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We have recently upgraded our recommendation on Vale S.A (VALE - Analyst Report) from Underperform to Neutral.
We are optimistic on the growing commercial market for miners like Vale, particularly on the back of rising spot prices for metals and minerals. Moreover, rapid consumption in the US, China, and Japan are anticipated to infuse further sales growth
Vale leverages its operational efficiency and mining development to drive top-line growth. The company focuses on volume growth of bulk material, which we believe will certainly boost the company’s sales in the coming quarters.
Vale plans to diversify further in areas of coal, copper and fertilizers, while maintaining a competitive position in iron ore and nickel. The company’s investment in research and development, supporting its search for new mine reserves, is expected to boost organic growth.
Moreover, the large logistics systems, integrated with mining operations, add value to the balance sheet. This reduces shipping cost of metals and minerals as well. Also, Vale’s strategies of divestment appear favorable—generating additional cash flow while reducing operational cost.
However, the flipside scenario raises concern. The volatile international iron ore market has been impacting the company’s financials and dampening sales. Rising oil price and mining cost inflation have also been affecting margins.
The company often faces governmental delays on permits and tight environmental regulations and policies. Moreover, mining and income taxation thwarts top-line results. In addition, resource nationalism within the regions of operation and declining iron ore grades inflate costs.
Mention may be made of current instability and a slower-than-expected global growth, which has been leading to an oscillating stock performance. Also, significant currency fluctuations, competitive pricing, natural disasters, and shortages of skilled workers continue to threaten stock performance.
Rio de Janeiro-based, Vale S.A. is one of the world’s largest producers and exporters of iron ore and pellets. The company keeps improvising its competitiveness against rival companies, such as Rio Tinto plc (RIO - Analyst Report) and BHP Billiton Ltd (BHP - Analyst Report).
Vale holds a Zacks #3 Rank, which translates into a short-term (1-3 months) 'Hold' rating.