Driver Training will Impact your Vale Investment
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the biggest worries that mining companies have to deal with is that of cargo handling. Most countries that are underdeveloped lack training procedures that help truck and train drivers to assess the kinds of goods they need to transport and also the way the cargo must be unloaded. When it comes to a country like Mozambique, things can only get worse if we have to talk about the state of affairs in the locomotive department. With decades of civil war and internal strife still bearing their mark on the society, Mozambican people are left without proper training from private or public agencies.
Major mining companies like Vale (NYSE: VALE) and Rio Tinto (NYSE: RIO) are actively engaged in coal and other sorts of mining in Mozambique which makes it very important for Mozambique and investors to make sure that cargo handlers and drivers know how to deal with metals, coal and sometimes even fuel. VALE is a major player in Mozambique and knows that unless it trains Mozambican workers, it will not be able to make optimum utilization of the situation. VALE has trained thousands of its employees all over the world and Mozambique is just one example.
What is surprising is that it recently announced it has trained more than 1,149 professionals in various areas of activity in Mozambique so that its business in that African nation is not hampered by lack of skills or knowledge among its citizens. The latest step in that direction is the announcement made by VALE that it would invest in training train drivers across Mozambique so that coal can be transported easily.
Though railway lines were laid out by the Portuguese colonizers and though the civilian government has tried to ameliorate the locomotive condition in Mozambique, training drivers and cargo handlers has been rather dismal. In fact, VALE had earlier pointed out that by training train drivers, the process of transporting coal from Moatize coal basin to Beira port would become very easy. Vale is one of few companies that are presently mining in the coal-rich region of Tete in Western Mozambique. Apart from training the drivers who run trains on the Sena Line, Vale is also planning to build a new railway line as well. This line would run across southern Malawi and would begin at Moatize and end at the northern port of Nacala.
It is for this reason that Vale is seriously investing money in training drivers who can later be hired or given permanent jobs with its railway lines. 125 locomotive drivers have been trained by Vale as apprentices after signing a deal with the publicly funded railways of Mozambique, CFM. Vale and CFM have been cooperating right from 2010 and the results have been very positive. Not only has the publicly funded railway company stepped up its efforts to modernize its fleet and tracking system, it has also upped its capabilities to transport coal and fuel from mines to ports.
Investing in Mozambique's infrastructure is another way to gauge Vale's capabilities and future prospects. Its cash flow has more than tripled between 2009 and 2011, and this year it will bring more of the same. We must remember that Rio Tinto is a formidable competitor in Mozambique, but that should not cause any trouble to vale, as its businesses are in order in all its locations across the world. BHP Billiton (NYSE: BHP) on the other hand has been facing problems in Australia regarding its uranium mines, which puts Vale in a stronger position.
Anadarko Petroleum (NYSE: APC) is yet another company that is doing exceptionally well in Mozambique. Italy's Eni has not been able to match the success of Anadarko but at the end of the day, there is a lot of money to make in the region. Anadarko is investing a lot of money in building LPG and LNG systems in Mozambique. With that in mind, VALE is doing just the right thing by offering to train the drivers of Mozambican railways and building a new railway line. The next couple of months are going to be crucial for VALE as it not only has to juggle its mining activities but also infrastructural development in Mozambique. However, VALE is a company that is exceptionally good at juggling various roles, as we have seen earlier.
Investors have a lot to feel secure about, as VALE is the world's second largest ore-miner. Though the company has reported poor financial results when compared against its own performance in the last few years, it still has managed to be way ahead of its competitors. It has a debt to equity ratio of 33.45%. That is certainly way below 38%, which is the industry average. VALE has almost $4.9 billion in cash and $2.4 billion in short-term debt. This leaves the company in a very favorable position. With a gross margin of 48.7% and operating margin of 35%, VALE sort of disappointed many investors. This was 940 basis points less than last year's quarter where as the operating margin was 1,420 basis points fewer. Does this mean investors who are skeptical or disappointed have reasons to be so? Certainly not.
Margin can fall, reduce or even increase each quarter. It has a lot to do with global and political conditions. Considering how important political and economic situations around the globe are to mining companies like VALE, we must expect certain fluctuations. This time, the changes in number may have seemed disappointing. However, that does not reflect the real status of VALE. With a 5-year average dividend growth of 40.20% and 140.38% dividend growth in one year, VALE has a very promising future in terms of returns to investors. VALE's second quarter profit has fallen 59% to $2.66 billion and this has been blamed on decreasing demand in China and currency trouble across Europe. VALE's profit margin is 33.57%, which is close to its 5-year average of 32.66%, again suggesting that the implied volatility is only just imagined. VALE will continue to stabilize eventually.
In spite of the disappointing margin and profits that Vale has revealed, I expect VALE's position in Mozambique to consolidate considering 5-year average dividend growth of 40.20%. Moreover, analysts have upgraded VALE to neutral from being in 'underperform' status for a long time. One may also note that VALE has a very strong global identity, which helps investors to be bullish.
My argument that training Mozambican train drivers would help VALE's business in that country and globally in general is supported by the fact that there is a lot of significance in corporate goodwill and positive contributions made by a company to the community it is located in. Mozambique, being an impoverished country, will definitely need the knowledge and training that VALE would impart to its less-skilled drivers and luggage handlers. This would result in a sense of indebtedness among those at power in the government and would be obliged to be lenient towards offering future contracts and tenders in favor of VALE. On the other hand, any positive contribution to a community will always improve a corporation's image and training Mozambican train drivers will have positive global effect as well, though it may sound very insignificant. Ultimately, VALE knows that by being good to communities across the globe, it only improves its own corporate image and gain investor confidence.
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