Vale Missed Expectations in 4Q15: Is More Downside Ahead?



Vale Missed 4Q15 expectations

Vale (VALE) reported its 4Q15 results on February 25, 2016. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) came in at $1.39 billion, which was almost in line with market expectations of $1.37 billion. However, its earnings per share (or EPS) were -$0.20 in 4Q15, way below the consensus estimate of -$0.01. The lower-than-expected results were largely due to large writedowns.

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Significant writedowns

Vale’s results were noisy with large writedowns on assets. Its earnings included $9.6 billion in impairments. Impairments included $3.5 billion on Voisey’s Bay, $2.4 billion on Moatize, $1.5 billion on Vale Caledonia, and $0.5 billion on Midwestern System iron ore. Larger impairments in 2015 were mainly due to the significant reduction in price assumptions used for the impairment tests.

Investors were not very happy with the earnings miss or management’s commentary, which suggested the company could take drastic measures to weather the prolonged commodity price weakness. The company’s share price was down 4.4% after the results.

Underperformance YTD

As the above graph shows, Vale has underperformed its iron ore peers including BHP Billiton (BHP) (BBL), Rio Tinto (RIO), and Cliffs Natural Resources (CLF) year-to-date (or YTD). Vale has fallen by 11% YTD as of February 25 while BHP and Rio have fallen by 5% and 1%, respectively. CLF, on the other hand, has gained 10% YTD.

In this series, we’ll analyze Vale’s earnings for the full year 2015 and 4Q15. We’ll also discuss the management team’s outlook on the business and see how it’s trying to position the company in this falling commodity price (COMT) environment.


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