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Ken Brier  

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  • Vale: Short Interest Touching New Highs [View article]
    I find this article somewhat contradictory and mis-leading:

    1) depreciation of the Brazilian Real is a very good thing for Vale. It lowers their operating cash costs, reduces capex, and increases cash flow (please read Vale financial statements for more detailed analysis of this).

    2) USD debt is matched off against USD revenue. All iron ore sales are transacted in US dollars.

    3) Brazlian Real weakening results in accounting losses but cash flow gains. The accounting losses are meaningless as ultimately it is cash flow that matters. A more accurate accounting method would recognize USD debt is matched off against USD revenue with a net impact of nil.

    4) record short interest can be a buy signal, especially after a capitulation sell-off as we've seen. So if anything, I would interpret this short interest as more reason to own here.

    5) After the completion of their newest mine, coupled with lower cost of transport and increased automation, Vale will be the lowest cost iron ore producer in the world even FOB to China.

    6) Mining is a cyclical business. History tells us to sell the miners when spot prices are high (e.g., 2011) and buy miners when spot prices are low (i.e., now). This strategy has proven success as it is rooted in a) investor fear and greed; b) the supply response (i.e., high prices bring investment/supply and low prices reverse that process). Hence, the price of iron ore, like any asset, will not remain below the average industry cost of production for long. The transition period will flush out the weaker players to the long-term benefit of the majors.

    7) As one of the lowest cost producers in the world, Vale will be around for a long time. It will weather this storm - though one cannot say the same for many of its high cost competitors.

    8) You cannot build mines for anywhere near the book value on Vale's balance sheet, yet the stock trades at 0.64 book value. This is a gift.

    9) Given the low book value, any sale of assets would likely result in accounting profits (something the short-sighted seem to cherish).
    Apr 7, 2015. 09:17 PM | 9 Likes Like |Link to Comment
  • Is Vale SA A Wise Investment? [View article]
    Small correction. Spot nickel is 18,000 per ton (not 20k).
    Jun 24, 2014. 08:28 PM | Likes Like |Link to Comment
  • Is Vale SA A Wise Investment? [View article]
    Vale is the lowest cost producer of iron ore in the world with a cash cost of 21.6 per ton. Their cost curve will continue to decline as new, and even cheaper, production comes on line in the next few years. Even with the most pessimistic forecast of 80 per ton, VALE is hugely profitable. Using an 8% cost of capital and long term 80/t price of iron ore would imply a net present value of well over 20 per share (Credit Suisse has does some scenario analysis on this). Vale also has huge upside with respect to their nickel business, as the price of nickel is forecast to remain above 20,000 for this year and next. Their other businesses are small and largely irrelevant from a valuation perspective.

    The recent decline in spot iron ore is all the more reason to own Vale over other miners. As the lowest cost producer, Vale will remain profitable long after their high cost competitors shut down. Estimates vary by bank, but the consensus average cash cost of iron ore production in China is 110/t. China produces roughly as much iron ore domestically as all the ore it imports. The increase in cheap seaborn iron ore will eventally displace high cost local production. The recent drop in spot ore prices is a necessary and healthy development for the industry. Large, low cost producers, such as Vale will continue to produce while high cost marginal producers are forced to shut down. A period of low prices also discourges investment and sows the seeds for the next big rally in commodity prices once demand picks up again in the absense of new supply - perhaps a story for 2020.

    The long term future of the industry is bright. Demographics combined with emerging market growth virtually guarantee the world will consume far more iron ore in 20 years time than it does today. India, Indonesia and Vietnam will eventually pickup where China drops off. The Emerging market story is far from over. The wobbles in China today will mean very little in 20 years time. Growth is never linear and China is no excpetion. Travel around Asia and you cannot help but feel wonder for the spectacular growth throughtout the region. Literally billions of people are slowing transitioning from a rural agrarian lifestyle to an urban one. This shift is extremely iron ore intensive.

    As for valuation, Vale is dirt cheap. One could never build their mines anywhere near book value. Yet, as an investor, you are buying them at precisely that price today. As for income, the shares pay you handsomely to wait. The preferred shares guarantee a 3% dividend as percentage of book. The preferred shares trade at roughly 90% of book (ordinary at exactly book), which implies a dividend floor of roughly 3.30%. So receive 6% in current dividend yield with a free 3.3% floor. I wish US Treasuries paid as much. Even at the same yield of Treasuries, I would argue Vale is the much safer bet for long term wealth preservation.
    Jun 24, 2014. 08:25 PM | 10 Likes Like |Link to Comment
  • Earnings Preview: Cisco Q2 2014 [View article]
    Nice summary. Remarkable how volatile CSCO is around earnings compared to any other Dow component. One can only guess Cisco's CEO, Chambers, does an exceptionally poor job of managing expectations. That being said, this earnings report presents a much lower bar than those in the past. I imagine it would take a a very poor earnings report indeed to see another 10% drop as we saw last quarter.

    One correciton to your article, 17-18 is nowhere near the middle of the range. In the past 10 years, the stock has been under 17.5 less than 10% of the time. Even over the past 5 years, 20 would be closer to the middle. If anything, I would say 17-18 is closer to the bottom of the range and an excellent entry level. Cash on balance sheet alone is worth close to $10 per share.
    Feb 10, 2014. 01:01 AM | 2 Likes Like |Link to Comment
  • Yields Of 10%+: Market Insanity Leads To Huge Opportunity [View article]
    I have a substantial interest expense carry forward tax deduction (from historical margin interest). Does anyone know if I can use that tax deduction to offset interest income on these funds? Qualified dividends do not count since they are taxed at a lower rate than interest income. Without having a view on the level of interest rates or credit spreads, is there a relatively safe and cheap (i.e., below book) closed end fund to buy? Also needs to be fairly liquid.
    Jul 5, 2013. 06:38 AM | Likes Like |Link to Comment
  • Coeur d'Alene Mines: Compelling Silver Investment [View article]
    Everyone likes to harp on about poor management diluting the shares. Have you considered this: management sold shares to the public directly or via convertible debt at prices well over double where the stock trades now. Those shares were used to raise capital and reduce interest on debt. Given the shares are now trading at a fraction of the issue or conversion price, I would say that makes management quite savvy.

    Fact: any issuance at a price above the current share price adds value to all existing share holders.

    Sep 25, 2008. 09:27 AM | Likes Like |Link to Comment