Vale (NYSE:VALE), the world’s largest iron ore mining company, will announce its second quarter earnings on Thursday. We expect a stronger dollar to lend support to operating income even as Vale may record revenue growth declining on a year-over-year basis. Prices of iron ore and base metal are well below prices realized in Q2 2011. Higher production in Q2 following favorable weather will offset some of concerns. Apart from iron ore, Vale‘s diversified product portfolio encompasses copper, nickel, aluminum, precious gems, and fertilizers.
We have a $26 price estimate for Vale, which is around 45% ahead of the market price.
Low Mineral and Metal Prices to Hurt
As a result of economic conditions in the Eurozone and a slowdown in demand from China, iron ore prices crashed to about $135 in the second quarter, significantly down from the $180 levels seen last year. In addition, Copper and nickel, with virtue of their heavy industrial usage, have yet to recover to 2011 levels. However, a production increase could offset some of the losses from lower prices. Further, fertilizers, largely immune to recessions, may also offer some support as agriculture is one of the fastest growing industries in Brazil.
U.S. Dollar Appreciation a Good News
While we expect margins to take a hit from lower prices and soaring cash costs, an appreciating U.S. Dollar against other currencies including Brazil Real could bring some breather for the company. While the company realizes most of its sales in USD, its costs are based on local currency of country where the miner has operations. Therefore, an appreciation in USD provides for lower costs when translated into USD equivalent.
While the company continues to face short term headwinds, we are bullish on the company’s long-term prospects. With the company’s move towards business realignment and self sustainability for electricity coupled with various expansion plans for key mineral iron ore and agriculture product potash, we believe the company is undervalued at current market price.