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by Ahmed Ishtiaq

Vale SA (NYSE:VALE) is one of the stocks that was most severely hit by the slowdown in the global economy. Over the past two years, the stock has lost almost half of its value. Vale was trading close to $40 at the start of 2011. However, at the end of 2012, the stock closed at around $20. The end of the year was encouraging for the company as the stock gained substantially due to the expected increase in demand from China. Vale is the second largest mining company in the world, as well as the largest producer of iron ore and pellets. The company focuses on production, exploration and sale of basic metals in Brazil and internationally. Vale is also engaged in logistics, fertilizers and steel businesses.

Due to its position as the second biggest mining company in the world, the company suffered heavily from a decrease in demand. However, global economic conditions are expected to recover in 2013, which has caused some positive movement in the stock price.

Dividend Profile

Vale announced $3 billion in cash dividends at the end of the last quarter, which translates into $0.5821 per share. Increase in dividends took dividend payments to $6 billion for 2012, and per share dividend to $1.1771. The biggest iron-ore producer in the world is one of the best dividend paying stocks in the market. Current payout ratio of the company is around 70%. Ideally, the payout ratio should be below 50%. Low payout ratio allows the company to easily maintain and grow its dividends. However, payout ratio for Vale is on the higher side. Nonetheless, massive size and solid cash flows should allow the company to maintain its dividends.

Will Emerging Economies Make a Difference?

The global economic environment is recovering, and the Chinese economy is expected to play a vital role in the revival. The Chinese government has announced heavy infrastructure expenditures. As a result, demand for iron-ore from China has increased. On the other hand, Europe will still linger, and the economic growth will be minimal. Mining giants like Vale and BHP Billiton (NYSE:BHP) will surely benefit from the recovering demand. However, I do not expect the market to do wonders in 2013. There will be a slow recovery and demand will be moderate. The Chinese economy is showing signs of growth; however, there are still doubts about the sustainability of the growth.

At the moment, demand for iron-ore is getting stronger, which has resulted in a slight recovery in the iron-ore prices. Currently, the spot prices are at around $150 a metric ton, significantly higher than $116 reported at the end of November. Demand from China has played an important role in the recovery as it is a key ingredient in infrastructure development. Supply of iron-ore is expected to increase in the second half of the year, which will again put downward pressure on prices. Furthermore, Chinese demand is not expected to cause a major long term lift in prices. As a result, there is a possibility that iron-ore prices may come down. Vale CEO, Murilo Ferreira was cautious when he said that demand will be higher in 2013. Ferreira used the word "significant" while talking about the recovery in the market; however, he suggested that the prices of iron-ore will not reach previous high levels.

Comparison with Peers

Main competitors for Vale are BHP Billiton and Rio Tinto (NYSE:RIO). The table below lists some important metrics for comparison.

VALE

BHP

RIO

P/E

5.0

13.3

25.3

P/B

2.2

3.1

1.9

P/S

1.3

2.8

1.8

EPS Growth

18.80%

39.90%

8.90%

Operating Margin

34.20%

32.90%

16.70%

Net Margin

26.70%

21.40%

7.20%

ROE TTM

20.30%

25.10%

7.00%

Debt to Equity

0.40

0.30

0.30

Source: Morningstar

Vale is trading at a discount compared to its peers at the moment. BHP has the best EPS growth in the group. However, Vale has better margins compared to its peers. Massive scale of operations allows these companies to record impressive margins. Despite weak iron-ore prices, these companies have been able to achieve impressive margins. Debt-to-equity ratios are also low in the industry.

Summary

Global economic conditions will certainly be better than the previous year. However, there will not be a dramatic change. Iron-ore prices will recover, but it is unlikely that the prices will reach exorbitant levels. As a result, I believe Vale will have a better year than 2012, but growth for the company may remain sluggish. Furthermore, Vale's massive ships, Valemax will be able to dock in China. The company spent a massive amount on "Valemax", hoping to bring the costs down by 20%-25%. The company will be able to compete with BHP and RIO if the shipping costs come down. Overall, I believe Vale will be a good investment for investors looking for stable long-term investment. I do not expect robust growth; however, the stock does pay healthy dividends and is a moderate growth opportunity.

Source: How Will Vale Do In 2013?