Vale praises new iron ore pricing, announces Paranapanema copper deal

Vale reports a 146% jump in net earnings for the first half of this year, along with near-record iron ore production.

RENO, NV - 

As the second quarter of this year was the first quarter to implement the new pricing regime to iron ore, Vale praised the transition to price flexibility as allowing "the recognition of quality differences, contributing to stimulate long-term investment."

"In addition, clients are able to know beforehand the price to be paid in the following quarter, thus facilitating cost control and inventory management," Vale noted in its quarterly financial report made public Thursday.

At the same time, Vale also announced its offer to buy up to 100% of Brazilian refined copper and downstream copper products producer Paranapanema, which is also the sole Brazilian producer of LME-certified copper cathodes. Paranapanema is also the parent company of Cibrafertil, which operates a phosphate fertilizer plant.

However, the lengthy strike of Vale Inco nickel operations, which was recently settled in a five-year contract, took its toll in nickel and precious metals production at the Brazilian mega-miner's Canadian operations.

For the first half of this year, Vale reported US GAAP net earnings of US$5.3 billion, a 146% jump over the $2.15 billion of net earnings reporting during the first half of 2009. For the second quarter of this year, Vale reported net earnings of US$3.7 billion or 70-cents per share, compared to $790 million or 15-cents/sh reported during the same period of 2009.

PRODUCTION

Iron ore production reached 75.9 Mt during the second-quarter 2010, which was the best performance since the all-time high production of 85.8 Mt during the third quarter of 2008. Second-quarter 2009 iron ore production was sufficient to feed the second highest quarterly pellet output of 12.7 Mt.

Coal production achieved a record 1.9 Mt during the second quarter of this year.

For the first half of the year, Vale reported iron ore production of 145 Mt, a 34.5% increase over the 107.7 Mt iron ore production reported during the same period of last year. Vale reported an astounding 224.4% increase in pellet production during the first half of this year from 7.13 Mt in the first half of 2009 to 23.14 Mt,

However, the lengthy strike at the company Sudbury and Port Colborne, Ontario operations dropped Vale's nickel production 44.1% during the first half of this year from 124,000 metric tons recorded in the first-half 2009 to 69,000 metric tons during the first six months of this year.

During the second-quarter 2010 Vale reported 37,000 metric tons of nickel production, down 37.8% from a year ago.

The strike also hit nickel by-product production including cobalt, platinum, palladium, gold and silver. Cobalt production dropped 77.1% during the first half of this year from 1,344 metric tons for the first half of 2009 to 308,000 metric tons during the same period of 2010.

Platinum by-production production declined 92.3% from 86,000 ounces in the first half of 2009 to 7,000 ounces during the first half of this year. Palladium production fell 85.2% from 121,000 ounces in 1H09 to 18,000 ounces in 1H10.

By-product gold production sank 76.7% from 43,000 ounces in the first six months of 2009 to 10,000 ounces for the first half of 2010.

Silver production declined 28.7% from nearly 1.2 million ounces of silver in the first half of last year to 855,000 ounces of silver during the same period of this year.

OUTLOOK

Vale expects China's demand for steel and iron "to bounce back in the fourth quarter of 2010 as the inventory correction-which produced a mini-cycle of decreasing steel prices within an expansionary cycle-comes to an end and the outlook for the property market becomes clearer."

Meanwhile, Vale noted, "The demand for nickel for non-stainless steel applications has been strong around the world, and we expect it to remain steady in 2H10. Simultaneously, the demand for stainless steel will soften due to the seasonal weakness in 3Q10 before improving by year-end."

"We recently concluded import steps in the acquisition of fertilizer assets in Brazil," the company said. "Alongside the expected contribution to long-term shareholder value creation, the development of a fertilizer asset base is a move that leads to a further and more interesting diversification of our asset portfolio, as the fertilizer business in exposed to cyclical changes that have different drivers than those determining minerals and metals cycles."

Vale said the Paranapanema acquisition "is consistent with our strategic objectives of accelerating the growth of copper production and has a significant potential for value creation to Vale's shareholders."

"The acquisition enables the development of Vale's copper projects, which concentrates have certain contaminants," the company explained. The smelter adjustment to process these concentrates, is feasible from a technical and economic point of view, and will improve the economic conditions for the treatment of these concentrates, thereby enabling the faster production expansion of Vale's metals over the next years."

Vale estimated the cost of the all-cash transaction will be R$2,010.82 million (US$1,143.49 million) or R$6.30 (US$3.58) per common share.

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