Vale - Q1 2013
Vale is one of the world's largest producers of iron ore and nickel and is also involved in the production of copper, coal, manganese, ferroalloys, fertilisers, cobalt and platinum group metals. The company's primary operations are in Brazil, but Vale has embarked on a strategy of global expansion in the Americas, Africa and Asia. One of Vale's main competitive advantages is its vertical integration across mining, transport, shipping and logistics. With one of the largest railway networks in Brazil and large port shipping facilities, Vale is well placed to export its iron ore abroad. Furthermore, its investments into iron ore ships and transhipment hubs in the Middle East and Asia will allow it to remain a low-cost producer as it seeks to supply Chinese demand for iron ore.
• Vale recorded record profits of just under US$23bn in 2011, thanks to strong iron ore sales to Asia. Its production costs are significantly lower than competing producers in China, maintaining import demand for Vale's products even when prices fall.
• Vale's access to high grade deposits in Brazil as well as vertically integrated transportation capacity allow it to remain cost competitive with major iron ore producers in Australia who face shorter transport times to Asia.
• Vale has allocated US$12.9bn to project execution in 2012 as well as US$2.4bn for research and development and US$6.1bn to maintain its existing operations.
|Iron Ore To Remain Dominant|
• Vale is highly dependent on iron ore and pellet prices and demand, as the two products accounted for 74% of company revenues in 2011. Vale has announced plans to sell roughly 80% of its iron ore based on spot prices. This is due to pressure from steelmakers, which were locked into quarterly contracts as iron ore prices fell in H211.
• Vale's ability to generate a significant proportion of its own energy needs and transport its products through extensive logistics operations give it advantages when other miners face rising energy costs. This will be particularly important as it invests in Africa, where transport and shipping infrastructure is less developed.
• Investment in African iron ore and coal will give the company quicker access to Asian markets in India and China as well as open up new exploration and acquisition opportunities. The company is developing the Moatize coal mine in Mozambique, which is expected to produce 24mn tonnes per annum in 2014.
|Asian Demand Fuels Vale Revenues|
Vale's large iron ore and base metal expansion plans in Brazil, Guinea and Mozambique will allow it to keep up with its global diversified peers in terms of production. The company was seeking to diversify its product base increasingly into base metals such as nickel and copper, but maybe forced to revise some expansion plans should metals markets continue to weaken in 2013 and 2014 as we expect. Vale continues to face significant challenges with regard to its shipping vessel investment strategy, which could continue to weigh on company performance in the coming quarters. Furthermore, with such a large portfolio of investment projects globally, Vale will encounter continued risks associated with developing economies and uncertain government policies. That said, we maintain our view that Vale's strength will come on the back of its vertical integration. The company will be able to achieve synergies and operational efficiencies by running its own railway, port and shipping infrastructure.
|Vale To Underperform As China Slows|
|na = not available/applicable. Source: BMI, Bloomberg|
|- % chg y-o-y||na||272.2||64.1||16.1||-37.7||103.1||30.6|
|- % chg y-o-y||na||245.8||78.1||20.3||-52.6||199.6||31.2|
|Net Income (US$mn)||1,998||6,528||11,825||13,218||5,349||17,106||22,656|
|- % chg y-o-y||na||226.8||81.1||11.8||-59.5||219.8||32.4|
|Profit Margin (%)||37.8||33.2||36.7||35.3||22.9||36.1||36.6|
|Debt to EBITDA||0.8||2.6||1.2||1.0||2.6||1.0||0.9|