Vale S.A. (NYSE:VALE) is the second largest metals and mining company in the world primarily as a leader in producing iron ore and iron ore pellets. All of its iron ore comes from Brazil through three main systems: Northern, Southern, and Southeastern. The Brazilian ore that the company produce is the highest quality in the world and is purer than the Australian ore, their main competitors mine. Brazil is world's second largest exporter of iron ore, with 25% market share of global iron ore trade volume.
Growth of Vale is highly dependent on global macro trends and outlook. Its business is heavily concentrated in Asia (particularly China), generating more than 50% of its total revenues from Asia. China is one of the world's largest steel producers and uses much of the iron ore in that process. The country's reliance on imported iron ore is over 60%. Due to many reasons, China will remain dependent on imported iron ore. China's domestic iron ore supply is highly price sensitive and much of its iron ore is of low grade. Labor and energy power prices are also increasing in the country; as a result, domestic iron ore cost will continue to rise. Some mines in China are producing iron ore at $170 per metric ton.
Chinese iron ore demand will also remain strong in 2014. China's iron ore imports hit an all-time high of 820 million tons in 2013, and may increase to 850 million tons in 2014. Besides China, India will also have to import iron ore soon to meet significantly increasing demand from domestic companies. Steel demand in India is expected to grow by 5.6% this year.
Brazil's iron ore exports are forecast to increase 9.1% to 352 million tons. The increase will benefit Vale as it accounts for more than 80% of Brazil's total iron ore exports. Although Vale is largely dependent on China for growth, the company also has a strong demand from within Brazil and South America. Brazil's iron and steel industry has traditionally relied on overseas growth drivers. Now the industry is poised to get a big boost from domestic factors too. Steel demand in Brazil is rising due to increasing investment in infrastructure. The country's steel consumption is expected to grow 3.8% in 2014, as a result, demand for iron ore will increase. The company generates more than 15% of its revenue from Brazil.
Vale is well positioned to capitalize on global growth. As the company is the largest producer of iron ore, this gives it a significant advantage both in economies of scale, as well as negotiating prices. Due to Vale's experience in the industry and the integration of their mining systems it is the lowest cost producer of iron ore. Although the company is not incredibly diversified, it does currently produce quite a bit of nickel, copper, coal, manganese, and more that allow Vale to not be entirely dependent upon iron. The company is also in the process of developing many more projects that will make it much more diversified.
Vale attributes their success to strong relationships with steelmakers in Asia and the higher quality ore from South America. The company also has ownership interest in several steel companies in an attempt to get a bigger share of the value chain. This includes a 27% stake in TK Companhia Siderurgica do Atlantico, and a 50% stake in California Steel Industries. Most of its current steel production has come from joint ventures and acquisitions. The ownership in steel companies will continue to provide a significant revenue to Vale for the foreseeable future, and also help to keep selling expenses low.
While there are a number of mining companies worldwide that produce all kinds of metals and minerals, there are only two other huge players that really go head to head with Vale everywhere. The two competitors are BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO). BHP Billiton is the most diversified mining company, while Rio Tinto is the second largest iron ore producer in the world. Some of the key statistics for Vale and its competitors are given below.
Return on Assets
The chart represents that Vale's stats are almost as good or better than its competitors. Looking at Price/Book and Price/Sales ratio, Vale seems undervalued as compared to BHP Billiton and Rio Tinto. Vale has done a good job managing their debt. With a very high current ratio of over 2.07, the company is well positioned to invest and buy out other companies in the future.
One business risk that needs to be considered with all mining companies is the capital intensive nature of the business. Miners needs to continue investing in its plant & equipment in order to continue extracting material. As Vale digs deeper into the mines, costs will increase. Therefore, they need to open new mines to keep their costs low. Opening mines is also a key to sustaining the business model. Although, this is not a huge issue for Vale since they have a lot of reserves, but it is a risk to keep an eye on.
Vale is an excellent, well managed company with a strong history of profits. Even though the company operates in a highly cyclical industry, it has managed to make a good profit in every year, even in the downturn. Beside China, demand for iron ore is also rising in India and Brazil due to increasing spending on infrastructure. In my opinion, Vale is a buy stock.
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.