Valeâ€™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 companyâ€™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.
However, the fourth-quarter report (PDF) notes, â€œa rebound in confidence . . . we expect the global economy will grow at an above-trend rate during 2010.â€ This recovery is being led by the developing worldâ€™s manufacturing industry, an especially intensive user of metal. As a result, the rebound in metal prices has been â€œstronger than any price recovery from global recessions over at least the last 40 yearsâ€ (page 4).
Valeâ€™s stated rationale for concessions has vanished. ItÂ 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 reportâ€™s second page, Vale lauds itsÂ investments in â€œcorporate social responsibility.â€ Why does the companyâ€™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?
Vale notes that â€œ$236 million of the 4Q09 expenses were due to the idling of Canadian nickel operations, compared to $209 million in 3Q09â€ (page 11). Therefore, the United Steelworkersâ€™ strike is imposing high and increasing costs on the company. This Canadian strike accounted for 96% of Valeâ€™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, â€œDue to the stoppage of the Sudbury and Voisey Bay operations, we have increased the purchases of intermediate and finished nickel productsâ€ (page 10).
Some analysts have claimed that management has little incentive to settle because the strike is increasing nickle prices and hence profits from Valeâ€™s other nickel mines. The fourth-quarter figures clearly disprove this claim.
Valeâ€™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 Valeâ€™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 Valeâ€™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 -Â 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, â€œVolumes 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.â€
By any measure, the strike is costing Vale far more per quarter than the annual cost of the United Steelworkersâ€™ pension and bonus plans. Even if Vale were to â€œwinâ€ 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 Voiseyâ€™s Bay back to normal production would add a few hundred million dollars to Valeâ€™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 directÂ management back to the bargaining table.
Note: All figures are in US dollars.