Vale (VALE, Financial) appears to be pretty balanced going forward. It is executing various initiatives such as productivity enhancement, new growth projects and a better quality operation at the N4WS mine. These initiatives coupled with its continuous focus on reducing overall costs and maintaining quality amidst of declining commodity prices should improve its margin. It
Looking beyond the results
The company reported first-quarter 2015 net loss of $0.13 per share on a fully diluted basis. This outpaced consensus estimates of a loss of $0.22 per share for the quarter. However, the bottom line performance was completely unfavourable as compared to earnings of $0.40 per share. This was mainly due to drop in iron ore prices that declined $12 per ton this quarter. Also, this had great impact on its revenue that declined in spite of record iron ore production of 74.5 million tons. Its revenue came in at $6.4 billion for the quarter, a decline of 34.3% as compared to last year.
Looking ahead, the company plans to reduce its iron ore production by up to 30 million tons during the next two years. It is shutting down higher costs and lower quality production assets that had relatively low margins. This move along with its cost-cutting initiatives will help the company to mitigate the losses under this severe commodity price decline and pay off its net debt.
Focusing on nickel
In addition, the company is expanding production for nickel that remains the best base metal for Vale, due to positive pricing relative to other commodities. The company is realizing increase in nickel production across its mines worldwide. Vale reported record nickel oxide and total nickel production at VNC (Vale New Caledonia), record single-furnace production at Onça Puma, and positive progress with the ramp-up at Long Harbor. The single-furnace production at Onca Puma in Brazil looks quite attractive in the long-run. This was about 12.7% better than its production in the first quarter 2014.
Moreover, the prices of nickel are expected to rise in the coming years. As per the EIU, the price of nickel will rise from $6.8 in 2013 to $10.9 in 2019. This represents approximately 60% increase in price. Vale should benefit from this enhancement in nickel price going forward. This increase in prices of nickel is due to greater consumption of nickel that outpaced total production. According to the a report published in the basemetal.com, the production of refined nickel is expected to be at 1930 tonnes, which is below about 50 tonnes from the consumption of 1,980 tonnes in fiscal 2015. The chart and table below demonstrates its price, production and consumption level.
Conclusion
Vale looks pretty solid with its iron ore production in the coming years. Moreover, it is right-sizing its asset portfolio with continuous focus on improving operational efficiencies. Thus, the efforts of reducing costs coupled with rationalization of its assets could turn out to be a great investment for the company and deliver positive cash flows from its operations in the future. The analysts expect its earnings to grow at CAGR of 10.00% for the next five years. This indicates reasonable growth for the company in the long-run.
Moreover, the stock remains pretty cheap. It has trailing P/E of 134.26, which is quite high from its forward P/E of 23.40. Its balance sheet carries total cash of $3.73 billion and total debt of $28.43 billion. It has operating cash flow of $9.15 billion and levered free cash flow of $1.31 billion.
