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  • Vale's Hidden Value 1 comment
    Aug 27, 2014 9:30 AM

    Vale stock has been under fire recently due to lower iron ore prices, but I believe analysts covering the stock are missing out on a number of positive factors, that could have significant upside:

    1) Environmental approval received for Carajas project which will add 90,000 tons by 2018. In total, Vale have plans to expand Iron Ore capacity with 32% from 280,000 in 2014 to 370,000 in 2018.

    That is 32% additional Ore related revenue assuming prices remain at their current levels.

    2) Pellet production capacity will expand rapidly with Turabao VIII and Vargem Grande as well as Teluk Rubiah in Malaysia. Pellets have a positive effect on gross margins.

    3) Cost to serve China will come down as they expand their fleet of Valemax vessels (the largest ore carriers in the world) and they will likely obtain approval to berth Chinese ports directly. This would eliminate costly transfers and directly reduce freight costs with an estimated USD 8-9/ton.

    This would further reduce the cost advantage that BHP/RIO currently holds into China. (Vale holds the opposite cost advantage at the North/South American continents...).

    Further, the Chinese will never rely solely on Australia for Iron ore due to politics. Australians have a way of stepping the Chinese on their toes...

    4) Coal assets, which have been a financial burden, are gradually being sold of. The Integra mine in Australia has been put into maintenance & care and a majority share of Moatize (MZ) assets are expected to be sold in 2015. A further 20% share of Australian coal assets are also planned to be disposed of during 2015.

    5) Aggressive expansion of Nickel assets with high margin and improving supply/demand as Indonesia put a lid on exports. Expansions are planned in New Caledonia, Brazil and Canada.

    6) Vale produces an Iron Ore of finer grade than the rest (less costly to convert to steel), which justifies a higher price than competitors.

    When considering all of these factors and assuming a conservative forward iron ore price of USD 85/ton, Vale's forward PE is around 5-6 for 2015-2017. Most analysts covering Vale have few of these assumptions built in and thus guide basis lower revenue and gross margins and a much higher forward PE of +8.

    Please share your thoughts if you have other insights on Vale.

    Disclosure: The author is long VALE.

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    Author’s reply » Vale's hidden value $VALE $BHP $RIO $IRONORE
    27 Aug 2014, 09:50 AM Reply Like
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