Timothy Rose

Timothy Rose
Contributor since: 2013
Apologies if it's wrong, source was from Deutsche Bank presentation, including shipping costs - but I wouldn't suggest using my figures in any valuations models. I agree, it seems pretty high given their costs of just production are only around $22/tonne company wide. There seems to be a lot of different figures being presented.
Anyways, regardless, the point is that they need to ship further and that it is more costly than from Australia (the new 400,000 tonne capacity Valemax bulk ships will reduce shipping costs by around 20%).
An estimate of total (all in) cash costs, including transport:
Vale: US$75 / tonne
BHP’s: US$55 / tonne
Rio Tinto: US$45 / tonne
So yeah, Vale will become more squeezed. This is one reason why there's been a huge push to increase capacity (to counteract the decreasing margins with more tonnes shipped).
WHen I first thought about your comment regarding these figures putting Rio and BHP in a more favourable position to benefit in an upcycle, it made sense.
However, thinking more closely, it could be the case that these tight margins actually put Vale in a more favorable position in an upcycle (and in a less favourable one in a downcycle). For example (put simply), if the price of iron ore is $90/ tonne, then Rio, BHP and Vale would be making a profit of $45, $35 and $15, respectively (assuming the prices I stated above are correct). However, if this price of iron ore increased to $100 / tonne then these companies would be profiting $55, $45 and $25, respectively (from their iron ore businesses).
In terms of percentage increase to earnings from iron ore, this would be far greater for Vale (66.6%) than for BHPB (28.6%) Rio (18.2%)... Conversely, if the price decreased this percentage decrease would be also far greater...
China will still buy off Vale. There is the demand for their high quality ore.
Current iron ore price is currently much higher than production + transportation costs for the big 3 iron ore miners. All three will be able to sell and make money off of their products (although Vale's shipping costs are obviously more than the Australian producers - but only in the vicinity of $10/tonne I think).
By comparing the stock to the stockprice, you're making a big assumption that they all are 100% iron ore miners. This isn't the case (for example, BHP has significant oil and gas, copper, uranium assets, etc).
The trends in stockprice can be very rationally explained and would be a reason against being bullish on Vale:
(1) Cliffs is the least diversified of the bunch and relies most heavily on iron ore - and therefore took the biggest tumble when the outlook for iron ore prices became grim.
(2) Vale is the second least diversified of the bunch, and therefore took the second biggest tumble;
(3) Rio Tinto is the third least diversified, and therefore took the second biggest tumble;
(4) BHP Billiton is the most diversified, and therefore its stock remained the strongest - because lower iron ore prices will have less impact on its earnings that for the other three miners (say, on a percentage basis).
In addition, be cautious of comparing the P/E ratios for these miners - because each of these businesses obtains its earnings from fairly different types of commodities, in different proportions. Hence, their earnings aren't exceptionally well related. Yes, the businesses are run similarly but that's irrelevant in the P/E comparison.
They appear to be a bit of a value trap in my opinion - it's unlikely that increased production of iron ore (and some cost saving) will counteract the reduced earnings from lower price per tonne. Therefore, earnings from iron ore will probably decrease and the P/E's are justified - with Vale's P/E being the lowest because it has the lowest growth potential (i.e. least diversified).
One of the better analysis I've seen of Billabong, good stuff. I was one amongst the group that got stung early last year when the proposed ~$1/ share takeover was going on (and got rejected)! I only wish I had not succumb to the fear of buying the shares when they were selling for 15 cents!
looks like it wasn't a bad move in the end - you just gotta have faith. you still holding onto it pipopipo?
Just revisiting this, the stock was sitting at $11 bucks when I wrote this article, now its at around $16.40. So probably (in absence of further analyses), the stock is no longer undervalued.
However, it would have produced a reasonable return over the last 18 months.
Drehm, no one on this board has to give a rats a s s what I say. I'm not on here to prove a point of superiority.
Pleasingly, however, the QRx board is addressing some of the points I've mentioned and are moving on from this setback - the replacement CEO has recently announced (within the last week) that they are going to commence new trials to try and statistically show the benefits of Moxduo to a defined population. Fingers crossed the benefits they attempted to show (but not conclusively) in the post-hoc trial can be replicated in the new proposed trials.
Also, BHP is in general more diversified than Rio, the latter of which is significantly more reliant on iron ore.
drehm, no I am not in healthcare and no I do not know how to interpret SaO2 data - you are clearly much more knowledgable than me in this respect. But I do no how to interpret data in general - my comments were around the statistics presented (in which I held a number of positions and have postgraduate qualifications in).
My point was not that there are no respiratory benefits (because there may well be) it was simply that the data they presented was was not statistically conclusive/ robust. Whilst their data did show that there was a (small) respiratory benefit but the sample size was very small and the FDA advisory committees data shone doubt on the data QRx presented. And of course doubt is not going to attract a yes vote.
In terms of if it gets approved, I personally doubt it will based on the statistics they presented. We'll have to wait and see I guess.
