Brazilian mining goliath Vale (NYSE:VALE) has disappointed this year. The organization's stock is underperforming the S&P 500, losing almost 9% of its value so far. What's more, Vale posted weak results with a decline in key metrics. Indeed, Vale sold iron ore 25% cheaper than the business sector reference value, sparking a selloff. Be that as it may, will Vale have the capacity to skip back from this disappointing performance going ahead? Let's take a look.
A turnaround is probable
A slowdown in China, which is a key area for Vale, turned out to be a sore point for Vale. Be that as it may, Citigroup is still upbeat about Vale's performance and sees an improvement in iron ore pricing.
Vale was weak because of a drop in its normal selling value while there was a marginal decline in the iron ore demand as well, demonstrating that the industry is under pressure.
Universal iron ore prices are primarily controlled by Chinese demand. China is accounted for to be the largest consumer of iron ore on the planet. However, in the later times, because of tight government and fiscal policies, a large number of the steel plants have been shut down. This has prompted piling up of inventories at Chinese ports and diminished imports.
- Warning! GuruFocus has detected 7 Warning Signs with VALE. Click here to check it out.
- VALE 15-Year Financial Data
- The intrinsic value of VALE
- Peter Lynch Chart of VALE
Short-term problems and going with solutions
Also, Vale's production is robust. Indeed, the first quarter was the organization's best since 2008 for iron ore production. Vale reported strong generation levels for nickel and coal as well. However, since production was more than demand, administration concluded that it will push the remaining products into the supply chain amid the approaching quarters.
Going ahead, Vale expects iron ore prices to increase, however it will be a long while until this turnaround happens. This is fundamentally because of overgeneration by iron ore players, which has led to an oversupply in the business sector. This will keep iron ore prices subdued, in any event in the close term.
Meanwhile, as iron prices increase, management is adopting various initiatives to stabilize the business. It has been working on various cost-cutting initiatives across all areas of the organization, and this is yielding results.
Rio Tinto's can be a problem
On the other hand, Vale is by all accounts not the only player in the industry and has to face intense competition from rivals such as Rio Tinto (NYSE:RIO). To offset the adverse effect of lower prices, Rio Tinto has increased its generation volume, which will empower it to attain economies of scale. The organization anticipates that iron ore demand will enhance later on, and developing markets such as China and India will assume key roles to fuel the iron ore industry.
Furthermore, Rio Tinto has sued Vale and BSG Resources. As indicated by reports, Rio Tinto alleges that "they intrigued to loot the Anglo-Australian organization of an exceedingly prized iron-ore concession in Guinea." The situation presently is extremely mind boggling, and if Rio wins this fight in court, it could cost Vale billions of dollars. In spite of the fact that Vale has denied the allegations, time will reveal who wins the fight in court.
Despite the fact that Vale faces an enormous danger because of Rio's lawful move, it can't be denied that the organization is shabby. Despite the fact that it does not have a trailing P/E, its forward P/E is just 8. The stock is trading close to its 52-week low, and it could be a decent investment considering the normal knock in iron ore valuing and interest. Also, Vale's cash stream metrics are truly strong, with operating cash stream throughout the last twelve months standing at $15 billion.
As such, investors should stay invested in Vale, and revel in the 6.10% dividend yield that it pays out.