Is Vale a Buy?

Vale S.A. (VALE) announced first quarter ended April 30, 2016 total operating revenue of $5.719 billion, down 3.1 percent sequentially from $5.899 billion in fourth quarter of 2015 and down 8.3 percent year-over-year from $6.240 billion in first quarter of 2015.

Vale declared first quarter of 2016 net income of $1.776 billion or $0.10 per diluted share compared to a net loss of $8.569 billion or $0.20 of diluted loss per share in the sequential fourth quarter of 2015 and as against a net loss of $3.119 billion or $0.13 of diluted loss per share in first quarter of 2015.

The iron ore mining company reported continued sequential and year-over-year declines in both its top and bottom lines primarily driven by the ongoing weaker global commodity demand and pricing environment with only a slow market recovery, negatively impacting the company’s key margins.

A closer look at the performance

Vale’s operating cash flows for first quarter of 2016 were negatively impacted by US $1,309 million growth in working capital.
Net debt for the quarter also grew sequentially and year-over-year mainly due to negative impact of the translation of total debt in the Brazilian real to US dollars and driven by the weaker free cash flows during the first quarter of 2016 along with enhanced capital expenditure for the period.

Adjusted EBITDA for Vale for the first quarter of 2016 has continued to decline both sequentially and year-over-year despite ongoing cost minimization efforts of the company primarily due to seasonally weaker sales volume which is again related to the continuing weaker global commodity demand and pricing environment.

The continuing cost minimization initiatives of Vale are somewhat weaker to support the company in overcoming the ongoing tough international operating environment, poorly impacting the company’s key margins amid expanding global mining and exploration expenditures.

Strong projects will drive growth  

Carajas project is expected to have a total production capacity of 90 Mtpy and is believed to start-up during the second half of 2016 with 85% of physical progress made till date in terms of executed capex for 2016 which is currently at US $253 million and targeted capex for full year is US $890 million.

Another key project Moatize II has total capacity of 11 Mtpy which is estimated to begin during the first half of 2016 with 99% of physical progress as of now considering the executed capex for 2016 which is currently US $29 million and projected capex for complete year is US $134 million. In addition, Vale’s total capital expenditures for first quarter of 2016 including both sustaining and growth projects declined 34.4% year-over-year to US $1.449 billion which is in line with Vale’s continued commitment to preserve cash while sustaining its daily operations profitably.

During the first quarter of 2016, the iron ore production at Rio de Janeiro was recorded at 77.5 Mt, depicting the greatest quarterly production in the company’s history. Carajás recorded a solid first quarter production of 32.4 Mt, up 17.7% or 4.9 Mt compared to the first quarter of 2015 and primarily driven by superior performance at the key mines N4WS and N5S. Further, Tubarão pellet plants comprising of Tubarão 3, 4, 5, 6, 7 and 8 gained a robust first quarter production of 7.2 Mt, depicting growth of 100,000 t over first quarter of 2015 and particularly driven by general expansion in performance at the company’s key production plants.

Therefore, despite a slight sequential and year-over-year improvement in several of the ore’s key production performance for the first quarter of 2016 Vale continued to witness weaker margins, mainly due to ongoing weakness in the global commodity demand and pricing scenario coupled with the rising mining and exploration expenditures.


Overall, the investors are advised to “Hold” their position in Vale S.A. considering the company’s significant long-term growth prospects but currently weaker financial position with significant total debt of $35.22 billion against weaker total cash position of $4.07 billion only, restricting the company to continue with its daily operations profitably. The profit margin of -31.68% seems disappointing and signifies no profit but loss. The PEG ratio of 945.00 indicates highly overvalued company growth.
Published on Jun 29, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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