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Why Vale’s Profitability Was Down in 3Q15

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Vale’s EBITDA fell 15% quarter-over-quarter 

Vale (VALE) reported EBITDA (earnings before interest, tax, depreciation, and amortization) of $1.9 billion in 3Q15, which was 15% lower quarter-over-quarter and 38% lower year-over-year. The lower EBITDA was due to lower realized prices, partially offset by higher sales volumes. Vale reported a net loss of $2.1 billion in 3Q15 due to an unfavorable pricing environment and the devaluation of Brazil’s currency, which was 28% lower against the US dollar.

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Ferrous minerals and base metals pulled down Vale’s EBITDA

Vale’s Ferrous Minerals segment’s 3Q15 EBITDA was down 31% year-over-year from $2.4 billion in 3Q14 to $1.7 billion in 3Q15 while EBITDA was down 9% quarter-over-quarter. The lower EBITDA was due to lower sales prices.

The Base Metals segment reported a 75% fall in EBITDA year-over-year due to lower copper prices and delayed sales in 3Q15. Base Metals’ EBITDA fell 52% quarter-over-quarter from $406 million in 2Q15 to $193 million in 3Q15.

The coal segment continued with its weak performance, as the segment has reported negative EBITDA of -$129 million in 3Q15 from -$102 million in 2Q15. The negative profit was due to higher costs and lower realized prices.

The fertilizer segment’s EBITDA outperformed other segments

The fertilizer segment reported a solid jump of 105% in 3Q15 EBITDA with a rise of $96 million in 3Q14 to $197 million in 3Q15. This was due to higher volumes and lower costs, partially offset by lower realized prices and higher expenses. The EBITDA rose 21% quarter-over-quarter from $163 million in 2Q15 to $197 million in 3Q15.

Lower COGS and SG&A expenses limited net loss

Vale’s cost of goods sold (or COGS) fell 22% year-over-year from $6.5 billion in 3Q14 to $5.0 billion in 3Q15. COGS was down 3% quarter-over-quarter from $5.2 billion in 2Q15 to $5.0 billion in 3Q15. The lower costs were driven by the Ferrous Minerals and Base Metals segments.

Vale reduced its selling, general and administrative (or SG&A) expenses by a whopping 52% from $274 million in 3Q14 to $131 million in 3Q15. This was due to the depreciation of Brazilian currency and other cost reduction measures.

BHP Billiton (BHP), Cliffs Natural Resources (CLF), and Rio Tinto (RIO) are peer companies of Vale. Vale forms 2.8% of the iShares MSCI Brazil Capped ETF (EWZ ) holdings.

In the next part, we’ll analyze Vale’s strong iron ore cost performance and factors driving its solid performance in 3Q15.

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