Vale (VALE, Financial) investors have had a disappointing year as the declining iron ore prices have hurt the company’s growth. After a dismal 2014, can Vale investors expect the company to bounce back in 2015? It looks dubious. Let’s take a look at the reasons why Vale may continue to struggle in 2015.
Prospect analysis
The company performed well in the ferrous minerals segment. The iron ore production reached 80 million tons, which is record growth. Nickel prices are estimated to grow due to a rise in the demand in Europe and the U.S. Also, the steel demand is expected to grow by 3%-3.5% in the year, thereby increasing the demand for iron ore. However, metallurgical coal requirement is expected to decline in the coming quarters, owing to a weakening demand in China.
Vale missed the estimates on both top and bottom lines in the quarter due to a weak market environment for iron ore. Since Vale carries a weak balance sheet, the bottom line is expected to decline. The company stands under a debt of $33.3 billion and its debt-to-equity ratio has risen in the past two years.
Currently, the weak iron ore pricing is what is troubling Vale the most, and there are very few chances for this trend to change in the near future. In the wake of making up for the losses, the company will have to continue to write down its assets. Vale wrote off billions in assets due to the weakness in the mining industry. In the previous two years, there were asset write-downs by the company worth $7.1 billion. It also wrote down $274 million from its coal mine in Australia.
About 35% of Vale's sales were to China in the second quarter, and since China is now willing to trust its own production, Vale loses a large market. Another problem is that Vale is located much farther from China than its competitors. While it takes Vale 45 days to move a ship from South America to China, its Australian competitors require only 15 days for the job. This issue can't be ignored because shipping ore is expensive. The company is taking measures to solve this issue by building Valemax ships, which can handle more than twice the ore as other ships. This will lead to a reduction in shipping costs and increase productivity. But, if the iron ore prices remain where they are or continue to decline, then even this investment would turn out in a loss.
All of the above suggest that a turnaround is unlikely to occur for the company. The 18% year-over-year drop in iron ore prices has hurt Vale to a great extent and the prices are expected to go down further next year by around 7.6%. The company’s bottom line is expected to tarnish at an annual rate of 17% for the next five years. In addition, the company carries a massive dividend yield of 6.10%, but seeing the current status, Vale will be forced to cut the dividend very soon.
One of Vale's competitors, ArcelorMittal, also expects global steel demand to be flat to slightly higher in the year. Other stocks that can be considered include U.S. Silica Holdings, Inc., Dominion Diamond Corporation (DDC) and Hi-Crush Partners LP (HCLP), all of which have been rated a good buy. All in all, Vale is not worth trusting for long-term as well as short-term investors.
