Mining giant Vale (VALE, Financial) released disappointing results in the recently reported quarter. The company posted weak numbers on earnings and revenue, which declined considerably. The main reason behind the weak performance was lower commodity prices. However, Vale is hopeful about its performance in the long run. Let us have a look at the overall iron ore scenario and Vale’s prospects.
A closer look at the weakness
In the recently reported quarter, EPS on ADR basis dropped by 81.7% over the year but declined by 66% sequentially on per quarter basis. The company also posted loss of $0.15 per share missing consensus estimates of earnings of $0.30 per share.
Vale is going through tough times. The mining giant is suffering on the back of a weak commodity market. The prices are low, and this is eating away at the profit margins of companies such as Vale. However, the company still has some key points which can be a growth driver to it in the near future besides the weak commodity market. The company can gain good market share on the back of a strong balance sheet with considerably low amount of debt. However, the mining giant is working on various initiatives to improve its position in the market. It is undertaking several strategies to defend itself from the drowning iron ore prices.
Vale's strategies
Vale is working on cost reduction initiatives which can improve its profit margins in future. Even if the production is strong it is expected to decrease on the back of Iron ore cash cost. However, Vale is seeing some positive signs from the base metals such as Nickel and Copper which were better than iron ore in the last reported quarter. There is a huge ramp up going in this regard. Vale is pleased and confident about the base metals contributing well to its top line in the long term.
Vale is also focusing on coal. It is trying its best to reduce the cost and improve its profitability. Vale expects this initiative in this segment to drive better value to the shareholder’s wealth which can also attract many investors to the stock even after this challenging commodity market environment. In addition, Vale is also investing in various profitable initiatives. It is investing in Moatize and Nacala and, surprisingly, seeing good fiscal improvement. Vale is also seeing good improvement in the fertilizer business as well. The segment is performing well and seeing good growth. This segment improved by almost $100 million in the recently reported quarter. Vale is focusing on generating positive cash flows. It is also looking for divestment opportunities and cost cutting initiatives to support its free cash flow.
Despite the weak commodity prices as of now, many analysts forecast about a bullish commodity market in the future across the U.S. According to them, the market might be on an inflationary rally, which is expected to recover in late 2014. The fundamentals are strong, and the market is sure to turn around in the coming quarters. However, the iron ore segment is still expected to remain soft. The iron ore segment was showing some good signs in 2013 on the back of demand for iron ore from China, but this also wasn’t enough to create any sort of significant interest for iron ore.
Conclusion
Now moving to the fundamentals, as Vale is still incurring losses, the company doesn’t have a trailing P/E but its forward P/E of just 7.99 shows little improvement in the earnings. But the overall industry is suffering due to the weak commodity market. Though analysts are expecting this market to turnaround but the turnaround might be in infancy initially and the investors might be disappointed by the company’s offering. Considering all these facts, I would like to suggest the investors to stay away from Vale until it shows some concrete signs of gaining market share in future.
