside. Even to look at Ship Finance (SFL), which I also hold, the impact from FRO contract changes only affected one quarterly dividend, and even then not as bad as most analysts expected. Over a longer time, I expect FRO to recover and reinstate the dividend. However, I would not be buying more unless shares got near 2.85 or lower.

     

    Definitely few people talking much about shipping, because there remains an over-supply issue. That is getting a little better in product tankers, so maybe we will see some improvement in crude oil tankers next year. Some ports have better cargo activity, but energy demand is just not that strong as developed economies are in a slow growth time. We need solid growth improvement in the U.S. and Europe, then shipping can begin to build a turn-around.
    26 Jul 2012, 12:37 AM Reply Like
  • PeterScriabin
    , contributor
    Comments (189) | Send Message
     
    HH - judging from your comment about Vale's mining interests OUTSIDE Brazil, I am not sure you have fully grasped the issue in the tax case. The government proposed that companies like Vale should pay hefty domestic profit tax ON TOP OF the taxes they already paid to foreign governments, and that such tax bills would be backdated through 2010. Although Vale has clearly stated that they expect ultimately to prevail, in the courts, against the "double-taxation" threat, this still does not fill me with the confidence to buy MORE, since I have seen a calculation that VALE might fairly be around $13 should the government prevail 100%.

     

    Regarding FRO, thanks for your comments. Yes, it is my worst performer too, by a great distance (av cost $9 and a year of dead money). And, yes, I know Frontline is Fredriksen's first-born, but he is no sentimentalist, and I understood that the Nov 2011 deal with SFL and Frontline 2012 involved FRO virtually having an upside limit on profits beyond which they would be taken and paid to one or other of those companies (the details seem to have slipped my aged brain). Thanks for the 2.85 tip, I had not found the balls to buy more since the mid-6's.
    26 Jul 2012, 01:47 PM Reply Like
  • Herr Hansa
    , contributor
    Comments (3079) | Send Message
     
    The first worry was that VALE would need to post a bond in order to appeal or challenge the litigation.

     

    http://bit.ly/MLIRTi

     

    That was the last motion granted, and they did not need to appeal. My point about their assets outside Brazil is that in the event of an unfavorable ruling, VALE may be more likely to invest more outside Brazil. I doubt Brazil wants to push VALE to invest more outside their country. Look at the proposed mining tax in Australia, on which that government backed down because both BHP and RIO stated they would stop investing in Australia. Governments may think there is easy money to gather up in these cases, but in the longer run they could lose more. Now whether the legal issue is valid or not needs to be determined in Brazilian courts.

     

    If we guess a negative outcome, given the current near $55 billion market cap, then the calculated hit from the tax case would be 5.6 billion. That implies shares could go from 17.00 a share to 15.00 a share, though perhaps someone else has a calculation of some other secondary losses due to that. I doubt it would need to be paid all at once, in the event VALE lost. It would definitely change the nature of their future continued investment in Brazil. Under an extremely unfavorable situation, I would not expect this global company to remain in Brazil.

     

    So does the government there really want to play chicken with Vale? RIO and BHP set the precedence for action in Australia. If Brazil wants to push the issue, then the country stands to lose more in the future. A look at the recent Chevron and Transocean case should be a good indication. If Brazil tried to become more like Venezuela, then their sources of revenue will suffer, as they would be unlikely to encourage outside investment.
    26 Jul 2012, 02:11 PM Reply Like
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