Vale's Diversity Makes it a Good Buy

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Dec 04, 2014

Vale (VALE, Financial) is the world's biggest iron ore maker. Apart from its iron ore mining operations, which represent the main part of its revenue, the company is additionally a noteworthy maker of base metals, coal and manures. Falling iron ore costs have had a negative effect upon the profitability of the company's iron ore mining operations. Vale's normal acknowledged deal cost for its iron ore fines fell 38% year-over-year in Q3. The essential explanation behind the fall in iron ore costs has been an oversupply circumstance, made because of an enduring increment in production despite shortcoming sought after for the item. Costs are relied upon to stay stifled in the close term.

Given the disheartening viewpoint for Vale's iron ore mining operations, the company's different segments will play a supreme part in driving its business prospects. So, let’s take a look into Vale’s future prospects.

Diversity is a plus

Vale's management makes it clear that iron ore is only one item that Vale offers. Yes, it is the most essential item, however the organization likewise mines for copper, coal, and composts, besides everything else. Those items make up an eminent 30% of sales. As indicated by the company's management, "the other segments we have are [also] delivering better results." He thinks that these segments aren't getting enough credit.

Vale's copper ore reserves came in at 1.39 billion tons toward the end of 2013, with the Salobo mine accouting in excess of 80% of these reserves. The organization delivered 370,000 tons of copper in 2013. Vale created $1.45 billion in deals from its copper business in 2013, around 3% of the organization's general incomes. Going ahead, the company will fundamentally raise its creation levels, determined by an ascent in yield at the Salobo mine.

In this way, Vale is improving in its core iron ore business in the meantime as its get ready for still robust, however slower becoming, long haul request. Also it’s doing so in a fiscally capable manner that permits it to remunerate shareholders with sizable dividends. Vale is likely a good buy for dividend investors.

Cost structure

To adapt to weakening demand and price, Vale has decided to address its cost structure. In the company's most recent quarterly results, its EBITDA margin approached 28%, far surpassing the past quarter's 10% mark. Not just was administration ready to bring down its overhead costs, but also costs of merchandise sold dropped significantly. With these progressions anticipated that will be kept up for the long haul, investors will probably be liberally compensated now that the company is reporting better margins. Throw into this the company's operational plans to decrease the requirement for higher capital expenditure, and solid cash flow and you get a stock worth buying.

Valuation

Vale is currently trading at 40% below its historical price as the minor has been severely punished for the drop in iron ore prices. However, given the company’s diversity, economies of scale, and excellent cost structure, you can expect the company’s share price to start moving upwards soon. With a P/S ratio of just 1.12, Vale is definitely worth buying.

Conclusion

The impending decades will see demand for iron ore take off and the best iron miners will become rich and shower long-term investors with capital growth and quickly developing dividends. Vale and Rio Tinto are two illustrations of best-in-breed iron diggers with access to prevalent technology, economies of scale, and broadened resources that can ride out cyclical downturns. Hence, Vale is a good buy.