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Vale S.A. - ADR (VALE)


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We downgrade our recommendation on Vale S.A. - ADR (VALE) from Neutral to Underperform. We are concerned about the current global instability and a slower-than-expected worldwide growth rate which has been constantly raising concern for miners, including Vale. On the operational side, resource nationalism, political uncertainty and natural disasters continue to impede efficiency.

In addition, rising energy prices, currency fluctuations and huge mining taxes may compress margins in the coming quarters. Vale recorded an EPADS of $0.74 in first quarter 2012, drastically down from $1.29 in the year-ago quarter.

Vale ADR has a trailing 12-month earnings multiple of 4.8x compared with 5.9x for the peer group and 13.7x for the S&P 500. We expect Vale ADR to trade at a P/E of 4.8x EPADR 2012, to arrive at the target price of $17.00.

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