VALE's Saskatchewan Mining Project Minor Bump In Long-Term
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The last time I met someone from Regina, Saskatchewan, we spoke about the state's immigration policies, which are slightly different from the rest of Canada's. The state has a very thin population and has been trying to attract more people to settle in Regina, Saskatoon and other townships. On its part, Saskatchewan is a state that is rich in culture, history and natural beauty. The Canadian prairie stretches unendingly across the landscape and when seen from the edges of Regina, one may feel one is stuck in the middle of nowhere. Dismal as it may sound, it has a strange beauty that can be mesmerizing.
There are many reasons why the government of Saskatchewan feels insecure. The state has been experiencing very low population growth and most people are aging. Investment is usually concentrated in Ontario, Quebec and British Columbia. Tourists hardly visit the prairie and many people haven't even heard of Regina, the capital city of the state. This being the case, Saskatchewan rightly feels it needs more attention not only from immigrants but also from investors and corporations who can create jobs and productive employment. The state is rich in minerals and metals, and potash is one of those. VALE (NYSE: VALE) had announced that it would develop a huge mine at Kroneau, near Regina.
The mine was expected to employ more than 1500 people and create 500 permanent jobs. With a projected production of 2.9 million metric tons of potash, VALE seemed to be all set to make the administrators in Saskatchewan happy. However, things took a different turn for the people of the state as the Brazilian mining giant announced that it would be postponing the $3 billion potash mine indefinitely. The company stated that it would be happy to look for other short term opportunities within the state and that the potash mine will be considered as a long term project. This implies that the mine is going to be sealed behind locked gates and fences, and many hopes and dreams of Saskatchewan administrators will remain unrequited.
The state government called the announcement "unfortunate". For its part, VALE has decided not to forge ahead with its plans to kick-start operations at the potash mine because of decreased Chinese demand and drought conditions in the U.S. Potash is used in fertilizers and agricultural products and the agrarian industry isn’t doing well. VALE also mentioned that it has other projects that can be postponed or delayed. It declined to elaborate further, but it added that it would like to focus its energy on its $8.04 billion Serra Sul investment in Carajas, which happens to be the world’s largest iron-ore mine.
The company has made it clear that it is not walking away from its projects and that these mines will not be shut down forever but will be opened when the right time arrives. As an investor, I think this is a very wise move by the company. There is hardly any demand for potash because of the drought-like conditions and the terrible economy in China. Moreover, VALE would benefit from concentrating on what is in demand in the market. Iron and steel are both hugely in demand in markets all over the world. By developing the world’s largest iron mine, VALE will add yet another feather to its cap.
Though postponing plans and deferring projected milestones do not always reflect positively, I believe VALE made a wise decision. It does not make sense to divert money to a mine whose product will not be in demand once processed. When the Chinese economy improves and the drought-like conditions in the U.S. ameliorate, VALE will have a reason to begin extracting potash so that fertilizers can be manufactured. At the moment, concentrating on iron ores is probably the most intelligent thing to do.
If we look at VALE's operating cash flow, it is quite impressive at $24.5 million. The company’s investing cash flow is $14 million and its stock yields almost 6%. The company also has a lower than average debt to equity ratio of 33.45% and only $2.4 billion in debt and more than $4.9 billion in cash. However, VALE's gross margin is only 48.7% and its operating margin is 35%. This may cause concern to some investors. However, we must note that the mining industry is not doing too well because of a flagging international economy.
Another positive thing to note is that the company is not planning to layoff any of its employees. It would simply curtail hiring new ones, and that makes perfect sense in an economy like todays. All this leads me to believe that VALE is taking certain calculated steps after careful consideration of the economy. It is refraining from boosting its own ego by keeping unnecessary mines open and functioning. It might sound harsh to some people but closing mines that are not required in the short term is a good idea, especially when there are more profitable mines to take care of.
VALE’s major competitors Rio Tinto (RIO) and BHP Billiton (NYSE: BHP) have announced pay cuts for their CEOs, citing bad economy as a reason. Rio Tinto is a very successful mining company and if it is forced to cut its CEO’s pay, things do not seem to be that great in the industry. This is another reason why I think VALE did a great thing by not continuing to operate the mine at Saskatchewan. BHP on the other hand has been on the receiving end in Australia. Its mines have remained shut down for various reasons and the Australian government has been pressurizing BHP to begin work soon. BHP has also been embroiled in environmental issues.
Other mining and gas giants like Barrick Gold (NYSE: ABX) and Goldcorp (GG) have cited bearish economy as a reason for their own calculated steps in investment and expansions. Barrick Gold recently was in news when a Chinese company mentioned that it plans to purchase Barrick’s operations in Africa. Selling a profitable mine to a state-owned Chinese company would be an unwise thing to do, especially when profitable mines are so difficult to come by. I feel that Goldcorp is in a better position than Barrick, as it recently announced new gold production in Pueblo Viejo, Dominican Republic. Compared to its competitors, VALE certainly is in a stronger position with only Goldcorp doing equally well. I think VALE is one of the best long-term stocks on the market today, and I expect VALE to climb slowly but steadily in the coming quarters.
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