On Oct 5, we issued an updated research report on Vale S.A.
(VALE - Free Report
) . Rise in global steel production, demand for higher iron ore grade and increased liquidity is likely to strengthen the company’s competency, going forward. However, an oversupply situation in the mining market might impact Vale's results.
Let’s analyze these factors in detail.
On Track to Meet 2018 Production Guidance
Despite the nationwide truck drivers’ strike over rising diesel prices in Brazil, Vale achieved record iron ore production and sales in the second quarter of 2018. Iron ore production totaled 96.8 million tons (Mt) in the second quarter, 4.9 Mt higher than the prior-year quarter. The company continues to benefit from record high price premiums for its high grade iron ore fines as high grade ore accounted for 77% of its second-quarter iron ore production compared with 68% in 2017.
The company anticipates producing more than 100 Mt per quarter in the second half of 2018 to meet its full year guidance of approximately 390 Mt. The company will be able to achieve this as volumes continue to improve at its S11D mine.
Lower Cash Costs in Second Half 2018
In second quarter 2018, the company’s cash cost were in line with first-quarter 2018. Vale’s cash cost is projected to be lower than $13 per ton in second-half 2018, benefiting from the competitiveness of growing volumes at S11D, seasonally lower costs and higher production.
Deleveraged Balance Sheet to Aid Growth
Vale has been steadily lowering its debt, of late, through increased free cash flow generation. During the second quarter, Vale reduced net debt by $3.4 billion, closing the quarter with net debt of $11.5 billion — the lowest level since the second quarter of 2011. This can be attributed to the highest second-quarter free cash flow in 10 years. Over the last 12 months, the company has managed to cut down debt levels by $10 billion. The company is close to its target of $10 billion.
Further, the company announced a share buyback program of $1 billion to be executed within the period of one year. Vale also announced $2.054 billion of shareholder remuneration to be paid in September 2018, its highest remuneration since 2014.
Rise in Steel Production to Boost Top Line
Steel demand continues to be strong backed by growing global economy, strong machinery and construction sector activity. Chinese central and city governments continue to stringently implement pollution emissions control, leading to higher steel prices and steel margins. Steel-makers continue to look for higher iron ore grade and low alumina iron ore to increase productivity while lowering emissions. Vale is well positioned to capitalize on the scenario as it is a major supplier of sinter fines combining high iron and low alumina.
Steel production is increasing in South East Asia as mills ramp up production and new projects emerge to meet increasing regional steel consumption. Going forward, rise in global steel production will augment demand for iron ore, and in turn help boost Vale’s top-line performance.
Few Headwinds to Persist
An oversupply situation in the mining market might hurt Vale's near-term results. This is because the mining giants are constantly trying to augment productivity in order to become more cost efficient. Additionally, high environmental cleanup expenses required after the closing of a mine also prevents shutdowns.
Moreover, stiff rivalry in the mining industry remains a concern. The market is dominated by few big companies other than Vale. Entry of new companies in the industry is almost limited due to huge start-up costs involved in such businesses. Moreover, we believe exchange-rate fluctuations will hurt Vale's revenues and profitability in the quarters ahead.
Share Price Performance
Over the past year, Vale’s shares have performed in line with its industry
, as both recorded growth of around 53%.
Zacks Rank & Stocks to Consider
Vale carries a Zacks Rank #3 (Hold).
CF Industries Holdings has a long-term earnings growth rate of 6%. Its shares have gained 60% in the past year.
KMG Chemicals has a long-term earnings growth rate of 28.5%. The company’s shares have surged 40% over the past year.
Potash Corporation of Saskatchewan has a long-term earnings growth rate of 14%. The stock has gained 22% in a year’s time.
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