UPDATE 1-Vale vows spending austerity as metals price outlook improves

RIO DE JANEIRO/SAO PAULO Feb 27 (Reuters) - Vale SA , the world's largest iron ore producer, will maintain cost and capital-spending austerity this year even as the outlook for prices is improving, its chief executive officer said on Thursday.

Murilo Ferreira told investors at a conference call to discuss fourth-quarter earnings that cost-cutting and efforts to allocate investment in projects that yield the highest returns possible will continue to be a key business focus.

His remarks come as Vale reported a net loss of $6.45 billion in the quarter, its largest since Brazil's government sold control to private investors in 1997 and more than twice the shortfall of the year-earlier period. The loss came as a result of a one-time income tax settlement and the writeoff of an abandoned potash project in Argentina.

Despite the loss, which was limited to non-operational activities, Ferreira managed to cut costs, write off bad investments and wring more cash from its mines, railways, processing plants, ports and ships while focusing more on Vale's main iron-ore business.

The company's adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, in the quarter rose 50 percent to $6.64 billion, beating the average analyst estimate of $5.85 billion. The EBITDA result was the third-highest in the company's history.

Vale is working with a "nearly 100 percent chance" of meeting output targets for iron ore during the next two years, Jose Carlos Martins, the company's head of ferrous metals, said on a conference call with investors on Thursday. He added that ore quality will again become a defining element in pricing, helping boost the value of Vale's high-grade iron ore in China, its main market.

Executives also said that market conditions will make it difficult for iron ore prices to fall below $110 a tonne in the spot market.

Preferred shares of Vale, the company's most widely traded class of stock, rose as much as 2.7 percent in early Thursday trading, as cost and expense cuts helped trigger the biggest positive surprise in EBITDA since the third quarter of 2008, according to Goldman Sachs Group Inc.

Sales, general and administrative expenses fell 37 percent in the quarter and 39 percent in the year. Prospecting and other research and development costs fell 40 percent in the quarter and 45 percent on the year.

Cash flow from its iron-ore and ferrous metals business rose 50 percent in the quarter from a year earlier, far more than the rise in iron ore prices.

Edmo Chagas, an analyst with Grupo BTG Pactual, said fourth-quarter results highlighted Ferreira's success in controlling the size of a company that was growing too big. While the current trends in iron ore and weak growth in China continue to offer some downside risks for Vale, a potential correction in prices should be mild, Chagas and other analysts said.

"With the stock underperforming its peers about 20 percent over the last 12 months, we believe most of the relative risks are priced in and remain constructive on the name," Chagas said in a client note. He has a "buy" recommendation on the stock.