Lowering Estimates for Vale, Chinese Demand Still Provides Large Upside
In light of current macroeconomic uncertainty, we have revised our price estimate for Vale (NYSE:VALE) to about $34, which is still roughly 30% ahead of the market price. Due to market conditions we have moderated our near-term forecasts for pricing and shipment numbers across all divisions, but we still believe that the company has significant long-term growth potential. Vale is targeting robust iron ore and nickel sales in developing markets with the majority of the demand coming from China. Reports suggest that iron ore shipments may reach 1 billion tons by 2015, keeping the demand for ore in the open market strong until further capacity is added. [1] Vale is the world’s largest iron ore mining company and it gets 18 percent of its value from its nickel business. It competes internationally with other mining giants like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).
See our complete analysis for Vale here.
Chinese iron ore demand looks bright
China is the largest importer of iron ore, and we expect significant demand growth going forward. The aforementioned 2015 figure of 1 billion tons is 60 percent higher than the 2010 number. Healthy demand in China will also support market prices leading to better profits for the miners.
While the debt crisis looms over global markets, we expect that Chinese demand will offset any decline in orders from Europe.
Vale looking to expand its nickel operations
Vale recently bought Indonesia’s largest nickel producer, International Nickel Indonesia, continuing its global expansion. ((Vale Invests in Indonesia, Livetradingnews.com)) Although lower demand for nickel has pushed prices down by 26 percent in 2011, the company is bullish on nickel sales going forward and will continue with the production targets set earlier this year. Moreover, Vale plans to increase the production at International Nickel Indonesia (now Vale Indonesia) from the current 73,000 tons to 90,000 tons through an investment of $232 million this year and $1.5 billion over the next five years. With Vale’s expansion efforts, we may see an even greater contribution from nickel to the company’s value going forward.
With support from the Chinese market and strong fundamentals, Vale looks well set on a stable expansion path.
We have a $34 price estimate for Vale, which is around 45% ahead of the market price.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes: