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  • Why Investors Should Exercise Caution On Vale [View article]
    alltaken the argument is not about Vale's lack of diversification, it is about establishing how Vale's fortunes are directly linked to the iron ore price. I am also not arguing that Vale requires diversification I am pointing out that the company has made a strategic decision to diversify its revenue base so they are better positioned to weather the events we are seeing now.

    Obviously this has not paid off for the company despite investing tremendous amounts of capital in acquiring alternate resources such as coal, base metals and phosphates. This also includes extensive investments in energy production including wind and hydro electricity. Furthermore, a substantial and sustained drop in iron ore prices will threaten Vale's R&D/Capex program and therefore the further development/acquisition of other assets. In the recent earnings call management alluded to reviewing their R&D program. In addition, part of the reasons that BHP has been able to weather the iron cycle better than most miners is its diversified production base.

    Overall Vale is almost a pure iron ore play, despite managements attempts to diversify and that is why its price is being hit so hard by the collapse in iron ore prices, which will see a significant drag on profits.

    Aug 30 11:59 PM | 3 Likes Like |Link to Comment
  • Why Investors Should Exercise Caution On Vale [View article]
    sreimer thank you for your comments and additional insight. It would seem that you have missed a number of vital signs regarding Vale and that you haven't grasped how a FCF/DCF valuation is conducted or the basis of my argument so i would like to make the following points in an attempt to clarify the content of the article:

    1. The FCF/DCF valuation is influenced by a range of factors particularly around the growth assumptions. When conducting the FCF/E I allowed for Vale's current cash holdings, D&A, historical EPS, capex and historical change in working capital (WACC). The limited range of assumptions that I am referring to are the scenarios that could play out in the current environment such as iron ore continuing to rise or fall, changes in Chinese demand, the macro environment and risks within Brazil itself. With space at a premium I was unable to include all of these calculations and assumptions or include the modeling for each scenario in the article.

    2. I am fully aware that commodities are cyclical but it is clear that the current movements in iron ore prices are more than cyclical there are other forces at play. I think that anyone who sees the current price changes as purely cyclical with a view that iron ore will rebound to 2010/2011 prices is naive and lacks a fundamental understanding of where China is at on the development curve.

    3. I plainly have not made any recommendation to sell Vale, that is purely your interpretation. The article clearly states to use caution when considering Vale as it doesn't represent the value that other pundits are claiming. I then set out the reasons for this including the mixed signals on economic activity in China and the domestic political risks.

    4. There is still some way to go before the European crisis clears up and we start to see growth in a number of European economies. This plain from looking at Spain, Italy and France. An additional indicator that may interest you is that all of the major European steel producers have cut steel production and commodities consumption in Europe has fallen significantly.

    5. There are still large inventories of iron ore and steel held in China and Chinese steel mills are still continuing to churn out steel at a rapid rate despite usage and demand falling, further adding to steel stock piles.

    6. We have yet to see any significant drop off in iron ore production and even when we do there are still large inventories in China to be consumed.

    7. Inflation, particularly linked to food prices is a significant issue in China hence the government induced soft landing, you only need to visit China to see the impacts or in this case I would suggest looking at the Chinese CPI available through this link

    8. it is clear that iron ore prices were unsustainable particularly when you look at theories of developmental economics, which show (and this is supported by historical data) that once a country reaches a certain point of development i.e passes or reaches the end of the catch-up phase growth slows significantly. Yet a range of people were speculating against this on the belief that demand for commodities will continue to rise as China will keep growing at 10% plus pa. forever. This is a naive assumption at best. it also led to a creation of a highly speculative market in the price for iron ore and it is this bubble that we are seeing burst now.

    9. You haven't at any stage considered the impacts of the royalty or taxation disputes nor factored these into the price. Nor have you considered the political risk in Brazil or the Brazilian government's hunger for additional taxation revenue and history of targeting private corporations as a means of boosting taxation revenues.

