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Vale's Aggressive Cost Cutting Makes It a Better Buy Than Cliffs Natural Resources

May 01, 2014 | About:
kcpl

kcpl

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Mining companies had a bad time last year. Due to the existing headwinds, many companies saw poor quarterly results, disappointing both analysts and investors. Vale (VALE) and Cliffs Natural Resources (CLF) are two such companies whose shares have seen a steep fall in the last year. These companies are taking up asset sales and are reducing overheads to maintain liquidity and profitability. However, if we compare the two companies, there are certain reasons which give Vale an advantage over Cliffs.

A Look at Vale

Vale is trying to maintaining its profitability and earnings position by selling its assets. The company has sold almost $3 billion worth of assets since 2012. Further, the company plans to continue this in the future also. Recently, it agreed to sell its minority stake in its VLI Logistics unit to Mitsui for a huge $1.24 billion. Also, Vale's CEO claimed that the company is looking to sell its stake in Norsk Hydro ASA.

The company is selling its stake in the Amapa iron ore operation to Zamin Ferrous Ltd. But this move might prove unprofitable for Vale as iron ore production is its primary business.

However, both Vale and Cliffs are making many smart moves to strengthen their positions. Both companies are working hard to fortify their position in the market. Vale, after selling its underperforming assets, has invested the proceeds from the sale in the expansion of its iron ore business. Vale's board has approved the Carajás S11D iron ore project worth $19.67 billion. The company claims that this mine will prove to be a growth driver as it has high quality products and low cost, thereby making it worthy of the initial investment.

Vale is aiming to secure a market leading position in the future. So, the company has obtained a license to expand its giant Amazon iron ore mine. On the other hand, Vale’s CEO stated that the company is in negotiations to sell iron ore pellets to a client in the U.S.

What's Cliffs Doing?

On the other hand Cliffs Natural Resources is also working aggressively to improve its position. As such, the company has extended its iron ore pellet sale agreement with Essar Steel Algoma to 2024. The company has bolstered its position as a result of cutting its selling, general, and administrative expenditure by a massive 47%. Additionally, it has also reduced its expenses on research and development by 50%.

Cliffs is working on its cost structure to reduce its expenses by $215 million. The exploration budget will also be reduced. Moreover, recent studies have revealed a growing iron ore market in China, and this could be a driver for Cliffs. There is an expected increase of 15% in demand for iron ore this year in China. However, Vale is in a better position than Cliffs as it has been more focused toward improving its performance. Also, Vale is bigger in size than Cliffs, so it also has a competitive advantage over Cliffs due to its diversification.

Conclusion

Vale is bigger than Cliffs, which gives it an inherent advantage in the mining industry. Vale is cutting costs more aggressively and it could be a better turnaround candidate when compared to Cliffs. So, investors should consider investing in Vale as against Cliffs going forward.


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