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Analyst Blog

We issued an updated research report on Vale S.A. (VALE - Analyst Report) on May 9, 2014. The company had reported weaker year-over-year results for the first quarter of 2014. Underlying earnings per ADR (American Depositary Receipt) dropped 33.9% year over year to 40 cents, while revenues decreased 10.7% year over year to $9.5 billion. The decline resulted from lower prices for most of the company’s commodities.

Due to its international presence, the company is exposed to various geopolitical, social as well as economic risks. Negative impacts from foreign currency transactions also hamper the results. Additionally, being a cyclical stock, Vale is largely influenced by economic activities and market movements. Moreover, competitive pricing and the drive to improve quality, product diversity and reliability raise operational costs, adversely affecting the company financials.

However, Vale has been increasing its production volumes for the past few quarters. In the reported quarter, the company achieved record production of iron ore and pellets. The production of coal also increased year over year, led primarily by an improved production at the Moatize mine. The company intends to keep expanding its production levels in the near future, driven by improvement in its mines, especially Carajas.

In addition, the company has also been endeavoring to cut costs, in order to maintain high margins. In first-quarter 2014, Vale’s selling, general and administrative (SG&A) and research and development (R&D) expenditure reduced by 20% and 15%, respectively. The company expects stoppage costs to drop 50% in 2014.

With a market capitalization of $68.2 billion, Vale currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the industry include Kumba Iron Ore Ltd. (KIROY), ArcelorMittal South Africa Limited (AMSIY) and ThyssenKrupp AG (TYEKF). All these stocks hold a Zacks Rank #2 (Buy).

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