Vale S.A. VALE reported adjusted earnings per share of 22 cents per share in second-quarter 2020, flat year over year. Notably, the bottom line missed the Zacks Consensus Estimate of 33 cents.
Including one-time items, Vale’s reported earnings per share of 19 cents in the quarter against a loss per share of 3 cents in the prior-year quarter.
Revenues
Net operating revenues declined 18% year over year to $7.5 billion. The top line also lagged the Zacks Consensus Estimate of $7.1 billion.
VALE S.A. Price, Consensus and EPS Surprise
VALE S.A. price-consensus-eps-surprise-chart | VALE S.A. Quote
Of the total net operating revenues, sales of ferrous minerals accounted for 78%, base metals comprised 19.6%, coal contributed 1.3%, and the remaining 0.8% was sourced miscellaneously.
Geographically, 72% of revenues were generated from Asia, 13.8% from Europe, 7.2% from South America, 2.9% from North America, 2.4% from the Middle East, and 1.7% from Rest of the World.
Operating Performance
In second-quarter 2020, cost of goods sold totaled $4,212 million, down 19% year over year. Gross profit declined 18% year over year to $3,306 million. Gross margin was 44.0%, contracting 30 bps year over year.
Selling, general and administrative expenditure increased 13% to $124 million from the prior-year quarter. Research and development expenses remained flat at $90 million compared with year-ago quarter.
Adjusted operating income was $2,564 million in the reported quarter compared with $2,132 million in the prior-year quarter. Adjusted EBITDA was $3,371 million in the reported quarter compared with $3,098 million in the prior-year quarter.
Balance Sheet & Cash Flow
Vale exited second-quarter 2020 with cash and cash equivalents of $12.1 billion compared with $11.8 billion at the end of first-quarter 2020. Net debt at the quarter end stood at $4.7 billion —lowest level since fourth-quarter 2008 — down from $4.8 billion at the end of first-quarter 2020. In second-quarter 2020, net cash generated from operating activities totaled $1.34 billion compared with $2.96 billion in the prior-year quarter. Capital spending amounted to $967 million during the quarter compared with $730 million in the year-ago quarter.
The company expects steel demand to slowly pick up in the second half of the year. In China, investments in new infrastructure projects will lead to demand growth for steel, which in turn will drive demand for iron ore. Excluding China, global automakers expect a gradual recovery of production as plants are reopening and consumers are returning.
In Europe, European Automobile Manufacturers Association reported a slight improvement of car sales in June. It is expected to improve as consumers respond to the incentives offered by European governments to spur interest in electric cars. However, the improvements in the second half will not be enough to offset the downturn in the first half. Overall, steel production excluding China is expected to contract between 10% and 15% in 2020.
Vale recently maintained iron ore fines production guidance for 2020 at 310-330 Mt. However, the company cautioned that production is likely to come in at the lower end of the guidance. Vale’s pellet production guidance is 30-35 Mt. The guidance for copper production has been affirmed at 360-380 kt. The company anticipates producing nickel between 180 kt and 195 kt in 2020.
Vale strives to sustain margins by focusing on product line, improving productivity and cutting costs. It is likely to gain from investment in projects, lower debt, efforts to ramp up coal business and transforming base metals business, and introducing more high-quality ore in the market. Iron-ore prices are currently trending above $100 per ton as the resurgence of coronavirus cases has triggered supply concerns while demand in China remains strong. Copper prices are also gaining on the signs of economic recovery in China and supply concerns. This bodes well for Vale.
Price Performance
In a year’s time, shares of Vale have fallen 3.7%, compared with the industry’s decline of 1.9%.
Zacks Rank & Stocks to Consider
Vale currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space are Coeur Mining Inc. CDE, Commercial Metals Company CMC and The Scotts MiracleGro Company SMG, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Coeur Mining has an expected earnings growth rate of a whopping 138.7% for the current year. The company’s shares have surged 70% over the past year.
Commercial Metals has a projected earnings growth rate of 15% for the current year. The company’s shares have gained 34% in a year’s time.
Scotts MiracleGro has an estimated earnings growth rate of 44.5% for the ongoing year. Its shares have appreciated 43% in the past year.
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