Vale Shows Record Profit on Rising Iron Ore & Nickel Volumes

by Trefis Team
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Vale (NYSE:VALE), the world’s largest iron ore producer has recently had to contend with a slow down in the global economy that could weigh on steel demand, consequently hurting the demand for iron ore, and concerns over pricing contracts as major buyers have balked at existing contracts. This morning it posted solid quarterly results though pricing for iron ore eased, which could be an item to watch going forward. We highlight some quick take aways below and recent updates. Vale is the world’s largest iron ore mining company, 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).

We have a $34 price estimate for Vale, which is around 30% ahead of the market price.

See our complete analysis for Vale here.

Operating Profit at Record Levels

This morning Vale posted record EBITDA of $16.1 billion up nearly 9% QoQ and 1.2% YoY. Rising iron ore prices and nickel sales volume supported growth up, 8.3% and 19.3% respectively. Effective iron ore prices fell 1.1% QoQ in USD rather than rise as many analysts expected .

Vale also had several important projects come online including Moatize, Onca Puma and Oman and Salobo is about to start. This is a sign that Vale’s organic growth project is on track. Furthermore, the company’s results were at record levels.

Other Recent Events Impacting Vale

1. Vale will likely need to adjust iron ore contract prices to appease its major customers. [1] As the spot market price of iron ore fell to a one year low, industrial buyers are pressuring mining companies to revise the contract prices. Iron ore contracts are revised quarterly, opposed to the annual contracts earlier. Vale CEO Murilo Ferreira acknowledged the need to revise prices. The company may also switch to monthly contracts in order to lure buyers from China by providing them better, market adjusted prices.

2. Vale Entered into a Strategic alliance with Millrock Resources for Copper-Gold deposit exploration in Alaska. As per the terms, Vale will fund Millrock for further research and early-stage exploration. Vale will spend $1 million annually for the first two years of the exploration. On completion of exploration, Vale is entitled to a 65 percent interest if it pays $200,000 to Millrock resources and spends $3.5 million over the next three years for the project development and feasibility studies. Vale also has an option to extend its interest to 75 percent by undertaking the total cost of the project development and implementation.

3. In a separate development, the company’s board approved a $3 billion shareholder payout in the form of dividends and interest on capital payments.

We are reviewing our model in light of earnings.

See our complete analysis for Vale here.

Notes:
  1. Vale CEO Says May Discuss Iron-Ore Prices as Clients Seeking Better Deal, Bloomberg []
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