Yiannis Mostrous'  Instablog

After a year under its new CEO, Murilo Ferreira, Vale (NYSE: VALE) is focusing more on profitability than on growth.

The Brazil-based diversified metals and mining company is pursuing this strategy in response to global uncertainty, particularly the slowdown in China. Governments around the world (e.g., Australia and Peru) have been raising royalties and mining taxes. In Vale's case, there's also the added burden of litigation with the US government over USD15 billion in overdue income taxes.

Until a year ago, the company was mainly investing in growth projects and merger and acquisition transactions, to take full advantage of the fast growth in commodity demand. However, it's now clear that the new management team is emphasizing profitability and disciplined capital allocation. This strategy will benefit the stock over the long term.

The company was been investing heavily in greenfield projects that are expected to produce solid returns. Its iron ore project in Carajás Serra Sul in Brazil and its Moatize coal project in Mozambique have been receiving the bulk of these investments.

The company has also been looking into divesting some of its non-core assets. Among those are coal assets in Australia, oil exploration assets in Brazil, and the company's stake in Norsk Hydro. Vale's potential sale of a stake in its general cargo logistics business also is in the cards. Vale is expected to net about USD9 billion from these transactions.

The company has been gradually adopting a more shareholder friendly approach. Last year, Vale returned around USD12 billion to shareholders in the form of dividends and buy-back programs. For 2012, the company has announced a minimum dividend payment of USD6 billion (an all-time high), which represents a high dividend yield of 6 percent at current prices.

Given the company's strong cash flows and stronger management team, investors should expect the company to start paying a dividend yield of around 5 percent, on a sustainable basis.

Slowing global growth will be offset by the continuing need of China's domestic steel producers for imported iron ore. This dividend investment's relatively low valuation offers investors a good entry point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Since the outset of Europe’s sovereign-debt crisis, we’ve argued that the EU treaty would need to be revamped to effectively deal with the situation. The EU continues to fail to achieve this goal. There’s plenty of blame to go around, from the sinners in the EU’s southern region, to the pedantic attitude of the Continent’s northern countries.

Over the past year, the debate in the eurozone has been characterized by finger pointing, accusations and chauvinism from all parties. The Continent’s political leadership has proved incapable of handling the crisis in a fashion that will convince the people or the markets of its resolve.

As a result, the tiny, indebted Greek economy has become a symbol of fiscal profligacy. Greece is now seen as the originator of a systemic crisis that could shake the world.

The EU has traditionally implemented change in an incremental fashion. From the outset of the crisis, policymakers adhered to this gradual approach as they feared political repercussions when the public learned of the sacrifices needed to resolve the crisis. Their inaction, which played out in endless meetings in Brussels, has worsened the crisis.

As bond and equity markets endure brutal swings, German Chancellor Angela Merkel recently commented that changes to the EU framework were necessary. She’s right, but she’s also stating the obvious. The deal reached between Greece and the EU at the end of October wasn’t a sustainable solution to the crisis. Greece’s debt burden would have remained onerous and the austerity measures would make economic growth all but impossible.

At present, there are two issues at play. Merkel and French President Nicolas Sarkozy recently informed Greece’s leadership that an EU member nation could be forced out of the common currency if it is unable or unwilling to follow the rule known as the Maastricht convergence criteria. This rule mandates that eurozone countries should not hold debt greater than 60 percent of national income. If debt rises above that level, it should be reduced at a satisfactory pace.

I don’t absolve Greece of its fiscal mismanagement. But Germany’s debt-to-gross domestic product (GDP) ratio stands at more than 83 percent. France’s debt is 82 percent of its GDP. It’s a far cry from the levels found in Italy and Greece, but the numbers speak for themselves.

It’s preposterous to imagine that the EU would force Italy—Europe’s third-largest economy—from the common currency. If any country can repair itself without the euro, it’s Italy. Why should the Italians implement reforms or structural changes when the terms of its rescue defeat the very purpose of the bailout?

Nevertheless, EU leaders must make a decision. If they decide to exile fiscally unsound nations from the eurozone, the very nature of the euro experiment will be inexorably changed. But if the EU holds together, the Continent will need better cooperation and fiscal unity.

This brings us to the second issue: fiscal unity. The crisis has proved that a monetary union without fiscal unity can’t work. True fiscal unity, however, will require both debtors and creditors to shoulder the burden. Unfortunately, this means that creditors will have to pay more to bailout their weaker neighbors. But if the euro were to break up, these same creditors would still be forced to rescue a massively leveraged banking sector with high levels of exposure to eurozone sovereign debt.

It’s a tough pill to swallow, but the benefits of a true fiscal union are compelling. The EU would emerge as a potent institution with the power to oversee the fiscal policies of its member nations. In the event of a mounting financial crisis, the European Central Bank can act as a lender of last resort, much like the US Federal Reserve. Regardless of which path Europe chooses, the time to act is now.