Over the past few years, Brazil's economy has been one of the strongest emerging markets in the world. With several upcoming catalysts and strong macroeconomic trends, Brazil appears to be the place to be invested. But which stocks are the best to take advantage of Brazil's strong economy? Vale S.A. (VALE) appears to be a rising star for Brazil and below are 3 reasons why investors should consider investing in it.
Vale S.A. is a Brazil based metals and mining company. The company services are divided into four segments which include bulk material, basic metals, fertilizers and logistic services. Vale is also active in joint venture investments. The company operates in more than 38 countries and focuses on global diversification.
Reason #1 To Invest - Brazil's Strong Economy
Recently, Brazil has certainly been an interesting economy. It has had signs of promise and also signs of frustration. But with upcoming catalysts and rising consumer confidence, the economy appears headed in the right direction.
Brazil will play hosts to both the 2014 World Cup and the 2016 Summer Olympics. Both of these events should provide the country with increased infrastructure development which should provide dividends to all Brazil focused companies, even companies in the metals and agriculture businesses. Recent analysis predicts that Brazil can expect to bring in roughly $3.5 billion from the World Cup and $5 billion from the Olympics.
Another reason for enthusiasm about Brazil's economy is the rapid growth of the middle class. Over the past decade, more than 30 million Brazilians have climbed out of the lowest socioeconomic group and into the middle class. This growth should eventually fuel increased demand for goods and services, and further transform the Brazilian economy.
Additionally, and specifically to Vale's benefit, Brazil is extremely rich in natural resources. The country has a vast supply of precious metals, oil and agriculture products. It is also one of the largest producers and exporters of iron ore and aluminum.
Reason #2 To Invest - Vale's Fundamentals
2012 was an extremely challenging year for companies in the minerals and metals space. Because of the heightened uncertainty for the global economy, there was a general decline in the prices of minerals and metals. The only exception was gold. Iron ore was especially volatile during the third quarter of the year.
However, although Vale was impacted by this slowdown like all other companies in the industry, the company did manage to continue to achieve solid performance. Vale's EBITDA was $19.1 billion, the third highest in the company's history. This was much less than the number in 2011, $23.2 billion, but was entirely due to the decline in the prices of metals and minerals.
The company also distributed dividends to shareholders of $6.0 billion. This was the second largest dividend ever paid out by the company and among the largest for the industry. The company also recently announced that it will pay out a minimum of $4.0 billion during 2013. This adds a nice security blanket for dividend investors. Even in light of the industry's volatility, Vale has promised to pay out at least 2/3 of what it paid in 2012.
The company's iron ore and pellet shipments reached an all-time high of 303.4 million metric tons during the year. The iron ore production during the fourth quarter was also the biggest ever for a fourth quarter. The company's hope was that this would amplify the v-shaped recovery of iron ore prices that took place in mid September 2012.
Vale's revenues in the fourth quarter 2012 were just over $12 billion, rising 9.5% from the third quarter 2012. This was the result of higher prices, driven mostly by iron ore. Additional sales volumes contributed about 1/4 of the revenue increase.
So in light of a challenging global economic slowdown and depressed metals prices, Vale still managed to perform historically well. They also correctly managed their iron ore production which contributed to a stellar fourth quarter sales effort.
Reason #3 To Invest - Growth Strategy
Vale has had a stellar growth strategy over the past couple years. The company has focused on organic growth opportunities, and diversifying globally and through various products. The company has done well to branch out into both investment-based demand products such are iron ore and coal, as well as depletion-based demand products, like fertilizers.
Additionally, the company continues to focus on developing new products, such as the Carajas Serra Sul S11D.
This project will provide an increased supply of iron ore at lower costs and higher quality. The end result should create more value and help to strengthen Vale's position in the global market.
Vale also commenced two new copper projects in 2012. The projects are called Salobo and Lubambe. Salobo is a copper with gold operation, and is in the first quartile of the industry cost curve. Lubambe is Vale's first copper mine in the heart of rich African Copperbelt. This area has the largest growth potential in the world for copper supply expansion.
While all of the above sounds like the perfect investment opportunity, Vale does not come without its own set of risks. Brazil is an emerging market and as such, is prone to immense spikes in volatility causing all investments to swing wildly. Combine the potential country risks with the industry risks. Precious metals and minerals are prone to large price swings depending on the state of the global economy. It's incredibly difficult to predict and as such, investors need to exercise patience with these types of investments. It may be prudent to wait for pullbacks in prices before looking to enter a position.
Currently, there are large risks across the global economy. It is unclear for how long the risks will continue and what impact they will have on the metals industry.
Although there are risks, both on a macro level and industry level, I believe Vale is poised to outperform its peers in the industry. Should the global economy pick up and metals prices get back on track, Vale should prove to be one of the best investments in this space.