Vale SA (NYSE:VALE) will eventually top iron ore scale

Posted by Peter Lauro August 12, 2013 0 Comment 718 views

Murilo Ferreira Vale SA (NYSE:VALE)’s CEO said that the company may adopt some “hedge-accounting” rules to dull currency-fluctuation impacts like the ones that affected the company’s Q2 earnings. Under hedge-accounting, companies set-aside few dollar denominated export-proceeds. These compensate for the impact that the exchange-rate fluctuations have on the local currency’s value-of-debt.

All companies affected

It also helps in spacing currency losses and gains over a period of many years. This is permissible under the IFRS Foundation’s International Financial Reporting Standards. It is an accounting rule book that Vale as well as numerous other Brazilian companies use. The real, which is Brazil’s currency, has weakened considerably.

Brazilian companies have been witness to the rise in currency-value of dollar debts as well as the cost of servicing. Even Brazil’s biggest company in terms of revenue, Petroleo Brasileiro SA, said last month that it had started using hedge-accounting in May.

Investor backing

On Wednesday, VALE said that its Q2 profit had plummeted 84%. This has been attributed to a $2.78B charge that is related to foreign-exchange losses on debt as well as currency derivatives. Despite this, vale stock rose on Thursday and on Friday it saw a 5.58% rise. This was a strong indicator that investors appreciate the company’s cost-control efforts.
They feel that in a constricted global-commodities market, these are more relevant than a dipping bottom-line that had been created by the company’s non-cash financial losses.

Steady does it
The company’s preferred shares which are its highest-traded class of stock, increased by 2.99% to its highest close since 4 June. Common shares also increased by 3.69% to the highest close since 13 May. The company expects a rebound on iron-ore prices in the Q3.

These had dropped an average of almost 12% in the Q2 in comparison to the same quarter in 2012. The company says that over the long-term, iron ore will have a tough time dipping below the $110/ton price. All-in-all, VALE seems to be in control.

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