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Vale reports 42 per cent drop in net income

Vale SA, the world's leading iron ore producer and second-largest nickel producer, has seen a 42 per cent drop in its net income between the first and second quarters of 2009, attributing it in part to the rising costs and the weakning US dollar.
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Despite having a deal at hand, mediated talks have broken off between Vale and the Steelworkers Local 6500.

 
Vale SA, the world's leading iron ore producer and second-largest nickel producer, has seen a 42 per cent drop in its net income between the first and second quarters of 2009, attributing it in part to the rising costs and the weakning US dollar.

Vale, which also produces coal, PGMs and aluminum, saw net earnings drop to $790 million US in Q2, down from $1.36 billion in the first quarter, according to a report released July 30. This also represents an 84 per cent drop from the same period a year prior, which saw net earnings of $5 billion.

Despite these lower numbers, nickel still stands as one of the company's largest generators of revenue. While iron ore represents 47.7 of Vale's operating revenue, nickel stands at 18 per cent, or $916 million.

This is up from the first quarter of 2009, where nickel revenues stood at $639 million, or 11.8 per cent of Vale's operating revenue.

Nickel revenues from both quarters are drastically down from the pre-recessionary second quarter of 2008, where nickel represented $1.8 billion, or 17.2 per cent of total operating revenue.

In its quarterly production report, Vale also indicated total finished nickel production dropped to 59,000 tonnes in Q2. This is down from 69,000 tonnes in the second quarter of 2008, and 65,200 tonnes in the first quarter of 2009.

Much of this is attributed to the scheduled maintenance shutdown and subsequent strike at its Sudbury operations, which slid 34.5 per cent, from 22,400 tonnes in the first quarter of 2009 to 14,700 in the second. This also caused production numbers to drop at Voisey's Bay, which used Sudbury's smelting and refining operations to process its nickel concentrates.

Vale states in the report that "our offer aims to provide the right incentives to labor productivity growth, contributing at the same time to lower costs on a permanent basis."

The Thompson, Manitoba operations saw a 32.6 per cent production increase, however, reaching 8,300 tons this quarter as a result of "better asset performance and continuing strong demand for Thompson's premium grade finished nickel products."

Lower production didn't stop Vale Inco from increasing shipments of finished nickel to 69,000 tonnes in the second quarter of 2009, up 16.8 per cent over the previous quarter. Sales to Asia represented 70.9 per cent of this increase.

The cost of goods sold also rose for Vale in the second quarter of 2009, increasing 8.1 per cent to $3.1 billion from the previous quarter's total of $2.9 billion. The cost of materials such as spare parts, maintenance equipment, tires and conveyor belts contributed to $660 million or 21.1 per cent of the total. Outsourced services such as cargo equipment and facility maintenance, cargo freight, and operational services accounted for $519 million.

Cost reduction and productivity-increase measures implemented through the quarter include shedding 20 per cent of managerial positions, and globally sourcing fuels and lubes.

However, the report shows some signs of optimism for the future, as "the global economy is very likely to have bottomed out." These include gains in global industrial production, softening contraction among developed economies, surging industrial production in Asia.

Some recovery in manufacturing activity among Japan, Germany and France are also cited as hopeful elements.

What's more, Vale is the leading supplier of nickel for batteries in hybrid electrical vehicles, which currently represents "a very small market for nickel but it has great potential to grow over time as electric cars seem likely to become the dominant product of the auto industry in the future."

China remains the primary market for Vale's products, at 39.7 per cent, followed by Brazil at 15.8 per cent, Japan at 7.4 per cent and Canada at 6.2 per cent.

www.vale.com