According to the company itself: "Vale is the world leader in iron ore and pellet production and the second biggest nickel producer."
Coming out of The Great Recession, as manufacturing rebounds, Vale (NYSE: VALE) is poised to gain from expansion of the manufacturing base -- particularly in markets like China, India, Asia-Pacific, Middle East, and Latin America. The company already has a growing global footprint of 38 countries with an exposure to most of the world's high growth markets -- not in the least its home country of Brazil.
Furthermore, there are very real geological and geo-political constraints on the supply of minerals that Vale (or any of its competitors) can extract, produce and sell on the world markets. This demand-supply dynamic has both secular as well as a cyclical themes interwoven. Hence, the global demand-supply dynamic for Vale's products bodes well for the company's growth prospects and profit margins for a long-time to come.
Vale is also showing an enormous appetite for bottom-line results with Net Profit Margin almost doubling from 2009 margin of 21.6% to the Q3, 2010 figure of 40.9% . Even as of last year, the company was only 310 basis points (in net profit margins) behind the industry's most profitable of the large mining and metals companies: BHP Billiton.
Vale's net profits are just as noteworthy because the Brazilian company generates revenues that are approximately half (US$ 23.3 billion) compared with another industry leader Rio Tinto -- whose top-line figure is US$ 41.8 billion. Yet, Vale's 2009 Net Profits were US$ 5 billion compared with Rio Tinto's US$ 5.8 billion -- which makes Vale's profits merely 15% less that that of Rio Tinto's.
There are -- however -- large, concentrated, inter-connected and material risks to Vale's growth story. Two that are particularly noteworthy are:
According to Vale's 2009 annual report:
In 2009, Chinese demand represented 68% of global demand for seaborne iron ore, 44% of global demand for nickel, 39% of global demand for aluminum and 40% of global demand for copper. The percentage of our operating revenues attributable to sales to consumers in China was 38% in 2009.
If China slows down, Vale (and most metals and mining companies) revenues and profits decline. Furthermore, the company's heavy exposure to the global steel market makes it vulnerable to fluctuations in the fortunes of the global steel industry -- particularly from a construction industry perspective.
The annual report goes on to say:
Iron ore and iron ore pellets, which together accounted for 59% of our 2009 operating revenues, are used to produce carbon steel. Nickel, which accounted for 14% of our 2009 operating revenues, is used mainly to produce stainless and alloy steels...The prices of different steels and the performance of the global steel industry are highly cyclical and volatile, and these business cycles in the steel industry affect demand and prices for our products.
There are other lesser risks such as:
Price volatility of nickel, copper and aluminum that are actively traded on global commodity markets;
Capacity expansion gestation periods and consequent constraints to meet demand in the short-to-medium term;
Geo-political considerations given that many of the mineral-rich countries have unstable political and regulatory regimes.
All that said, the company has a growing and diversified geographic market with 50% of its sales coming from the growing continent of Asia. The company also has a swath of valuable mines being developed in resource-rich Latin America, Africa and Central Asia, among other mineral-rich locations around the world. Due to the very nature of businesses Vale is involved in, over several decades, the company has developed an extensive, defensible, and hard-to-replicate production and distribution capability -- again with a global span.
Not to mention, the company can be expected to pay out healthy and steady dividends in the forthcoming years.
As of December 3, 2010, Vale's ADR (NYSE: VALE) traded at approximately 14.2 times earnings compared with its other global metals and mining peers' ADRs:
ArcelorMittal (NYSE:MT): 13.0
Rio Tinto (NYSE:RIO): 14.9
BHP Billiton plc (NYSE:BBL): 16.8
BHP Billiton Ltd (NYSE:BHP): 19.5
Anglo American plc (PINK:AAUKY.PK): 40.2
Since I added Vale's ADR to my simulation portfolio on Sept 17, 2010, the position is up 23% in merely two and half months (as of Dec 3, 2010).
Moreover, it is a highly liquid ADR -- consistently ranking as one of the highest traded ADR's on NYSE. The target P/E one could set for the ADR is a value of 20 times its earnings per share compared with its current P/E of 14.2. Even at a P/E of 20, it is worth "taking stock" (no pun intended) rather than sell-off the entire position.
Given Vale's exposure to the twin forces of Brazil's breathtaking economic expansion couple with the insatiable global demand for minerals and metals that Vale produces, the company's stock and ADR are poised for a significant upside. At its core, Vale is really a "buy and hold" play over the medium-to-long run.
Disclosure and Disclaimer: The author owns no stock of Vale and has written this research note purely based on publicly available information.