    I also do find it somewhat offensive that because I have laid out a case that is contrary to the normal performance ratio driven articles and hackneyed phrases of iron ore demand being cyclical, that you accuse me of being biased and imply that I have a conflict of interest.
    As per my disclosure I have no interest in Vale either long or short, nor do I have any contact with or relationship with anyone who has an interest in the company. I have purely presented my interpretation of the evidence at hand including an analysis of the outlook for China and the immediate risks in Brazil. I would suggest that you conduct some further due diligence and understand the arguments I have raised and the content of the article before denigrating the content or casting aspersions as to my character or intent.

    Thank you for commenting and I look forward to future comments and discussion.

    Aug 30 09:34 PM | 2 Likes Like |Link to Comment
  • Why Investors Should Exercise Caution On Vale [View article]
    Peter I did forget to mention that I agree the $2bn royalties payment has been priced in by the market but a negative decision on the appeal hasn't been.
    Aug 30 08:49 PM | Likes Like |Link to Comment
  • Why Investors Should Exercise Caution On Vale [View article]
    DAG thank you for the feedback and comments. You have raised a very good question and I apologize for the lack of clarity in the article regarding the outlook for iron ore prices, an oversight on my part.

    It has been very difficult to get a handle on the actual pricing for iron ore and the outlook with everyone from analysts, brokers, iron ore company management and traders being exceptionally vague. I don't think anyone knows where the price will stop.
    There were iron ore companies calling $120 PMT and then $100 PMTY as the new long-term price floors while it was dropping to $90 PMT. Where $75 - $80 PMT is referred to as the long-term outlook I would expect to see that as the new floor price going forward. I would like to say that $90 PMT seems reasonable but I believe that it will drop close to the $80 PMT mark shortly.

    There are other factors that need to kick in yet such as Chinese producers winding down their extraction of lower grade ore (lower than Brazilian or Australian) and to see what approach the Chinese government takes to easing economic policy. At the moment the leading Chinese indicators like manufacturing and non-manufacturing PMIs and the industry value add measures are a mixed bag with both positives and negatives for the short-term. The long-term for China does look positive though (3 to 5 yrs plus).

    I am going to do a follow-up piece on Vale and commodities outlook from a Latam perspective in about 2 weeks and I will try and cover off the issue of iron pricing and demand in that article.

    Apologies for not being much clearer. I think I think I need to see China's August economic activity indicators soak those figures up and clear my head of Latam finance to give a far clearer opinion. If there are any specific issues you would like covered off with regard to Vale or iron ore pricing please let me know and I'll include them in the next article.
    Aug 30 08:13 PM | Likes Like |Link to Comment
  • Why Investors Should Exercise Caution On Vale [View article]
    Peter thank you for the feedback. The way I also understand it is that the royalties claim is a done deal but I haven't been able to find any details of how the payment will be structured and this may provide Vale with some relief. But $2bn is going to be a big hit on their cash holdings.

    I don't share the company's optimism on the tax case and it would be rare for the Brazilian Supreme court to overturn a ruling of a lower court that has been upheld on appeal. But again if there is an adverse finding against Vale it will be how the payment is structured that will determine the full impact. I would like to be able to give a clearer view of how the case will unfold but my understanding of Brazilian constitutional law is particularly basic, plus (I know this will earn me some scathing comments) the decision making process in the courts is quite opaque and difficult to follow.

    Another negative for Vale is that the Brazilian government has seen tax revenues fall and along with its populist politics it is unlikely to accept losing the case. Plus it needs to maintain funding for its considerable range of infrastructure and social programs along with preparing for the World Cup and Olympics.

    All of which in combination with introducing tax cuts to stimulate growth leaves government revenue particularly vulnerable and they will need to find alternate income sources.
    Aug 30 08:01 PM | 2 Likes Like |Link to Comment
  • Banco Santander-Chile: High Asset Quality And Solid Dividend Is Attractive [View article]
    Vincent for the SAN ADRs the broker provides share holders with the options. If you elect to take the scrip (rights to the shares) you can then on sell those rights on the market for a fee which effectively lets you receive the dividend as cash without paying Spanish withholding or you can exercise your right to the shares and receive them again avoiding Spanish withholding tax. This was covered off in my last article on SAN . It would appear that the majority of foreign investors would be using the scrip options (2 or 3) so as to avoid Spanish withholding. BBVA have a similar system in place for their shareholders.
    Aug 30 07:40 PM | Likes Like |Link to Comment
  • Bookmark this chart of iron ore prices, as it's becoming one of the more widely-followed global indicators. They've fallen another 1.9% today to just $100/ton, well below the line-in-the-sand price of $120 - the level at which Chinese producers would supposedly stop producing. [View news story]
    sreimer that is correct the Brazilian law obliges Brazilian companies to pay 25% of net profit as dividends. But where they make a loss they are not obliged to pay dividends. Also a large portion of Vale's dividend payments are made as interest on shareholder equity (ISE) payments and they are not obliged to make these payments. But they can make them in preference to dividend payments. The incentive for a company to pay ISE is because they can offset against the company's tax. It is likely that at current iron ore prices the dividend yield will halve.

