August 8, 2013 / 3:30 PM / 5 years ago

UPDATE 3-Vale may change accounting to curb forex impact on profit

* Possible accounting change follows 2nd qtr currency hit

* Company sees iron ore price, volume recovering

* Vale director “doesn’t lose sleep” on China demand

* Shares rise on cost cutting, China growth outlook

RIO DE JANEIRO, Aug 8 (Reuters) - Brazilian miner Vale SA may adopt so called “hedge-accounting” rules to smooth out the impact of currency fluctuations like those that slammed its second-quarter earnings, Chief Executive Murilo Ferreira said on Thursday.

Under hedge accounting, companies set aside some dollar-denominated export proceeds to compensate for the impact of exchange-rate moves on the local-currency value of debt, spreading currency gains and losses over several years. The practice is allowed under the International Financial Reporting Standards of the IFRS Foundation, the accounting rule-book used by Vale and other Brazilian companies.

As Brazil’s currency, the real, has weakened, companies have seen the local currency value of dollar debts soar and the cost of servicing the debt rise. State-run oil company Petroleo Brasileiro SA, Brazil’s largest company by revenue, last month said it had begun to use hedge accounting in May.

“We had a strong financial performance in a challenging environment,” Ferreira said on a conference call with analysts and journalists. “The financial impact of forex does not reflect our true operations.”

If studies show the change to be beneficial it could be implemented in 2014, Chief Financial Officer Luciano Siani said on the call.

On Wednesday, Vale said second-quarter profit plunged 84 percent due to a $2.78 billion charge related to foreign exchange losses on currency derivatives and debt.

Still, Vale shares rose on Thursday, a sign that many investors consider its efforts to control costs in a tight world-commodities market more important than a weak bottom line caused by non-cash financial losses.

Vale’s preferred shares, the company’s most-traded class of stock, rose 2.99 percent to the highest close since June 4. Common shares rose 3.69 percent to their highest close since May 13.

Without the extraordinary charges, Vale said underlying profit was $3.29 billion. Hedge accounting would approximate that result, Vale said, allowing investors to judge it on its mining operations rather than often unavoidable and temporary swings in the value of assets and liabilities caused by the exchange rate.

Vale said the declines in the real against the dollar that led to the financial charges on derivatives and debt will likely help it in the third quarter as a stronger dollar will make buying Brazilian goods and services cheaper.

Nearly all of Vale’s revenue is in U.S. dollars and most of its expenses in Brazilian reais.


Vale also said the planned sale of a stake in its VLI general cargo railway and port transportation unit is close to completion and that the board has authorized final negotiations with three suitors, two foreign and one Brazilian.

The company is Brazil’s largest railway operator and largest non-government owner of ports.

Vale also said it plans to hold onto its 27 percent stake in the CSA joint-venture steel mill with Germany’s ThyssenKrupp for the time being. ThyssenKrupp is trying to sell its 83 percent stake in the money-losing mill outside of Rio de Janeiro.

“We’ve done all we intend to do to get the CSA mill started,” Ferreira said. “We will maintain our stake.”

Ferreira also said that Anglo Australian mining rival Rio Tinto Ltd has not contacted Vale about the possibility of buying its stake in the Simandou iron ore deposit in the West African nation of Guinea. Earlier on Thursday, Rio Tinto said it might be interested in increasing its share of projects in the area, one of the world’s largest untapped high-grade iron ore deposits.


Vale expects iron ore prices , which fell an average of nearly 12 percent in the second quarter compared with a year ago, to rebound in the third quarter, the company’s iron ore chief, Jose Carlos Martins, said on the call.

Iron ore will have a hard time falling below $110 a tonne over the long term he said, saying that price level shows “strong resistance.”

Iron ore imports in China, the world’s largest market for the raw material used to make steel, rose 17 percent in July from June to 73.41 million tonnes, a record monthly amount.

Vale should be able to recover from lower iron ore output caused by weaker world demand and seasonal rains and meet its target of producing 306 million tonnes by the end of the year, Martins said. The goal will be helped as Chinese steelmakers and dealers increase their stockpiles of iron ore going forward, he added.

“I don’t lose sleep worrying about China,” Martins said adding that steel demand will grow 2 to 3 percent this year.

Vale said it is moving ahead with plans to focus more on its core iron ore business and improve the return from money-losing nickel and copper mines.

Nearly all the engineering design and 70 percent of the contracting for the $19.5 billion Serra Sul iron ore mine being built in Brazil’s Amazon is complete, increasing the chance that the project will be delivered on time and on budget, Ferreira said.

Vale also said it expects to cut “hundreds of millions of dollars” of losses from its Goro nickel mine in New Caledonia this year and turn the $8 billion project “cash-flow positive” for the first time in 2014.

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