Thursday, 30 July 2015

Rolling the dice with Vale?

I took a look at the Brazilian (and US listed) iron ore and other metals producer Vale late last year when the shares crashed through US$10 (link here). I had a think about the stock but fortunately decided not to invest: the shares are down over 40% since and as shown below are not too far off the 10 year lows*:

So what did Vale say today in their Q2 numbers?  Well no surprises that earnings were well below last year but sequentially quarter-on-quarter ferrous minerals performed better...

...and this was broadly based from price/volume/FX/cost control etc.
Of course this is better and reflects (as noted on the conference call) underlying core Brazilian production costs in the US$12-15/t range and a 'landing cost' to China (unsurprisingly one of their large markets) at around US$40/t.  So despite lots of influences on the price realization noted below the company does have some clear capability to make underlying profits - although clearly it helps if the iron ore price is stronger.  

Unsurprisingly their capex is coming down and they see some good benefits from the further development of some of their new mines below (higher margins etc.)  
Nevertheless the bigger issue still remains debt...which despite some of the initiatives above is still rising...and this makes Vale a still risky bet. 

Of course the iron ore market can change.  On the conference call the company noted that globally '90m/t coming out of the mkt balanced by (lower cost) new supply.  For '16 'people will be surprised about depletion'

We will have to see about that.  Clearly it is a very difficult backdrop out there currently which means I think you stick with a major with a good balance sheet - and that's a name like BHP Billiton in my view.  There will be more than enough leverage to this undoubtedly out-of-favour part of the market via such a route. 

*Of course for balance I did buy BHP Billiton (link here) which has performed better...but that is not saying too much: 

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