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Benefit from Mining Recovery with This Stock
Posted by: Rustic Nomad (IP Logged)
Date: May 31, 2014 12:13PM
Mining companies have been in troubled waters for quite some time. Last year, metal prices plunged heavily due to which the stock prices of companies such as Vale (VALE) and Cliffs Natural Resources tumbled greatly. Consequently, they have resorted to selling their assets and reducing over heads to strengthen their position in the market.
A Look at Cliffs
Cliffs has to face tough competition from its peers such as Vale. Vale has sold assets worth around $3 billion since 2012, and still there are no clear signs of its recovery. Recently, the company also decided to sell its minority stake in its VLI logistics unit to Mitsui for $1.24 billion. In addition to this, it will sell its additional stake in VLI to a consortium led by Brookfield Asset Management. Furthermore, Vale has plans to sell its stake in Norsk Hydro ASA.
But if we look at Cliffs, it has not made any significant divestment of such a high value. The only sell off the company has made till date was its stake in the Amapa iron ore operation to Zamin Ferrous Ltd.
If we look intently, there is a significant difference in the strategies adopted by the two firms. While Cliffs has been selling its stake in its iron ore business, Vale has been making smart moves to strengthen it. Both the companies make multiple products, but iron ore production stands as its primary business. Vale is trying to sell of its underperforming assets, and is using this money to strengthen its iron ore business. In the previous quarter, the iron ore business accounted for around 95% of its EBIDTA.
Vale’s board had approved the Carajás S11D iron ore project worth $19.67 billion in July. According to the management this mine will be a success because it has a product of high quality and low cost, which makes this project worthy of such an investment.
Vale is also in talks with a U.S client to sell iron ore pellets. This is one major segment, were the company does not have any presence. It has also acquired the license to expand its Amazon iron ore mine. This is a clear indication that Vale is trying to become the leader in the iron ore industry.
But when we consider Cliffs Natural Resources, it has extended the sale of its iron ore pellet sale agreement with Essar Steel Algoma to 2024. Beside this, the company has taken no decisive steps to expand its iron ore business.
Vale has managed to minimize its expenses by around $1.6 billion in the first half of the year. It also clipped off its SG&A expenses by a whopping 47%. In addition to this, it also reduced its R&D expenditure by 50%.
But Cliffs is still in the process of planning. It has planned to reduce its expenses up 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.
Recent reports have suggested that Chinese economy is increasing at strong pace. Its iron ore import is at its all time high at 76 tonnes, which is an increase of 15% year over year. This shows signs of recovery in the iron ore industry as the recovery of metal prices largely depends on the demand from the Chinese market. Moreover the purchasing managers’ index also shows the same, which will ultimately benefit the miners in the future.
From the above facts, we can clearly make out that Vale has made many correct moves, while Cliffs' strategy seems to be dormant. This is even evident in the stock prices as well, where Cliff has declined to 34%, Vale was down by only 22%. Analyzing the strategies of the two companies it seems that Vale is well positioned for a turn around. In addition to this, Vale has the benefit of economies of scale and diversification due to its large size.
Vale's strategy of selling its assets will probably benefit the company in the long run. And it 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 with the recovery in the Chinese Economy, we can expect some revival in the metal prices. This will benefit all the iron-ore miners. But because of decisive decision taken by Vale, it is likely to perform better than Cliffs.
Stocks Discussed: VALE,