Vale’s Striking Fourth Quarter

Vale, the company against which my union has been on strike since July of last year, released its fourth-quarter earnings this evening. This release deflates the company’s rationale for demanding labour concessions and confirms that the strike is hurting its bottom line.

Vale wants to eliminate defined-benefit pensions for new employees and drastically reduce the bonus paid to workers when nickel prices and/or profits surpass defined thresholds. These concessions were supposedly needed to mitigate low commodity prices during the economic crisis.

Why Concessions?

However, the fourth-quarter report (PDF) notes, “a rebound in confidence . . . we expect the global economy will grow at an above-trend rate during 2010.” This recovery is being led by the developing world’s manufacturing industry, an especially intensive user of metal. As a result, the rebound in metal prices has been “stronger than any price recovery from global recessions over at least the last 40 years” (page 4).

Vale’s stated rationale for concessions has vanished. It collected $1.5 billion of after-tax profits in the fourth quarter of 2009, more than in the fourth quarter of 2008 (page 2).

The company confirmed that it has no shortage of cash by paying $2.75 billion of dividends during 2009 (page 2), a year in which many other companies slashed or suspended dividends. These payments to shareholders substantially exceeded the $1.9 billion of wages and benefits that Vale paid to its entire global workforce during 2009 (page 11). So, management is trying to cut down $1.9 billion in labour costs while continuing $2.75 billion of discretionary dividends.

Corporate Social Responsibility

On the report’s second page, Vale lauds its investments in “corporate social responsibility.” Why does the company’s conception of corporate social responsibility not include maintaining pensions for its workers and sharing a small fraction of profits when nickel prices are high?

Strike Costs

Vale notes that “$236 million of the 4Q09 expenses were due to the idling of Canadian nickel operations, compared to $209 million in 3Q09” (page 11). Therefore, the United Steelworkers’ strike is imposing high and increasing costs on the company. This Canadian strike accounted for 96% of Vale’s worldwide expenses for idle capacity and stoppages.

To partially compensate for lost production, Vale spent $78 million buying nickel products, more than twice as much as in the preceding quarter. As the report explains, “Due to the stoppage of the Sudbury and Voisey Bay operations, we have increased the purchases of intermediate and finished nickel products” (page 10).

Some analysts have claimed that management has little incentive to settle because the strike is increasing nickle prices and hence profits from Vale’s other nickel mines. The fourth-quarter figures clearly disprove this claim.

Vale’s nickel revenues have declined over the past year because a sharp drop in volume has more than outweighed the price jump (page 23). Even making the heroic assumption that the strike caused the entire increase in world nickel prices since the fourth quarter of 2008, one would conclude that the strike reduced Vale’s nickel revenues by $110 million in the fourth quarter of 2009.

Alternatively, one might assume that nickel prices were entirely driven by the same global recovery that boosted other metal prices. If so, the strike reduced Vale’s nickel revenues by $539 million in the fourth quarter of 2009. The truth undoubtedly lies somewhere between these two extremes.

Quarterly revenues from platinum group metals and other precious metals - mined in Sudbury as byproducts of nickel – collapsed from $61 million to $4 million over the past year (pages 21 and 23). Page 8 of the production report released alongside the earnings report indicates, “Volumes of platinum and palladium produced by the Acton refinery, in the UK, were impacted by the strike at the Sudbury operations, whose ores provide feed for Acton.”

Shareholder Value

By any measure, the strike is costing Vale far more per quarter than the annual cost of the United Steelworkers’ pension and bonus plans. Even if Vale were to “win” the strike, it will have lost vastly more during the strike than it could recoup over time through reduced pension and/or bonus costs.

Shareholders would be better served if Vale abandoned its concessionary demands in order to settle with the union. Bringing Sudbury and Voisey’s Bay back to normal production would add a few hundred million dollars to Vale’s quarterly earnings.

Executives who have become personally invested in beating the union may be willing to continue forgoing these potential earnings. However, shareholders who want maximum earnings should direct management back to the bargaining table.

Note: All figures are in US dollars.

7 comments

  • China is the largest market for nickel and you can be sure that Vale is starting to feel the hurt from this loss of nickel at its $18 asset.

    Although they are more diversified than Inco with the Iron Ore, they still had annual revenues from nickel in 2007 and 2008 at around 30% (form 20F sec)

    Potentially they are counting on Nickel from the New Caledonia Project (near New Zealand) as some have referred to the project as Sudbury South.

    However, with the huge accident (major acid spill from the acidic leaching process) they had there last summer and further delays since 2001 in the $5 Billion project, one wonders if that technology for producing Nickel from that process will work and still be profitable.