Jon, agreed that some of the calls are (with the benefit of hindsight) fairly big leaps of faith - My point was simply that if the whole picture isn't available publicly, then then the accuracy or opinions of an article are always going to be inaccurate. To be fair to the author, he can only write based on the information provided by the company and other publicly available information. Any opinions are basically his only - and the same goes for any articles on Seeking Alpha - and it's up to the readers to do their due diligence.
A good analysis based on the info provided by QRx, I think. Just poor communication by management to provide information related to FDA expectations.
I think that blaming the FDA is a bit one-sided; somewhat reminiscent of the CEO's ranting's at the investor presentation post-meeting.
I personally don't think that they conclusively proved in there presentation that Moxduo improves respiratory depression in their statistics. The FDA said quite clearly: "if you can provide us with sufficient evidence/ point of difference that Moxduo does have an improvement to respiraotiry depression, then we'd love to have it on the market. But unfortunately from the date you've provided, it doesn't." They also said that Moxduo "might" improve respiratory depression, but due to insufficient conclusive evidence, there was no way they were going to hang there head on the line to vote yes.
And I agree with the FDA committee that there wasn't enough evidence. There were only very few test subjects and the doses and subjects were probably not the correct target population. And none of those board members on the FDA committee are going to vote yes on a 'hunch' that it has benefits!
It's a failing on the managements behalf, as they failed to communicate all this properly both to us (the investors) and to the FDA (in terms of conclusively showing the drugs benefits). It's about getting a differentiating product. They need to forget about managing administrative relations with the FDA and start to focus on the science - so that they can form a strong, robust case why it is better. Without that, they'll never get the drug through.
No, it got rejected because they couldn't prove conclusively it was different/ more beneficial from both Morphine and/ or Oxycodeine (i.e. its constituents).
If it was abuse deterrent, then this may have certainly helped create a point of difference.
Agreed. Absolutely furious at the lack of information they fed to us shareholders. Didn't feed a single negative thing to the market, yet I get the impression the FDA had said doubted their approach in the past.
I watched the whole thing and QRX got absolutely ripped apart. By the end of it, I would have voted 'No' too, given how inconclusive their evidence was that Moxduo had any additional benefits to Morphine and Oxycodeine. Yet, none of that was communicated to shareholders. Instead, they just have a trading halt and let everyone lose all of there money in one hit.
I then listened to the investor briefing after the meeting - and the CEO kept defending their stance and blaming the FDA. Well, from what I could have gathered, if they'd actually suceeded in proving conclusively that it had respiroatory benifits to the other drugs, they would have voted 'yes'. But they didn't! It wasn't the FDA's fault - they just had extremely shaky statistics.
Vale are hardly "diversified". The majority of their profit is tied to iron ore. Any fluctuations in iron ore price will effect its bottom line significantly and therefore its profit performance really is a lot of luck (regardless of how great the business performs - as with most commodities)
You fail to highlight the extent to which the % increase in supply (about 30-50% for each of the main producers) will far outstrip the expected increase in demand. This will likely have a significant downward pressure on iron ore prices; much more so than the cost savings that you think will counteract this. Also, I highly doubt that that as large a reduction in production costs per tonne will occur as you anticipate. It's fairly unrealistic in my opinion. Let's not forget that Vale also has to ship their iron ore fines for miles, from Brazil (unlike BHP Billiton and Rio Tinto, which are obviously less than half the distance). This is a huge disadvantage and limits the max. cutting (plus makes them highly susceptible to variations in freight rates).
Ultimately, surely the price of iron ore will reduce (and I personally expect the price will drop significantly). So I think it is reasonable to expect that this will reduce the overall profit they make per tonnes in the mid to long term. Therefore, to generate the same performance (i.e. as you state in your heading "Iron Ore Expectations Will Not Shape Its Performance"), they will need to sell more tonnes.
So really, the big question in my mind is: will the increase in tonnes sold offset the reduction in profit/ tonne. It may do in the short term. but what about in 5 years?
I personally doubt it, given the huge oncoming supply - but who knows.
e_blastman, I used to work for one of the top 3 iron ore miners and have a degree of insight into the business... I'll offer a few points.
Price fixing in the iron ore game, whilst obviously possible, would be difficult to achieve in practice unless we saw significant collusion between the the 3 major Iron ore producers (Vale, Rio Tinto and BHP Billiton). Given the sheer size, management and red tape that exists within these giant corporations, I cannot foresee that this would be possible (both practically and legally).
Granted, one of these companies could intentionally restrict supply to a degree - however, with all the major expansions underway at the moment (in particular by Vale and Rio Tinto) there is at present an ever increasing supply. Therefore, I would imagine that any gap in supply resulting from a restriction by one company would simply be taken up by another company - thus net supply remains constant and so to does price.
As you mention, this could instead be achieved through media to some degree - but I believe that manipulating anyone through media to create a perception of lack of supply would be difficult - particularly given the media and publicity surrounding the numerous growth projects/ expansions still going ahead at major IO mining sites.
In relation to Cliffs, it produces a relatively low market share in comparison to the three majors (and also the ever expanding Fortesque Metals Group (FMG) in Western Australia) and therefore I believe that their overall influence in respect to price fixing would be relatively minimal. However, given that they are less diversified than the other miners it makes for some good stock plays on iron ore price fluctuations/ predictions.
