Vale S.A (VALE) recently released its third quarter production report. Third quarter iron ore production totaled 83.9 million tons; increasing 4.2% sequentially and decreasing 4.5%, YOY. Through the year ending September 30, 2012, production totaled 317.4 million tons.
The company's N5 South production mine in Carajas is expected to commence operations in the second half 2012. The asset is expected to contain over 1 billion tons of proven and probable reserves, with 67.1% average Fe content. Vale expects this asset to improve the quality of its worldwide iron ore supply in the near and mid term.
Over the past nine months, Vale's coal production has increased 144.4% YOY. Vale has endured industry-wide and internal headwinds in the recent past. Beyond the near term, economic recovery efforts in industrial and developing countries bode well for Vale's long-term resurgence.
BHP Billiton (BHP), Rio Tinto (RIO), Barrick (ABX) and Freeport-McMoRan Copper & Gold (FCX) are the diversified mining firms that are most comparable to Vale S.A. Vale's price is around 5.7 times earnings, 1.68 times sales, and 1.12 times its book value. These are the lowest price ratios among these mining firms; only Rio Tinto's 1.62 price-to-sales ratio is lower than Vale.
Rio Tinto is around 22.2 times sales, both BHP Billiton and Freeport-McMoRan are around 12 times earnings, and Barrick is around 9.4 times earnings. Vale's current ratio is around 2.25 and its debt-to-equity ratio is around 0.34; only Freeport-McMoRan's 0.21 debt-to-equity ratio is lower. Vale's annualized dividend is around $1.18 per share.
Vale's EPS is around $3.07, it's increased 33.1% in 2012; this is the highest EPS growth among these diversified mining firms. Vale's EPS is projected to increase 10.4% in 2013. Vale's sales have increased 24.6% over the past five years. Vale's ROE is around 19.2%, its operating margin is around 41.2%, and its profit margin is around 27.9%; these are some of the highest margins among the aforementioned firms.
Vale's 2.02% float short and 2.94 short ratio are also among the highest within these mining firms. Vale's beta is around 1.5, while its 21.4 million average trade volume is the highest among these firms; it trades at a significant discount compared to the aforementioned firms. Vale is trading at a 13.5% deficit YTD and is down 2.8% over the past month.
Vale recently reopened the Carajas iron-ore railway that was being blocked in late September due to unrelated protests by the locals in the area. This 892-kilometer railroad is one of the main avenues for Vale's exports; it accounts for slightly less than 50% of Vale's 320 million metric ton output per annum.
Earlier in October, Vale announced it will reduce iron pellet production in order to adjust output to coincide with steelmakers' worldwide demand. Vale will increase sinter feed production, as more steelmakers are using this iron ore dust opposed to the pellets.
Vale has already reduced production at Sao Luis and will reduce production at the Tubarao I and II plants in early November; these assets produced 4.9 million tons of pellets in the first half of 2012. The three assets accounted for 18% of Vale's production volume in the materials division.
Iron ore accounts for around 90% of Vale's earnings before items; the price for iron ore dropped below $87 in September, one of the lowest prices in the past two years; prices were as high as $200 in 2011.
Rio Tinto's oil production increased 6%, and it is second largest iron ore producer to Vale. Rio Tinto's market share is around 14%, while BHP Billiton's is around 15%. Vale's seaborne iron more market share worldwide accounts for 26%, decreasing 2% YOY.
Vale's growth is currently being constrained due to economic weakness in Europe and slowed growth in China. Rio Tinto iron production increased 4.5% through the first nine months of 2012. Vale's iron production increased 2.2%, and BHP Billiton's increased 9.5%.
Iron ore imports to China increased to 65 million tons in September, the highest in almost two years. Both Rio Tinto and BHP Billiton are located closer to Vale, leading to a clear advantage in this resurgence in steel demand in the East.
Steel and iron ore account for over 50% of the metal industry's entire volume. Weak economic conditions worldwide are currently the primary headwinds facings firms in the metals industry. Global steel production in 2011 reached a high of 1.52 million tons, a 6.8% increase, YOY.
In 2012, first quarter production was 377.3 million tons, and second quarter production was 388.4 million tons. China's steel output accounted for 48% of total global steel production, an increase of 2%, YOY. The automotive sector is typically the largest consumer of steel; September US sales totaled 1.19 million units, increasing 13%.
The World Steel Association projects a 3.6% increase for 2012 global steel usage, down from a 5.6%, YOY. China's 2012 steel usage is projected to total 648.8 million tons, increasing 4%, YOY. The iron ore sector may benefit from increased demand from the energy, industrial, automotive, and transportation markets.
Increased construction in countries like China, South Korea, and India are also expected to improve market conditions. India's usage for 2012 is projected to total 72.5 million tons, increasing 6.9% YOY. Overall, steel firms expected third quarter earnings to be lower sequentially due to lower average realized prices and stagnant growth in emerging markets.
The improving US housing market and China's stimulus package should help to increase iron ore prices. Iron ore demand and India's imports are expected to increase due to under-supply from declining operations and increased demand for an upgraded electric power grid system in the country.
Europe's weak economic performance is still expected to partially constrain global iron ore production and consumption. The Asian market currently accounts for over 50% of Vale's revenues; once iron ore prices rebound in the near term, this stock should realize a significant uptick.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.