    In the 2Q12 earnings call management were evasive on a number of issues including whether capex will be reviewed and reduced. Any reduction in capex will be a costly excerise that will also affect future profitability in an environment where iron ore prices are significantly lower.

    The other issues are the tax dispute and royalties dispute. If Vale has an adverse finding against it for the tax dispute their cash won't cover it as the Brazilian government is seeking $15 bn. The royalties dispute which is to be settled in September is for $2 bn in additional royalties claimed by the government. If Vale has to pay the total amount it will effectively wipe out their cash holdings and either capex program of dividend payments.
    Aug 30 07:31 PM | Likes Like |Link to Comment
  • Banco Santander-Chile: High Asset Quality And Solid Dividend Is Attractive [View article]
    OldWarrrior good to see you again. Overall the CC defaults don't represent a significant risk as they are well within acceptable risk parameters plus the doubtful amounts are quite small.

    BSAC isn't reducing loan loss provisions they have remained steady which is a very good sign in the current macro environment. It means that the overall loan quality isn't deteriorating and their isn't pressure from the regulator to increase provisions. Banks need to keep provisions as low as possible in proportion to their active assets because they come with a tremendous economic cost and the bank literally has to spend money to hold the provisions on their balance sheet plus their is opportunity cost of not being able to use that funding to produce revenue.

    With regard to the points around provisions to capital the best ratio for measuring the adequacy of provisions is the NPL coverage ratio and anything over 100% is a good coverage ratio.

    Chilean withholding tax can't be deferred and in the case of dividends it is withheld by the business paying the dividend so that you receive the net amount.

    BBVA don't have an independently listed sub in Chile, with their Chilean business wholly owned by the Spanish domiciled bank. The only BBVA independently listed sub is BBVA Banco Frances (BFR) in Argentina. BBVA like SAN offers investors the ability to take either cash or scrip so for ADR holders if they take the scrip they are not subject to the 21% Spanish withholding tax.

    As for the comments around length and too many charts duly noted and I will endeavor to find a way of better presenting the information. The problem is these are the key measures to judge a bank's performance, asset quality and profitability and without them it is hard to form a reasonable view.
    Aug 30 07:16 PM | Likes Like |Link to Comment
  • Banco Santander-Chile: High Asset Quality And Solid Dividend Is Attractive [View article]
    ArtfulDodger thank you for the comments and feedback. I think that SAN will certainly bounce back and perform strongly, but it may be sometime because of the issues in Spain. Even once the doubtful loans are cleaned up and provisions are wound down profitability is still going to be hit by the deep recession being experienced in Spain which will last for sometime.
    Aug 30 07:01 PM | Likes Like |Link to Comment
  • Is Bancolombia Losing Its Luster For Investors? Part 1 - An Analysis Of Asset Quality, Risk And Liquidity [View article]
    Lockstep thank you for the feedback. CIB has been one of the best performing banks in Latam for sometime. I did a review of BAP before this which is available through this link .

    I quite like BAP and it is showing a lot of promise. I haven't looked at BBD for sometime but it is on my review list along with ITUB and I have collated the numbers for the 1H12 for both. I recently reviewed BSBR and found that overall it didn't represent value and was experiencing liquidity and asset quality problems.

