A 46% slump in operating profit for Brazilian iron ore giant Vale in the three months to September will give Australian investors an early idea of the damage the recent weakness in iron ore (and copper) prices is doing to the profits of BHP, Rio Tinto and Fortescue Metals.
BHP, Rio Tinto and Fortescue Metals report next February when they reveal their December 31 results. BHP and Fortescue Metals will be reporting interim results, Rio Tinto its full 2022 figures.
They will be nowhere near the results reported a year ago when BHP reported interim earnings from operations of $US14.8 billion, Rio Tinto had full year underlying earnings of US21.4 billion for 2021 ($US14.6 billion for the six months to June) and Fortescue’s interim underlying operating earnings $US4.76 billion (down 28%).
Judging by the 40% plus drop in Vale’s operating result, the Big Three Australian iron ore groups face sharp falls in revenues and especially profits with all three companies reporting higher costs in the September quarter.
October saw the three Australian iron ore companies issued their third quarter iron ore production and sales data (and in the case of BHP and Rio, data for other metals such as copper) but because we don’t have quarterly earnings and revenue figures, the full extent of the damage to their bottom lines from the slump in prices was not revealed.
Iron ore prices fell sharply in the September quarter – down 20% according to trading on Singapore’s SGX futures market in the 62% Fe fines product shipped by the major miners (it’s the global iron ore price benchmark).
BHP, Rio and Fortescue all maintained or lifted shipments slightly (Fortescue by around 4%) while Vale boosted its production and exports of both fines and iron ore pellets thanks to an absence of wet weather and low levels of Covid infections.
The current December quarter will see more profit pressures with a very weak start – prices were down 14% in October up to Friday, although prices a year ago tumbled to just over $US80 a tonne in November, then rebounded to just over $US110 a tonne by December, 2021.
Copper prices fell in the quarter and while nickel prices rose 15% from a year earlier, they were down 20% from the record levels in the June quarter. Thermal coal prices rose but coking coal prices fell (which will impact BHP as well).
The latest Covid lockdowns in China are showing similarities to those mid-year (especially in Shanghai) and this is adding to new fears about demand and prices heading into 2023.
The growing outbreak and control measures will have a growing impact on Australian companies, markets and investors – iron ore prices fell to two-year lows on Friday with the SGX Iron ore prices falling to $US80.15.
That was lower than the lows of last November and Friday’s close saw the price of the benchmark 62% Fe fines back to levels seen in November 2020 in the depths of the first round of Covid lockdowns outside China.
On top of the weaker prices, all miners are seeing dramatic rises in costs, especially for energy (such as diesel and electricity) and labour shortages. Fortescue reported a 16% rise in costs in the third quarter from a year ago.
In its September quarter financial report, Vale revealed net earnings fell 46% to $US3.66 billion (which is still a lot of money) from $US6.9 billion a year ago.
Net operating revenues dropped more than 20% to $US9.93 billion from $US12.33 billion over the year.
Vale’s realised iron ore price in the quarter in the three months through September 2022 was $US92.6 a tonne (it also sells a lot of higher value 65% Fe fines), compared with $US127.2 in September, 2021 quarter.
Proforma adjusted EBITDA from continuing operations slumped sharply to $US4 billion from $US7.07 billion. That saw its adjusted profit margin tumble to a still solid 37% from a very rich 56% in the third quarter of 2021.
The latest figure excludes expenses associated with the Brumadinho dam disaster that claimed the lives of 270 people and led to massive environmental damage, as well as Covid-19 donations.
CEO Eduardo Bartolomeo said in the results statement: “Our operational performance in the quarter was solid across our portfolio, with iron ore production reaching 90Mt and nickel and copper greatly increasing volumes. While the world is facing growing inflationary pressures, we remain focused on cost discipline and improving operational reliability.
“In Sudbury (Canada), our nickel production reached the highest quarterly level since Q1 2021. We have also made progress in growing our supply of low-carbon nickel and other critical minerals for the energy transition.”
Vale, like all Brazilian business, is waiting the final results of the country’s Presidential poll run off on Sunday.
The company has a new, unwelcome shareholder in sugarcane billionaire Rubens Ometto whose company Cosan bought a 4.9% stake last month and wants to boost that to 6.5%.
He has financed the raid with debt, no equity and there have been reports from Brazil that vale’s management and foreign shareholders are not happy with the raid.
Ometto is the biggest single political donor in Brazil with the vast majority of his money going to the far right-wing groups around President Bolsanaro.
