As one investigates the Brazil-based mining company Vale (VALE), it is impossible to dismiss the fact that it is currently facing a multitude of difficulties. These relate mostly to national-level economic troubles and delays on projects that are limiting Vale's growth. Stockholders also have good reason to stay optimistic as Vale responds to these difficulties, but with the way things currently stand, I believe the stock will continue dropping in the near future. I do believe it is in a good place, however, to recover from this drop.
One financial struggle for this company-which may translate to drops in Vale stock price-is the worsening condition of the economy in Brazil. Unemployment is rising, Brazil is in a bear market, and there is concern about limited growth in Brazil. Investors have cause to be skeptical of a Brazil-based company like Vale, and this will quite probably lead to a decline in the Vale stock price.
Despite acknowledging the troubling conditions of the Brazil economy, one writer still argues that Vale is a potentially-profitable company to invest in. The author even adds that the Brazilian government appears to be impeding this company's success through policies that may help the Brazilian economy grow. Regardless, the author goes on to claim that the demand for iron ore in the global economy is about to improve as the result of a stimulus in China, and profits in the company will soon be on the rise. This may outweigh the trouble from the economy and government interference.
I think one must take the ideas of this author with a grain of salt though. The economy in Brazil and the government interference is just a sampling of the difficulties facing Vale, and the increased demand for iron ore is speculative at the moment. Even if the demand does increase, the rises may still be minimal or nonexistent as the other issues continue to have harmful effects on Vale stock.
One other issue for Vale is that it may face losses in Australia as environmental mining laws and restrictions are delaying Vale projects. Its competitors Rio Tinto (RIO) and BHP Billiton (BHP) have much to gain from these delays, as they may take over a greater percentage of the mining market in Australia.
Stockholders should not take this possibility for granted, however, as Rio Tinto has recently encountered a delay in a large Australia expansion project as a result of its potentially harmful environmental impact. The federal environment minister of Australia has shown concern over the proposal as it may have a negative impact on the Great Barrier Reef. This demonstrates that Australia is valuing environmentally conscious practices and may begin imposing more strict mining rules to protect the environment as Brazil has attempted to do.
Vale, furthermore, is beginning to establish itself as an environmentally-respectful and still profitable company. It is garnering positive attention for its work in Malaysia, particularly for projects falling under the title of corporate social responsibility. These projects range from support for Malaysia's fishermen to the creation of a public park. Vale is receiving some skepticism for its creation of a plant in Malaysia, but Vale has assured Malaysian residents that it will be careful with the environmental impact and work to improve social benefits of the plant. As Vale's prior work has been so beneficial, the majority of residents are optimistic about the plant.
Not only is Vale expanding in Malaysia, therefore, but it is creating a reputation for itself that will be better received by Australia as it shows great desire for environmentally conscious companies. The initial loss in Australia may not be as severe in the long term, as the stricter environmental rules in Brazil and Vale's commitment to sustainability and community may help Vale become an even greater force in Australia.
Aside from the iron-ore aspect of the company, Vale's fertilizer business may take a large hit as it reconsiders a major project in Argentina. This is $5.9 billion potash project, and there are speculations that the hesitancy from Vale may be the result of inflation and a recent government decision to nationalize a large oil company. There is also a belief that the fertilizer section of Vale will take a hit if it decides to delay or abandon this project. This appears to be a difficult situation that may result in a loss either way, and it shows another way a struggling national economy is making growth difficult for Vale.
Another mining company is succeeding elsewhere, helping to show how Vale's connection to struggling economies is hindering its potential. Cliff's Natural Resources (CLF) is currently developing a large chromite mine in Canada that will lead to success for that company. The author of this article also notes that there has been an increase in demand for minerals such as iron ore and chromite due to urbanization in developing countries.
Demand is not the issue for Vale, therefore, but the potential for growth is being hindered by struggling economies in places like Brazil and Argentina. Competitors that can find beneficial locations where they can expand - as Cliff's Natural Resources is doing - are the ones who can take the most advantage of this growing demand.
As companies compete to meet the growing demand, many are struggling with the high costs of their projects. Amongst these companies are BHP and Rio Tinto. Teck Resources (TCK), however, has announced an interest in entering the iron-ore market, which would produce another competitor for Vale and others. Teck Resources is interested in producing iron-ore rather than mining it, however, so it may be able to respond better to the demand than the struggling mining companies.
Despite there being great demand for mining companies, many are struggling with economic difficulties causing delays on projects and limiting growth. Vale is one of these companies and has faced particular difficulties with the economic situation and strict mining rules coming from Brazil.
Vale has done well in Malaysia and shows potential for growth through its work there. Like most other companies, it is struggling to grow at the moment, but it is maintaining signs of strength despite the struggling economy. Vale is not a good stock to buy at the moment, and it will likely drop in price. It does appear, however, to have some strength that may carry it through in the longer term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.