Vale Looks Ripe For A Turnaround

Oct. 8.13 | About: Vale S.A. (VALE)

2013 has been a tough year for most mining companies. Metal prices have dropped and there are little or no signs of a rebound. The drop in metal prices has had a big negative impact on Vale (NYSE:VALE) as the company's stock has witnessed a drop of approximately 27% in 2013. Consequently, Vale has turned its attention to selling some of its assets to reinforce its position in the market and focus on higher-return assets. The company recently agreed to sell its stake in its cargo unit for $1.2 billion to Japan's Mitsui & Co. The company also claimed that it may also sell its stake in aluminum producer Norsk Hydro ASA along with oil and gas assets.

Will this wide-scale asset sale benefit the company in the long run? Let's find out.

Focusing on iron ore

Vale is engaged in the production of numerous metals like iron ore, manganese, iron copper pellets, copper etc. along with some other materials like coal and fertilizer nutrients. However, the company's ferrous mineral sector accounts for approximately 95% of earnings. The majority of the ferrous mineral segment consists of manufacturing iron ore and iron ore pellets; therefore, it isn't surprising that the company is trying to sell the underperforming assets, which apparently means that it'll concentrate more on its iron business.

Vale is reportedly in talks to sell iron ore pellets to a consumer in the U.S., which is the only key market where Vale has no major presence. A considerable portion of the money generated from the sale of its underperforming assets will be used to expand its iron business in the U.S. Also, in the previous quarter, Vale received a license to expand its massive Amazon iron ore mine as the company is looking to fortify its place as the world's largest iron ore mining company.

Will this strategy help?

The year has been difficult for Vale till now and a drop of 27% in the stock prices hasn't pleased investors either. Therefore, I expect that Vale will continue to expand its iron ore business as it drives 95% of the company's profit.

Also, the fact that Vale has managed to sell its assets in a difficult market is a plus point for the company. By comparison, Rio Tinto (NYSE:RIO) has failed to sell its stake in its Australia-based Clermont coal mine. Rio received three bids for the mine, but none met the company's valuation.

For the next quarter, iron ore prices are expected to drop, but since the iron ore business is Vale's most consistent segment, the temporary price drop shouldn't have a negative impact on the company's long-term future. The revival of metals' prices depends on demand from China and according to reports, the purchasing managers' index (PMI) rose to 51.1, attaining its highest level in 17 months.

Looking at peers -- Rio Tinto and Cliffs Natural Resources

The iron ore business is key for other companies such as Rio Tinto and Cliffs Natural Resources (NYSE:CLF) as well.

Rio Tinto generated roughly 84% of its earnings from the iron ore business and has been resorting to similar tactics as Vale, but has been unsuccessful in its attempt to sell its assets.

The present year has been dismal for Rio as its share prices have reduced approximately 20%, while its quarterly performance hasn't been great either. The company's earnings dropped $1.3 billion to $4.2 billion while cash flow from operations remained flat at $8 billion. The drop in overall average prices of materials was the key factor for this drop.

To make up for the plunge in material prices, the company is planning to replace its train drivers with robots. There are more than 400 workers who get paid $224,000 per year and replacing them with robots will save the company nearly $100 million. The company is aiming to reduce the transportation costs to $15.60 per ton by 2020, from $23.10 per ton in the present year and this automation of trains should help the company achieve its goal.

The drop in material prices has affected almost all the companies and Cliffs Natural Resources is no exception. In fact, the company has fared far worse than Rio and Vale as its share price has dropped more than 50% year-over-year. Also, Cliffs reported a drop of 6% in its revenue, while operating income dropped 28% to $262 million. On the earnings front, the company's bottom-line came crashing down from $258 million in the second quarter of 2012 to $133 million in the present year.

Though the company is focused on its iron ore business, it generated about 17.6% of its revenue from met coal. Cliffs has also been pretty inactive on the assets selling front and it doesn't look like it'll change in the foreseeable future. The company has only managed to sell its minority stake in Amapa iron ore operations and given that all companies are concentrating on the iron ore business, this deal will do more harm than good.

Cliffs is also trying to reduce its overheads to $215 million from $230 million by focusing on improving its cost structure. The company is also planning to reduce its exploration expenses by $10 million to $75 million.


Vale's strategy of selling off its non-core assets and expanding its presence in key iron ore markets looks good. The stock might have dropped considerably so far this year, but all is not lost. Over the next five years, analysts expect that Vale's earnings will grow at a CAGR of 21%, which could be achieved if Vale manages to bring down costs and strengthens its iron ore operations. Hence, with the stock being beaten down substantially this year, investors should take a closer look at Vale as it might prove to be a good long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.