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Vale - ADR (VALE)

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We are maintaining an Underperform recommendation on Vale S.A (VALE) based on the rising cost of raw materials, increasing price volatility and demand slowdown, especially in China. Also, rising cost of delivery of materials and the competition in the industry leaves the company in a pressure to maintain prices as well as earn profits to sustain.

In the third quarter of 2012, earnings of the company fell by 66% year over year and stood at $0.32 per ADR. The revenue was also reported 34.5% lower year over year at $10,963 million due to weak macro conditions.

We are maintaining our Underperform recommendation on Vale based on demand degradation for metals and minerals, especially in the company's main region of operation, China. We expect Vale ADR to trade at a P/E of 7.1x EPADR 2012, to arrive at the target price of $17.00.

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