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Vale reports first loss in a decade

By: Emerging Money
Posted: 2/28/2013 11:00:00 AM
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Brazilian iron ore giant Vale ( quote ) reported its first loss in more than a decade on the back of weak iron ore prices, write-downs, and soft global demand.

[caption id="attachment_58542" align="alignright" width="300" caption="Off road truck at Vale's ConceiƧao Mine, Minas Gerais state, Brazil"] Image courtesy Vale [/caption]

According to the Financial Times , "the Rio de Janeiro-based company posted a pre-tax loss of $2.65bn in the fourth quarter - twice as big as analysts expected - compared to a net profit of $4.67bn in the same quarter the previous year."

Vale, in addition to other miners such as Rio Tinto ( RIO , quote ), struggled over the previous fiscal year as the result of softening global demand, especially from China and the eurozone; these economic conditions adversely affected the price of iron ore which fell to a three-year low in September.

Given that Vale's equity performance is inextricably linked to the price of iron ore, it's unsurprising that Vale has struggled throughout 2012; the stock is down 27% on the year.

An additional consequence of weakening global demand was that mining companies were forced to scale back capital-intensive investments. As well, impairment charges for investments in a multitude of investments from a Brazilian nickel mine to Australian coal saw the company take a number of write-downs that hurt Vale's bottom line.

For Vale's stock to get back on track, global demand must pick-up. In light of the fact that the Chinese economy is starting to pick up as last year's stimulus takes effect, iron ore prices could continue to rebound. However, a dip in growth from American sequestration or another manifestation of European uncertainty could hinder iron ore prices.

In addition to depressed global demand, Vale's lackluster share price has also been the product of interference by the Brazilian government . Although oil-producer Petrobras ( PBR , quote ) has borne more of the brunt of President Dilma Rousseff's policies, Vale's share price has also been hindered by government meddling.

Until this administration makes it clear that Vale will be allowed to operate without the threat of excessive government involvement, the stock's upside will remain limited.

Author and family are long VALE