A Positive Outlook on Vale
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Vale (NYSE: VALE) is the second-largest metals and mining company in the world and the largest in the Americas, based on market capitalization. Its main competitors are BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RIO), Freeport-McMoRan Copper & Gold Inc, and Barrick Gold Corporation (NYSE: ABX), compared with whom Vale shows a better EBITDA margin and is among the leader in terms of revenues, despite a riskier profile due to high capital expenditure. This year before this writing, the company's shares had shown a gain of 5.4 percent compared with the drops of 2.9 and 8.5 percent for Rio Tinto Group and BHP Billiton LTd, respectively. According to its director of sustainable development, the company is planning to use palm oil to produe 420,000 tons of fuel annually by 2019.
The operations of Vale in 1Q12 were impacted by exceptionally heavy rains in Brazil, especially in Carajás, which were even more intense than last summer and caused a decrease in production levels. The precipitation levels were 57% higher than in 1Q11, reaching their peak in January.
Nevertheless, Vale's latest figures leave me optimistic about its results for the next quarter, because of strong demand from China for iron ore and metals, so it is the correct stock to buy. In addition, the World Steel Association predicts a growth rate of 5.4% in global steel production. However, in the short term, the expectation of Chinese demand for metal commodities, and legal developments regarding the payment of taxes of foreign subsidiaries, may negatively influence the performance of the shares. The momentum of mining can be affected by legal changes, with the possibility of an increase in royalties from exploration activity.
One of the biggest reasons to choose Vale is because it is the leader in the production of seaborne iron ore and purchases of iron ore from China, as well as the growing consumption of metal commodities in the domestic Brazilian market. This would indicate that many expect the price of iron ore to remain high. Furthermore, Vale has a high level of cash generation thanks to the high iron content of the ore the Company produces.
In addition to this, Vale has more advantages in competing with Australia's Rio Tinto and BHP for Asian Iron because of initiatives to reduce shipping costs and iron reserves in Brazil.
BHP Billiton is the largest mining company in the world and is the most diversified in comparison with its competitors. The BHP product portfolio is less concentrated in iron when compared with Vale. Otherwise, all companies in this sector have the same external commodity market risk but Vale has more political risk than BHP.
Like BHP Bilton, after the anouncemnet of interest rate decision by Bank of England and European Central Bank, Rio Trinto has shown a positive advancement of 2.7 percent to A$58.97 in Sydney, Australia.
In the short term, the market will be exposed to volatility and then exposed to the uncertainties related to China's growth and recovery in developed economies, especially Europe and the peripheral countries. In addition, we have seen more positive signs from the U.S. economy, driven mainly by data from the real estate sector and the improvement of consumer confidence. It is worth mentioning that those economies are important markets for metal commodities.
Furthermore, the production of metal in China shows signs of deceleration. The main difficulties in increasing the local production consist of low and declining quality of iron ore, inadequate logistics for transport of produce, as well as the existence of small mines.
The anticipated growth for the global steel industry is expected to sustain the prices of iron ore at high levels, but at lower levels than those seen last year.
I still weigh in favor of Vale mining practice prices remaining at high levels, the continuing restrictions on exports from India, the third largest exporter, as well as the possibility of bad weather affecting production in Brazil and Australia causing delays with starting production of new mines.
Another reason for weighing in favor of Vale is that its competitor Barrick Gold Corporation is not doing well and is nearly 20% down from where it began in 2012, while Vale has shown an increase of 8% in its cash equivalents.
The outlook for the segment of non-ferrous metals, especially nickel, copper and coal, is also favorable. The demand for those metals will remain strong in the Asian region, especially in China, while consumption will remain weak in Europe. In the United States, a major consumer of nickel, demand is expected to increase driven by the market for aircraft engines, as well as the sectors of alloys for use in medical equipment and corrosion resistant alloys.
muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.