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Why Vale's Turnaround Looks Likely

April 27, 2014 | About:
FinanceGuru

FinanceGuru

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2013 was a rough year for most mining companies. Metal prices have dropped and there are little or no signs of a rebound. The drop in metal prices has had a big negative impact on Vale (VALE) as the company's stock has witnessed a drop of approximately 27% in 2013. Consequently, Vale has turned its attention to selling some of its assets to reinforce its position in the market and focus on higher-return assets. The company recently agreed to sell its stake in its cargo unit for $1.2 billion to Japan's Mitsui & Co. The company also claimed that it may also sell its stake in aluminum producer Norsk Hydro ASA along with oil and gas assets. Will this wide-scale asset sale benefit the company in the long run? Let's find out.

Focusing on iron ore

Vale is engaged in the production of numerous metals like iron ore, manganese, iron copper pellets, copper etc. along with some other materials like coal and fertilizer nutrients. However, the company's ferrous mineral sector accounts for approximately 95% of earnings. The majority of the ferrous mineral segment consists of manufacturing iron ore and iron ore pellets; therefore, it isn't surprising that the company is trying to sell the underperforming assets, which apparently means that it'll concentrate more on its iron business.

Vale is reportedly in talks to sell iron ore pellets to a consumer in the U.S., which is the only key market where Vale has no major presence. A considerable portion of the money generated from the sale of its underperforming assets will be used to expand its iron business in the U.S. Also, in the previous quarter, Vale received a license to expand its massive Amazon iron ore mine as the company is looking to fortify its place as the world's largest iron ore mining company.

Will this strategy help?

2013 was a very difficult for Vale and a drop of 30% in the stock prices didn’t please investors either. Therefore, I expect that Vale will continue to expand its iron ore business as it drives 95% of the company's profit.

Also, the fact that Vale has managed to sell its assets in a difficult market is a plus point for the company. By comparison, Rio Tinto (RIO) has failed to sell its stake in its Australia-based Clermont coal mine. Rio received three bids for the mine, but none met the company's valuation.

For the next quarter, iron ore prices are expected to drop, but since the iron ore business is Vale's most consistent segment, the temporary price drop shouldn't have a negative impact on the company's long-term future. The revival of metals' prices depends on demand from China and according to reports, the purchasing managers' index (PMI) rose to 51.1, attaining its highest level in 17 months.

Conclusion

Vale's strategy of selling off its non-core assets and expanding its presence in key iron ore markets looks good. The stock might have dropped considerably so far this year, but all is not lost. Over the next five years, analysts expect that Vale's earnings will grow at a CAGR of 21%, which could be achieved if Vale manages to bring down costs and strengthens its iron ore operations. Hence, with the stock being beaten down substantially, investors should take a closer look at Vale as it might prove to be a good long-term investment.


Rating: 3.0/5 (1 vote)

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Comments

pravchaw
Pravchaw premium member - 4 months ago

Does not look like price has bottomed out. Should be interesting <$10.

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