Vale Earnings Preview: Iron Ore Prices Could Weigh on Sales Volume
Vale (NYSE:VALE), the biggest iron ore mining company globally, will announce its fourth quarter and full year earnings for 2011 on Wednesday after the market close. We are expecting Vale to follow the trends set by weaker earnings announcements from mining giants such as Rio Tinto (NYSE:RIO) and BHP Billiton. Vale may record slow revenue growth relative to first three quarters of 2011 due to major decline in iron ore prices in the fourth quarter. Our price estimate for Vale stands at $31, implying a premium of nearly 20% to the current market price.
See Full Analysis for Vale Here
Iron Ore Prices may continue to be under pressure
Slowing demand from China, a change in China credit policy barring traders to use iron ore stocks as a guarantee for bank credit and seasonal supply increase collectively battered iron ore prices down in Q4. Iron ore prices have recovered briefly in December and January. However, prices may continue to be under pressure, if steel demand in China doesn’t pick up significantly.
New Price Determination Policy to Hurt in Downtrend Market
Earlier, iron ore contracts were priced based upon the average market price of iron ore in the month preceding the date of the contract. Recently, under pressure from major steel manufacturers, Vale renegotiated its iron ore contracts pricing and the method of determining prices.
Now, the price at which a contract is finalized, will be taken from the commodity’s average market price in the month in which the contract starts (as opposed to the preceding month). It will further hurt the miner if prices continue to fall. We discussed this in a article New Iron Ore Contracts to Hit Vale’s Margins.
Ferrous minerals (iron ore) constitutes 53% of our price estimate for the company. Accordingly any prolonged weakness in iron ore prices could impact our estimate of the company’s value.
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