One Mining Stock to Buy And Hold Forever
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Brazilian mining giant Vale (NYSE: VALE) seems to have temporarily postponed its plan to invest $4 billion in the African republic of Guinea. The Simandou project, which originally envisioned an exploration map of one of the largest iron ore reserves in the world, is facing difficulties due to the actions (and inaction) of the local government, legal problems, and the fall in the value of commodities internationally.
Vale is a private Brazilian company headquartered in Rio de Janeiro and is one of the largest mining companies in the world. It was founded in 1942 by the Brazilian government, and was privatized in the 90s. Today, Vale is the largest diversified mining company in the Americas and the second largest in the world. It is the largest producer of iron ore in the world and second largest of nickel. Vale is also noted for its production of manganese, copper, coal, cobalt and fertilizers such as phosphate (TSP and DCP) and nitrogenous compounds (urea and ammonia).
The government of Guinea recently adopted a new mining code that seeks to increase the state's participation in private sector projects from 15% to 35%. In April last year, the President of Guinea, Alpha Conde, canceled a railway project, which had been initially given to Vale, and instead announced that it will now allow other companies to sign the contract if they offer more competitive prices.
The government of Guinea has claimed that it is consulting with BTG Pactual bank and B&A, a company formed by BTG Pactual and the former president of Vale, Roger Agnelli, to finance a railway line that would connect Simandou to the main port of the country. The Simandou mines, with reserves of 7.7 billion tons of iron ore, are only surpassed by the Carajás, Brazil. Rio Tinto (NYSE: RIO) and China's Chalco are stakeholders at blocks 3 and 4 of Simandou, while Vale and BSG Resources have a joint venture at the Zogota mines (Simandou South) and in blocks 1 and 2 (Simandou North).
As with any resource rich and underdeveloped nation, the government of Guinea's lack of transparency brings legal uncertainties to those who invest heavily in that African country. Not to mention the disputes with partners and rivals who also compete for the same region.
For a company to invest $4 billion, many guarantees need to be met, and those that are not being met by the local government are being given to undisclosed companies operating within Guinea. The project involves a partnership between Vale, BSG Resources (BSGR), BTG Pactual and B&A Mining, and businessman Roger Agnelli, the former CEO of VALE.
BSG Resources in Brazil reconfirmed the news that VALE is planning to hire a law firm to take legal action against BTG Pactual and Agnelli because of negotiations between the government of Guinea. VALE may seek answers about contracts related to a project that involves the complex logistics of Simandou railroad construction.
BSG Resources, which controls logistics and production, has accused BTG Pactual and Agnelli of illegally interfering in the affairs of GBV, a joint venture between Vale and BSG Resources. The original terms included a promise that GBV will have a major say in the construction of infrastructure project. VALE, on the other hand, seems to be losing in the project altogether. I believe this loss of interest may be caused by the discovery of a huge iron mine in Brazil called Serra Sul , located in northern Brazil.
The Serra Sul requires an investment of $8 billion for the development of the mine, and an iron ore processing plant. Vale has already obtained an environmental license for the development project, which will begin operations in 2016. The rated capacity of the project is 90 million metric tons of iron ore.
The best-case scenario for VALE is that the company will gradually move away from Guinea, although it has already invested about $500 million in the African country. The company is not abandoning the Simandou project (as evidenced by the lawsuits against the Guinean government and others involved) but is just expecting more guarantees and assurances from the Guinean government and its partners so that it can make more investments.
The worst case scenario is that the lawsuit will stretch out endlessly for years, and would involve a lot of legal expenses for both VALE and BSG Resources, hurting their stocks. However, from what I understand about the Guineans, they may try to avoid legal complications themselves and may compromise favorably, agreeing to the original terms promised to VALE and BSG Resources.
Meanwhile, competitors like Rio Tinto and BHP Billiton (NYSE: BHP) also face difficulties elsewhere in the world. Rio Tinto has been particularly hit by the unprofessional nature in which the Mongolian government has behaved after the previous government was deposed. One of the company's lawyers has been detained unfairly in Mongolia on charges of corruption. A slowdown in Chinese growth has affected the demand for industrial commodities. This has impacted most mining companies, but BHP has taken a severe beating. The company's projects have been stalled and its sales have remained stagnant. Moreover, BHP has faced several issues from the Australian government with regard to its environment policies.
AngloGold Ashanti, on the other hand has sought an agreement with unions in South Africa to put an end to wildcat strikes that occurred in the region. The strikes have caused a lot of losses to foreign mining companies that operate within South Africa, including AngloGold Ashanti. Barrick Gold is probably one of the few mining companies at the moment that is relatively free of issues. In fact, its stock was recently upgraded. However, Barrick's earnings have stagnated too, because of the economic conditions that are prevailing around the world at the moment.
Being one of the largest mining companies in the world, it does not come as a surprise to us that Vale has an enterprise value of $113 billion and a market cap of $94 billion. With a profit margin of 28.21% and an operating margin of 43.17%, those who have invested in Vale can look forward to good returns. Vale's gross profits amounted to $35.42 billion, and the company's total debt is $27.27 billion. Its stock seems to be hurt by the news of the Guinea fiasco, as its Q3 net fell by 66%. However, Vale has a cash flow of 17.24 billion, which gives it ample purchasing power and will allow it to wade through the legal trouble it currently finds itself in Guinea. There will not be any short term effects of the issues in Guinea.
In the long-term, Vale has ample investments elsewhere in the world, and the consequences in Guinea will not negatively harm its stock.
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