    There will have to be value emerging in Brazilian stocks given the sell off linked to slowing commodity demand but I think there is some way to go yet. I am hoping to have the BBD and ITUB published next week.
    Aug 30 06:55 PM | Likes Like |Link to Comment
  • Vale's Shares Are Too Cheap To Ignore With A Near 7% Yield [View article]
    Jan I think that you have raised some very valid points. I have had the same comments on a number of articles I have written on the Brazilian economy where I have taken a less than flattering view of Vale, Petrobras, Banco Santander Brasil and the economic outlook. For my efforts I have been thoroughly vilified.

    But the Brazil bulls always rely on the same tired lines, young population, endowed with tremendous resources and growing middle class. It seems that everyone has forgotten about how economics fundamentally works when they start trading. Overall the Wall Street view of Brazil is over hyped and despite 3 quarters of slowing GDP growth there are still analysts calling tremendous growth in Brazil when it patently won't occur.

    I also disagree with the view of a lot of pundits that Vale represents value and I think it has some way to fall yet for a wide range of reasons including royalties and taxation disputes, falling steel production, iron ore inventories, Europe and China.
    Aug 30 10:58 AM | Likes Like |Link to Comment
  • Stock Management The Sun Tzu Way: Part IV [View article]
    Thanks Colin that was my comment which appears to have disappeared. Looking forward to it.
    Aug 30 10:45 AM | 1 Like Like |Link to Comment
  • Banco Santander-Chile: High Asset Quality And Solid Dividend Is Attractive [View article]
    Tas thank you for the added perspective. I am not saying things are difference in Latam today but it is important to make decisions based on the evidence available. Plus it is easy to paint all of the countries within the region with the same brush and to stereotype but by doing that investors are missing out on opportunities. I would be quite interested to know which stocks are superior particularly banking stocks that pay a consistent dividend yield with similar growth opportunities?
    Aug 29 08:39 PM | Likes Like |Link to Comment
  • Banco Santander-Chile: High Asset Quality And Solid Dividend Is Attractive [View article]
    Vincent thank you for the additional information and clarification. I agree with your views and the Mexican IPO will be very interesting, while the local market conditions are good I don't believe they are as positive as other analysts state. There is also a lot of competition in Mexico with the banking market heavily saturated and BBVA having a controlling market share with Bancomer. But still given the group's need for capital it does present as a good time to release some of the capital tied up in the business.

    As for Colombia that is a very difficult market to enter, it is saturated with everything from micro-finance to major domestic and foreign banks all competing for the same limited market. The reality is that Banco Santander were struggling against the local incumbents Bancolombia, Grupo Aval and Davivienda and it was unlikely they were going to every hit their minimum performance hurdles for sometime. Releasing the capital tied down in that business to fund the additional provisioning requirements certainly made sense and meant they didn't have to raise additional capital or cut the dividend.

    The SAN operation in Brazil BSBR is also struggling to gain market share against both the state owned banks and Brazilian privately owned incumbents BBD and ITUB, which is affecting both group wide asset quality, provisions and profitability.

    I do believe that at current prices SAN is fairly valued and it still does pay a compelling dividend. Overall BSAC presents a s a lower risk alternative for income focused investors, though my preference is to be invested in the mothership for the reasons you have set out.
    Aug 29 08:09 PM | 1 Like Like |Link to Comment
  • Latin America's China Addiction (Part 3): What Are China's Leading Economic Indicators Telling Investors? [View article]
    mrj thank you for the feedback and comments. There will certainly be more to come as this is a huge topic that needs further investigation. I have also been asked to include Mexico and Uruguay, which will broaden it significantly. I wanted to include Argentina but with the issues relating to data integrity and the data gaps it was difficult to formulate a coherent forward looking view.

    I agree with your views on China and I don't think I was clear enough in my explanation of the forward looking indicators nor did I go deeper enough with the analysis and then draw that back to the outlook for equities and markets. My apologies and will certainly be taking that into account on the next installment.

    Overall my preference for investments is industrials, I don't really like mining and energy companies but when your investing in Latam there is little choice when building a balance portfolio. I also agree that policy easing is certainly on the agenda in China and I also don't think the development cycle is finished. But the historically high demand for commodities from China is over as it transitions to a more mature domestic consumption rather than export based economy.

    If there are any specific issues you'd like covered in the series please let me know and I am happy to work them in to the articles.
    Aug 29 07:04 PM | 1 Like Like |Link to Comment