Interesting point though, as price fixing also occurs from the buyers side - the recently heavily subdued IO price was largely the result of the steel producers in China intentionally using up all of their excess iron ore at their blast furnaces so to reduce demand and thus price... This was reflected in the negative media of 'IO demand decreases' and therefore declines in the shareprices of IO miners. However, this move by suppliers obviously not long sustained and as they ran out of IO at their blast furnaces, they again started buying, demand increased and as a result the IO price has again reached levels near mid 2012.
Interestingly, this raises another point - with suppliers/ buyers being able to manipulate the price so readily, it makes long term investments in mining stocks very challenging. Can we really do anything but make short term speculations (3-6 month) for these stocks?
bg6638, agreed that there are certainly risks associated with this stock - any further reductions in FTE cash flow would certainly result in another dividend cut. The latest announced ~40% dividend reduction was the result of management conceding a not quite 40% reduction in cash flow through 2013 (the remainder is for managing debt).
If the management forecast that the business will return to growth in 2014 comes to fruition then it is unlikely we'd see another dividend reduction or significant drop in share price.
Can't necessarily rely on these predictions though, so as you point at someone would have to weigh up the risks or research these more heavily before making the decision to invest - Garthilk also made mention of these risks in his point below...
Thanks mate, interesting - If you get the time could you kindly provide any more details on this so we can all learn some more about it?
Good points on the taxes everyone, I had neglected to discuss/ explor that in the analysis so thanks for the input.
As we can gauge from this conversation, taxes can get complicated and the implications can vary significantly between individuals so it is certainly an additional thing to consider when deciding to invest in this international stock (or any such stocks, for that matter)...
Again, thanks!
I revert - Ended up buying the stock a few weeks weeks ago on the ASX for AU$0.84 and made a good little 15% on it upon the news of 2 new, separate $1.1 takeover bids.
Agree completely. There's at least a few years left in nuclear growth.
Beyond 5-10 years, in the very worst case, we will see neutral growth but I believe the more probable case is that growth will continue to occur but simply at a slower rate.
In my opinion, it is unlikely that there is going to be a pronounced retraction of nuclear demand any time in the foreseen future. Whilst nuclear may lose some of its market share to alternative energy sources (such as natural gas) I don't think that this necessarily means a reduced demand for nuclear energy (and thus uranium) as there will undoubtedly be an increased energy demand globally acting as an offset.
I believe Cameco at its current price factors in very little growth in uranium demand AND subdued uranium prices - and realistically, given time, one of these two things will increase. And so to will the stock value (it's already increased >12% in the last month as investors are waking up to this fact!).
Agree completely. There's at least a few years left in nuclear growth.
Beyond 5-10 years, in the very worst case, growth will retreat but I believe the more probable case is that growth will slow. In my opinion, it is unlikely that there is going to be a pronounced retraction of nuclear demand any time in the foreseen future. Whilst nuclear may lose some of its market share to alternative energy sources (such as natural gas) I don't think that this necessarily means a reduced demand for nuclear energy (and thus uranium) as there will undoubtedly be an increased energy demand globally acting as an offset.
I believe Cameco at its current price factors in very little growth in uranium demand AND subdued uranium prices - and realistically, given time, one of these two things will increase. And so to will the stock value (it's already increased >12% in the last month as investors are waking up to this fact!).
I agree that Blackberry is dead.
Not sure how it's going to make the comeback anticipated in this article given how much traction it's lost in the mobile space. They have historically relied on corporate users when they offered a superior service for businesses. But they've certainly lost this moat now and their marketshare has eroded accordingly.
I believe they will continue to lose this market share as the lagging, clunky, large multi-national corporations IT departments slowly transition away from Blackberries to the more user friendly (and work efficient) alternatives such as iPhones, Android and Windows Phone. Many (if not most) smaller and more agile companies have already done this.
Nice article - I have made a fairly similar analysis of Coach recently with and reached similar conclusion... Let's hope we're right (it's been a shaky last few months!)!
They key question in my mind is: "Can pull off its sustainable growth in China and Japan?". To date, the answer to this question is yes. Lets hope this trend continues.
COH management has executed terrifically to date and I have no doubts in their ability to deliver.
Fingers crossed!
Mike, what are your thoughts on this stock now, given the new (and several failed) takeover bids - I've purchased a number of ASX listed Billabong stock recently and have confidence that the stock is currently undervalued given its market position.
However, I'd be interested in hearing your thoughts!
Does anyone get really tired of reading these kinds of articles of 'doom and gloom', without very little contrary opinion? The number of assumptions you've made here is huge, and your conclusions are highly sensitive to these massive assumptions.
One could easily write an article such as this which could show the complete opposite of your analysis; simply by using a completely different set of (probably equally as valid) assumptions.
Yes, you may be correct. But equally (or probably more likely), you may be incorrect.
Of course, one is entitled to their opinion and to express it, but I just hope no-one is basing investing decisions from reading speculative articles such as this.