Vale SA (ADR) (VALE), BHP Billiton Limited (ADR) (BHP), Rio Tinto plc (ADR) (RIO): Positives Continue to Outweigh Negatives With This Value Play

At the start of my Real Money Portfolio, I want to address a few key points. I knew that my first pick had to be a company that could be the cornerstone of my portfolio and generate income through dividend payments along with the potential for growth in share price. Global diversification is also a key tenet that I have my eye on. The final criterion that I want to build around is value. When screening for these qualities, Vale SA (ADR) (NYSE:VALE) leapt out at me.

It’s no secret that mining companies rely on worldwide growth for their success. With all of the worries permeating the globe these days, there is no shortage of reasons why companies like Vale SA (ADR) (NYSE:VALE) have struggled over the past two years. During this time frame, this Brazilian giant has fallen nearly 50% on the New York Stock Exchange. The demand for its mined products like iron ore pellets, coal, and base metals just hasn’t materialized like it did following the 2008 financial collapse. Because of this, Vale SA (ADR) (NYSE:VALE) is now trading at just 1.15 times its book value. With a stable dividend yield north of its peer group, that’s a rock-bottom price.

So, why Vale SA (ADR) (NYSE:VALE) and not its larger peers like BHP Billiton Limited (ADR) (NYSE:BHP) or Rio Tinto plc (ADR) (NYSE:RIO)? Well, the biggest reason is that I plan on weighting my portfolio toward energy, at least to a higher degree than the weighting of the S&P 500, and I feel that there are better options out there than the exposure BHP Billiton Limited (ADR) (NYSE:BHP) brings to the table. As far as Rio Tinto plc (ADR) (NYSE:RIO) is concerned, its valuation comes in a bit more highly priced than Vale SA (ADR) (NYSE:VALE) to the point where I eliminated it from consideration. Focusing solely on Vale SA (ADR) (NYSE:VALE), I believe strongly in the fertilizer market’s long-term prospects, and Vale’s growing business here is a welcome diversifier. Now, onto more Vale-specific arguments…

Those winds of change are tailwinds
To cope with soft demand and pricing markets, Vale has chosen to address its cost structure. Boy has it ever: In the firm’s latest quarterly release, its EBITDA margin approached 28%, far exceeding the previous quarter’s 10% mark. Not only was management able to lower its overhead expenses, but costs of goods sold dropped dramatically as well. With these changes expected to be maintained for the long term, investors will likely be handsomely rewarded now that the company casts a wider net from the top to bottom lines. Tie this into the company’s operational strategies to reduce the need for higher capital expenditures, and an already strong cash cow should be able to expand its free cash flow margin even further without sacrificing its ability to meet increased product demand once that corner is finally turned.