Weekly Metals And Mining Notes: Alcoa, Vale And ArcelorMittal

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The metals and mining space this week witnessed steps taken by Alcoa to further its ongoing portfolio transformation, in the form of capacity addition to cater to its aerospace customers. In addition, Vale announced a partial sale of its stake in a coal mine as it battles an environment of low iron ore and coal prices. Lastly, ArcelorMittal announced the signing of a contract to supply steel for the construction of cruise ships. Here are the major events of the week for companies that Trefis covers in the metals and mining space.

Alcoa

Alcoa (NYSE:AA) announced a $16.7 million capacity expansion at its Whitehall, Michigan facility. [1] This investment doubles high-technology coating capacity at the Whitehall facility. These coating capabilities improve the performance of blades and vanes used in the hot section of  next-generation jet engines produced by Alcoa. This capacity addition by Alcoa is the latest in a series of investments made by the company for expanding its revenues from the aerospace segment. Alcoa foresees robust long-term growth from the aerospace segment. This segment accounted for $4 billion, or around 17%, of the company’s overall revenues in 2013. [2]((Alcoa Doubling High-Tech Coating Capacity in Michigan to Capture Growing Aerospace Demand, Alcoa News Release)) With a flurry of investments made by Alcoa to cater to the aerospace segment, its share in the company’s overall revenues is set to grow.

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The unveiling of this new technology will facilitate Alcoa’s push for a greater share of revenues from value-added products, including jet engine components for the aerospace segment. Alcoa has been steadily shifting its product portfolio away from its commodity business and towards its value-added products. The percentage contribution of value-added products, represented by the Global Rolled Products and Engineered Products and Solutions business segments, to the company’s total revenues has steadily increased. This figure stood at 52.1%, 54.4%, 55.7%, and 57.1% in 2011, 2012, 2013, and the first nine months of 2014, respectively. ((Alcoa’s 2013 10-K, SEC)) [3] In calculating these figures, we have only considered third-party sales.

We have a $16 price estimate for Alcoa, which is around 4% above the market price. We estimate revenues of $24.2 billion in 2014 for the company and an EPS of $0.89, as against a consensus estimate of $0.82.

Vale

Vale (NYSE:VALE) announced that it has entered into an agreement with Mitsui & Co. Ltd. to sell 15% of its stake in Vale Moçambique and half of its 70% equity stake in the Nacala Logistic Corridor. [4] Vale Moçambique is a Vale subsidiary through which the company owns a 95% stake in the Moatize coal mine in Mozambique. [5] The stake sales in the Moatize mine and the Nacala Logistic Corridor are valued at $450 million and $313 million respectively. [6] The deal is expected to close in 2015.

The announcement of these stake sales is a part of Vale’s ongoing response to poor market conditions for both iron ore and coal. The company is looking to cut back on capital spending in order to operate competitively in a subdued commodity pricing environment. Last week, the company announced a reduced capital expenditure budget for 2015. The company’s estimated capital expenditures for 2015 stands at $10.2 billion, which is sharply lower than its capital expenditure in 2014, which is expected to total $13.8 billion. [7]

We have a $10 price estimate for Vale, around 40% higher than the market price. We estimate revenues of around $42 billion for the company in 2014.

ArcelorMittal

ArcelorMittal announced the signing of a new contract with the Saint-Nazaire shipyard to supply a minimum of 116,000 tons of steel for the hulls and decks of three giant cruise ships to be built by STX France. [8] This new contract follows an initial contract signed with STX France in 2013 relating to the construction of the world’s largest cruise ship. The 116,000 tons of plates and coils will be supplied from ArcelorMittal’s European steel plants. The first deliveries will start in January 2015.

The signing of this new contract is indicative of higher demand for steel in Europe,  compared to last year.  Steel shipments of the company’s Europe business segment rose 4% year-over-year to 30 million tons in the first nine months of the year. [9]

We have a $13 price estimate for ArcelorMittal, which is around 17% higher than the market price. We estimate revenues of around $80 billion and an EPS of $0.27 for ArcelorMittal in 2014, as against a consensus estimate of $0.28.

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Notes:
  1. Alcoa Doubling High-Tech Coating Capacity in Michigan to Capture Growing Aerospace Demand, Alcoa News Release []
  2. Alcoa’s 2013 10-K, SEC []
  3. Alcoa’s Q3 2014 10-Q, SEC []
  4. Moatize and the Nacala Logistic Corridor welcome New Investor, Vale News Release []
  5. Vale’s 2013 20-F, SEC []
  6. Moatize and the Nacala Logistic Corridor welcome New Investor, Vale News Release []
  7. Vale: Capital Expenditure Budget For 2015, Vale News Release []
  8. ArcelorMittal signs a new contract with STX France shipyards for three new cruise ships, ArcelorMittal News Release []
  9. ArcelorMittal’s Q3 2014 Earnings Release, SEC []