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A Closer Look at Vale and Cliffs Natural Resources
Posted by: Vinay Singh (IP Logged)
Date: April 9, 2014 02:11PM
The plunge in the prices of metals made 2013 a year to forget for mining companies. Share prices of Vale (VALE) and Cliffs Natural Resources (CLF) have nosedived in the past year. As a result, these companies are resorting to asset sales and reduction in overhead to strengthen their position in the market.
However, there are a couple of reasons to make me believe that Vale will perform better than Cliffs Natural Resources in the future. Let's take a look at those reasons.
Selling Underperforming Assets
Vale has already sold almost $3 billion in assets since 2012 and it doesn't look like the company will stop anytime soon. Recently, the company agreed to sell its minority stake in its VLI logistics unit to Mitsui for a massive $1.24 billion. Also, the company has reached an agreement to sell its additional stake in VLI to a consortium led by Brookfield Asset Management. Vale's CEO, Murilo Ferreira, further claimed that the company is looking to sell its stake in Norsk Hydro ASA.
Cliffs, on the other hand, has been very dormant on the divestment front. As of now, the company has only been able to sell its stake in the Amapa iron ore operation to Zamin Ferrous Ltd. But, given the fact that iron ore production is the company's primary business, this move doesn't make sense.
Improving the Primary Business
While Cliffs has been selling its stake in its iron ore business, Vale has been making smart moves to strengthen it. Both Vale and Cliffs are engaged in the production of multiple materials, but the iron ore business is their forte. In the previous quarter, the iron ore business accounted for about 95% of Vale's EBITDA; therefore, it's not surprising that the company is trying to sell its underperforming assets.
The money generated from the asset sale is being used to expand the company's iron ore business. Earlier in July, Vale's board approved the Carajás S11D iron ore project worth $19.67 billion. The company claims that this mine will be a success because it has a product of high quality and low cost, thus making it well worth the massive initial investment.
Also, Vale's CEO stated that the company is in talks to sell iron ore pellets to a client in the U.S., which is the only major segment where the company has no presence. Furthermore, in July, Vale obtained a license to expand its giant Amazon iron ore mine, which indicates that Vale wants to secure its place as the world's biggest iron ore mining company.
Moving on to Cliffs Natural Resources, the company extended its iron ore pellet sale agreement with Essar Steel Algoma to 2024. Apart from this, the company has taken no further steps to expand its iron ore business, and it doesn't look like it will change soon.
Reduction in Overheads
Vale was able to cut its expenses by nearly $1.6 billion in the first half of the year. The company was able to shave off its selling, general and administrative expenditure by a massive 47%. Vale even managed to reduce its research and development expenditure by an impressive 50%.
Cliffs on the other hand, is planning to reduce its expenses to $215 million by concentrating on improving its cost structure. In addition, the company is also trying to decrease its exploration expense by $10 million to $75 million.
China's Economy Gathering Pace
Recent reports suggest that China's economy is gathering pace. Iron-ore imports hit a new all-time high of more than 76 tonnes in the month of September, signifying a sequential increase of 8% and a year-over-year increase of 15%. This is good news for iron-ore miners as the recovery of metal prices largely depends on the demand from the Chinese market. Also, the sequential increase in the purchasing managers' index (PMI) indicates that the Chinese economy is gaining pace, which will ultimately benefit the miners in the future.
It is quite evident that Vale has been making most of the correct moves and Cliffs hasn't been doing as well. This disparity is reflected in the year-to-date stock price performances, where Cliffs has done worse with a decline of 34% while Vale is down 22%. Vale's moves position it well for a turnaround. Vale is bigger in size when compared to Cliffs and this is an advantage, since the company ideally enjoys economies of scale and diversification due to its size.
At a trailing P/E of 35, Vale does look expensive, but the company is profitable and also pays out a hefty dividend of 5.40%. It has been generating solid operating cash flow, with the metric standing at almost $18 billion over the trailing 12 months. On a forward P/E basis as well, Vale is cheaper than Cliffs. Vale's forward P/E of 8x is almost half of Cliffs' 15.2x.
Cliffs' dividend yield is not enticing either as the company carries a yield of 2.60%. Its debt-to-equity ratio of 52.60 is also higher than Vale's 46.18. So, on a fundamental basis, Vale makes for a better pick than Cliffs.
Although Vale's strategy of selling assets is not revolutionary, it will probably benefit the company in the long run. Vale has successfully used the money generated from the asset sales to expand its iron-ore business, which is the only segment that generates considerable profits.
Also, the recovering economy of China should ultimately revive metal prices, which will benefit all the iron-ore miners. But, since Vale has been making the right moves to expand the iron-ore business, it is highly likely that it will perform better than Cliffs Natural Resources in the future.
Also, looking at the fundamental aspect and the moves made by both the companies, Vale looks like a better prospect than Cliffs. Cliffs is unprofitable and is behind Vale in its divestment drive. Moreover, Cliffs' dividend isn't juicy either. So, in my opinion, investors should go for Vale and stay away from Cliffs for now as it doesn't present an intriguing proposition.
Stocks Discussed: VALE, CLF,