Vale S.A. Earnings: The Right Moves in a Bad Market

Vale S.A. missed Wall Street earnings expectations for the fourth quarter and full year because of weak commodity prices, writedowns, and currency impacts. The stock fell about 5% on the news. While there were numerous negatives, Vale is doing the right things to come out of this commodity downturn as a stronger company.

It's not so goodVale posted a loss of $0.05 a share in the fourth quarter. Analysts had expected a profit of about $0.19 a share. In fact, the low end of the range of analyst projections was $0.08 a share. So Vale was well wide of the mark in the quarter. Revenue, however, totaled $9.2 billion beating the consensus expectation of roughly $9 billion.

Source: Lars Lentz, via Wikimedia Commons.

For the full year, Vale earned $0.86 a share against Wall Street's $1 a share call. On the top line, though, the company posted revenue of $38.2 billion, a notch up from analysts' expectation of about $37.7 billion. Although currency fluctuations and asset writedowns affected the fourth quarter and full year, falling commodity prices had the primary impact.

Just a part of the businessVale is the largest producer of iron ore in the world. This one product accounted for roughly two-thirds of the company's fourth-quarter revenue and nearly 80% of its earnings before interest, taxes, depreciation, and amortization. Those numbers were roughly similar for the full year. In other words, as iron prices go, so goes Vale.

Just one sentence in the company's earnings release sums up the big problem: "The average realized price of iron ore was US$75.97 per metric ton in 2014, significantly lower than the US$112.05 in 2013." The word significant is almost an understatement -- iron ore prices were roughly 30% lower year over year. Similar declines were felt in the company's other ferrous operations.

There's not much the company can do about this type of market activity but deal with it. And that's exactly what it has been doing. In fact, ferrous production actually increased year over year in the quarter and full year.. While that helped to offset the pricing issue, it wasn't enough to counter it. Vale needs an iron ore rebound for results to show notable improvement.

Getting better for the futureBut don't let that overshadow the work being done on the operations front. The company reached records for both its supply and sale of iron ore. And that wasn't the only segment of the business hitting new highs. Copper and gold both hit record quarterly and annual production numbers and nickel was at its highest production level since 2008.

Source: Timkal, via Wikimedia Commons

Vale is also working on cutting costs. For example, capital expenditures were reduced for the fourth consecutive year in 2014, falling almost 16% year over year. Vale plans to keep the trend going in 2015. Sales, general, and administrative expenses also fell an impressive 21% year over year.

None of this is unique to Vale, since all miners are in retrenchment mode. That shouldn't diminish the benefits that will come when the company's core iron ore markets rebound. Vale today is basically working to maintain market share and remain lean. It appears to be doing a good job, though the damage of low prices is clearly evident on the top and bottom lines. However, when prices for the cyclical commodities in which it operates turn higher, Vale's results will be leveraged on higher volumes. Iron ore is the key to watch here.

There's no question Vale is enduring some tough times. But underneath the negative earnings news is a company positioning itself well for the future. There's probably more work to be done before the key iron ore markets start to rebound, but Vale seems set not to just survive this downturn, but to come out the other side in better shape.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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