Vale S.A.’s (VALE) first quarter EPADR for the fiscal year 2010 was 30 cents, an increase from 26 cents in the year-ago quarter. However, it missed the Zacks Consensus Estimate of 33 cents. Net earnings reached $1,604 million, up 17.7% from $1,363 million in the corresponding quarter of 2009 based on an increase in net operating revenues

Net operating revenues grew 26.3% year-over-year to $6,848 million from $5,421 million in the first quarter of 2009, primarily driven by the global economic recovery. 

Revenues generated from the sales of ferrous minerals accounted for 69.0% of total revenues, while non-ferrous minerals contributed 23.9%, logistics services 4.5%, coal 1.8% and the rest accounted for 0.8%. 

Geographically, 51.6% of revenues were generated from Asia, 25.2% from the Americas, 19.8% from Europe and 3.3% from rest of the world. 

Production of iron ore, responsible for 54.7% of total revenues in the quarter, amounted to 57.88 metric tons, down 0.5% from the previous quarter but up 13.9% from the first quarter of 2009. 

Gross margin swelled by 180 basis points while EBITDA margin dropped by 40 basis points. However, EBITDA increased to $2,855 million from $2,281 million a year ago. 

Total debt was $23.6 billion, with an average maturity of 9.0 years and an average cost of 5.33% per year from $22.9 billion in previous quarter. Net cash flow from operating activities almost remained flat at $1,406 million from $1,411 million in the previous quarter. Net debt reached $12.4 billion from $11.8 billion in the previous quarter.
Demand for iron ore products is usually related to worldwide demand for steel and the World Steel Association has forecasted a 10.7% increase in global steel demand in 2010 and a 5.2% increase in 2011 compared with 2010. The increase will be driven by strong growth in Chinese steel demand.
China’s steel consumption is expected to increase 6.7% to 579 million tons in 2010. China is expected to remain the largest consumer of metals in the future. A recent recovery in the global industrial production numbers is a positive sign as there is a positive correlation between global industrial production and Vale’s business. 

However, Vale’s strong exposure to international markets is a disadvantage on account of exchange rate fluctuations. Thus, we reiterate our Neutral recommendation.
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