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Why Vale Looks Like a Good Buy for the Long Run

August 08, 2014 | About:
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kcpl

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Vale (VALE) delivered solid operational performance during the second quarter, delivering record results in iron ore production despite a slowdown in the market. So, even though Vale's shares have declined 10% this year, a turnaround cannot be ruled out due to the solid improvements that the company is making. Let's take a look at the company's results and see how it is positioned for the long run.

Making good progress

There are big projects ramping up coupled with consistent cash flows in Vale’s base metal business along with the group operational results in the fertilizer business. Vale continued to achieve robust savings during the first half of this year as compared to the same period last year. It generated solid cash flows despite lower iron ore price and was able to pay $2.1 billion in dividends to shareholders, while maintaining its gross debt and cash position levels very similar to first quarter 2014.

Vale is talking with the government of Guinea about developing alternatives to recover value from its investment in Guinea. Generally, the mining major continues to focus on productivity and ramping up important operations coupled with reducing costs expenses and capital expenditures for achieving sustainable shareholder value.

Vale SA achieved a record iron ore production of almost 80 million tons making the best performance for the second quarter ever with an increase of the additional 40 million tons in Conceicao Itabiritos. Vale has more than 2 million tons stockpiled in Malaysia, sufficient to feed the supply chain as part of its logistic structure to allow more flexibility and for supporting greater sales volume in the coming quarters.

There’s low cost level and is believed to decline even further with the increase in production and hence diluting fixed cost in addition to the internal cost reduction initiatives of the company that are expected to bear additional fruit.

The base metal business of Vale has also made solid contribution to its results with steady cash flow generation.

Strong financial performance

Salobo and Onça Puma generated reliable cash flows and contribute 32% of base metals EBITDA. Salobo II just came on time and under budget at the end of the second quarter 2014. The successful completion of Solobo II in the second quarter 2014 illustrates the solid timing of the investments in its copper operations with the Solobo projects just coming on-stream on-time and under budget.

Moving ahead, the rise of ongoing projects reinforces Vale’s confidence that the base metal segment should achieve its EBITDA target of $4 billion in medium term.

Vale has made remarkable progress on the Nacala Corridor with advents in line with its plans and has reached physical progress of 77% in the Greenfield sections. The first train is believed to get mobile in the fourth quarter this year and the first shipments are estimated to start by first quarter 2015.

Recording good growth

The fertilizer business continues to make progress with an increase in the production of phosphate rock in both Peru and Brazil generating a record output for the second quarter. Vale also continues to discuss partnership opportunities in order to maximize its strategic option for the business. The Brazilian mining giant is committed to maintain efficient operations, reducing costs, expenses and optimizing capital expenditure for generating positive free cash flow in any price scenario.

Vale is currently fulfilling the inventory in Malaysia and is able to store 4 million tons as of now. Vale SA intends to blend high silica material with Carajás as soon as possible that is believed to improve the price realization as the material that would arrive at the market after the blending, will be a superior quality material.

Management expects the demand for steel to increase by 3%–3.5% in 2014, and thus driving the demand for iron ore. In addition, nickel prices are believed to increase as a result of the rising demand, particularly in Europe and the U.S. But metallurgical coal requirement is believed to fall in the coming quarters, due to a weakening demand in China.

Iron ore production at Vale increased 12.6% from a year before, whereas its average realized iron ore price reduced by 17.6% to $84.6 a ton from a year ago.

Vale acquired Simandou and Integra in 2010 and 2007, respectively, through a period of increasing commodity prices and rapid expansion of the mining companies around the world.

Conclusion

There is no doubt that Vale is making smart moves. So, despite being beaten down this year, Vale's performance should improve in the future, and this is why investors should consider capitalizing on the stock's dip to invest in it.


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