    Even so, there is no chance that the Nickel from New Caledonia will ever be as much and as profitable as the Nickel from Sudbury or Voisey BAy. Simply put the Nickel content in the Sudbury ore is second to none and every miner in Sudbury was born knowing the nickel percentage in the ore body was the highest in the world.

    Ultimately it comes down to a Multinational cominginto Canada, and despite its reassurances to the political elites, decided to pound the hell out of three communities in Canada that were strong, virbrant, productive and healthy. To me it is a white colour crime that ranks up there with worst of them.

    How can our political elite just allow this to happen, Mr McGuinty at least has got to step up and say something to the international community that corporate behaviour such as the deliberate attempt at breaking these communities and bringing there standards of living down in some global race to the bottom will not be tolerated in Ontario.

    We already know what Harper’s response has been to this when Mr. Clement stated his infamous Valley of Death comment. He needs to resign! I wish Mr. Clement would take a walk down Paris street on a Sudbury Saturday night!

    We are at a stage that politics on our side need to be amplified.

    Alternatively the USW needs to take this international campaign to the next level, and that is taking the spotlight that has been place on Vale’s bad labour relations and start showing a host of its many other bad corporate practices to the international community. I am sure there are a host of environmental, human rights abuses of indigenous peoples and cover ups that have been ongoing within Vale for a long time, they have quite a few skeletons in their closet.

    In solidarity to my friends, brothers and sisters in these locals- keep your feet stomping on those picket lines and hold together in the face of this challenge.

    Paul

  • I meant $18 billion asset and that China’s markets now seem to be recovering – at least somewhat.

    zero revenue on a $18 billion asset can not be maintained for long.

    Adding on to the the cost of the strike will be the labour relations night mare and hangover that will come with a huge cost for the next few years.

    This is a very odd way for a company to treat its $18 billion jewel, since when did beating the hell out of workers with a company induced strike actually pay off in terms of anything that could be remotely measured in terms of a positive pay off to any company.

    One additional point- when Vale bough the company, Nickel was at its traditional $8-9 a pound level, and then profited immensely when nickel shot up to $24 per pound.

    Now that it is back down again to $8-9 pound why can it now stating it cannot operate the mine at these historic levels of nickel prices?

    There is no logic in their arguement, they had a whole whack of cash from 2007 and 2008, seen the market dip with a bit of a glut from demand fall, so they took those inventories and all that cash and said, now is the time to take out the USW in Sudbury.

    Any weasily MBA student will tell you it is a business case pure and simple however bad faith bargaining is highly illegal in Canada. Maybe Roger feels he is above the law? However any smart MBA student will tell you that in the long run pitting your new asset against some of Canada’s strongest communities in terms of labour activism, is a very very bad way to treat ones corporate asset.

    Where precisely will Roger find another 3500 workers in Sudbury to replace these pissed off workers?

    I think it is high time VAle admitted defeat, offer up a substantial signing bonus to these workers and sort through these outstanding issues with a changed corporate attitude- otherwise Vale might as well put Inco back on the block as they will never get another ton of nickel out of Sudbury- potentially that is indeed their goal! Sad I must say.

    Paul

  • If you calculated what the sticking works have lost in the form of forfeited wages compared to what they would gain from the deal they want, does it make financial sense for them to continue to strike?

  • ahhhh lets see Darwin, the same could be said about the Company.

    You also miss the bigger point- if they give in then every foreign based multinational will attempt the same crap.

    So its not a matter of forgone wages. It is about the history and the future- all that fighting and strikes before have also to be factored into the equation and all the future strikes and struggle need to be thought of.

    That really is a quite simplistic perspective of a quite complicated situation so full of social unrest.

    It just is so much more than money in its present value.

  • ahhhh lets see Darwin, the same could be said about the Company.

    Yes. That is the point of the article. I was pointing out the same could be said about the Employees.

    It just is so much more than money in its present value.

    The same could be said about the Company.

  • sorry I am a little touchy around this issue.

    it is close to home and I hate the way Northern Ontario has been taken over by Global Inc. and if it hasn’t been bad enough with the forestry crisis in N. Ont, this latest round of mining bad news is making a bad situation much worse. Next we will have Essar in the Sault demanding concessions!

    The north as usual had been given a back seat to the powers hat be in the south of Ontario. If McGuinty had any notion of which way as up he would stand up and demand Vale to either bargain in good faith or something more drastic- like divestment.

  • Darwin it is not a one round game. Presumably both the union and the owners’ representatives (we will call them mangers for short even if to perpetuate solipsism) are dug in because they are both trying to set a precedent for the next round. Concession in this round portend concessions in the next particularly for the union.

    It is the natural outcome of a voluntarist labour relations regime.

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