Vale (NYSE:VALE), the world’s largest iron ore mining company, will announce its first quarter earnings on Wednesday. Vale may record slow revenue growth on a year-over-year basis mainly due to major decline in prices of iron ore and base metal are yet to reach the level seen in first quarter of 2011. We expect that a change in iron ore contract pricing mechanism will also lead to a muted showing.
Apart from iron ore, Vale‘s diversified product portfolio encompasses copper, nickel, aluminum, precious gems, and fertilizers. Vale earnings will set the direction of the its stock as well as competitors like Freeport McMoRan (NYSE:FCX), and Rio Tinto (NYSE:RIO), which have seen major correction in past few months due to rising concerns about Chinese economy. We are in process of revising our price estimate for the company and will release the updated estimate post earnings announcement.
Low Mineral and Metal Prices to Hurt
Iron ore prices have recovered briefly in first quarter after being beaten down heavily from a high of $180 in 2011 thanks to slowing demand from China and the country’s tight credit policy. Also now the price at which a iron ore contract is finalized, is taken from the commodity’s average market price in the month in which the contract starts (as opposed to the preceding month). In a downward trend this new pricing mechanism will hurt the company. We discussed this in a article New Iron Ore Contracts to Hit Vale’s Margins. Volumes, however should continue to grow.
Copper and nickel, with virtue of their heavy industrial usage, have yet to recover to 2011 levels. However fertilizers, largely immune to recessions, will continue offer some support to earnings as agriculture is one of the fastest growing industries in Brazil.
We will have to closely watch for company specific risks such as rising tax demands and China’s refusal to “Valemax” ships from docking at its ports, which weighed on sentiment in addition to ongoing tax disputes in Brazil. However, we believe that such company-specific events won’t hamper the company’s long-term prospects as the economy will continue to be a strong engine of growth, and we are cautiously optimistic about the company’s valuation.