UPDATE 2-Brazilian miner Vale's net income slips on currency, higher costs

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SAO PAULO/RIO DE JANEIRO, July 27 (Reuters) - Brazil's Vale SA reported on Thursday a drop in second-quarter net income, as the world's largest producer of iron ore was crimped by a weaker currency, higher production costs and lower prices for the mineral.

In a securities filing, Vale said net income totaled $16 million, far below an average consensus estimate of $421 million and the $1.11 billion reached in the second quarter last year.

Net profit was $949 million when adjusted for foreign exchange impacts and one-off items, compared to $784 million in the year-earlier period.

Adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, hit $2.73 billion, below a consensus estimate of $2.85 billion compiled by Thomson Reuters.

Vale's results were dragged down by a depreciation in Brazil's currency, the real, tied to investor concerns that corruption allegations against the country's president could undermine his pro-business agenda.

The miner said net debt reached $22.12 billion in the quarter, down from $22.78 billion in the first quarter. Vale has said it wants to reduce net debt to between $15 billion and $17 billion this year.

"Vale's balance sheet is improving, which is important in light of the downside risk to iron ore, but deleveraging is progressing relatively slowly," analysts with Jefferies said in a statement.

Buoyed by strong steel demand from China, iron ore prices this week rose to about $70 per tonne, although some analysts do not expect prices to hold at current levels due to expanding supply.

Investments totaled $894 million in the quarter, the lowest level since 2006, the company added, while free cash flow reached $2.15 billion.

Revenue in the quarter was $7.24 billion, just below estimates for $7.33 billion.

The results were announced after Vale said last week that iron ore output would close the year near the bottom of its forecast of 360 million to 380 million tonnes, despite record second-quarter production.

Vale faces rising mining royalties at home, after the Brazilian government unveiled plans on Tuesday to raise revenue from mining levies by 80 percent to shore up government finances.

Last month, Vale shareholders approved a share conversion plan to give equal votes to all shares and limit government involvement in the company, a milestone in a country long hobbled by corporate governance abuses.

"Vale remains an evolving bottom-up story with the new management team and set for important corporate governance changes ahead," BTG Pactual said in a client note. "Nonetheless, our cautious view on the direction of iron ore prices keeps us on the sidelines," it added. (Reporting by Bruno Federowski and Alexandra Alper; Editing by Edmund Blair and Paul Simao)