First, the company is cheap based on prevailing valuation metrics. Vale trades under 9 times trailing twelve-month earnings compared to 13 and 25 for BHP and Rio, respectively. Unfortunately, this is probably a reflection of current weakness rather than a discounted share price. However, this may bode well for the company in the event of improving economic conditions and, considering BHP and Rio are largely plagued by the same macroeconomic woes and reactionary capex adjustments, it could be interpreted as a comparatively positive figure.
Second, Vale boasts a strong dividend; shares yield 3.3%. However, fissures in the company’s financial condition cast doubt on whether the company has the capacity and the will to maintain this payout level, especially in light of the substantial yield reductions earlier in 2012.
Finally, and most importantly, Vale ADR shares have bounced nicely of late and may indicate that the stock is gaining momentum on news of its strategy of readjustment and a rising iron ore price since its summer trough.
Vale’s best-case scenario would include a slow smooth adjustment of China’s growth model, away from investment and steady demand growth from other markets to offset slowing or even falling Chinese raw materials purchases. This would lend some measure of price stability in raw materials markets – especially in the market for iron ore – and allow Vale to adjust its once aggressive capex to reflect more modest demand forecasts. And Chinese flexibility on Valemax ships docking in the country would also be a great help. There are many “ifs” in this rosy scenario.
More likely, mining companies will be forced to adjust once heady expectations to conform to slowing demand mitigate the effects of rising extraction costs over at least a one or two year time horizon. A familiar wildcard will dictate the pace and duration of a readjustment of growth scenarios for mining companies: Chinese economic policy. Doubling down on investment-driven growth will lift mining shares sooner but may have an ultimately negative long-run impact. A commitment to re-balancing would have the opposite impact.
Vale shareholders, their company trading at basement valuation metrics and just beginning a recovery from internal missteps and low iron ore prices, could just be comparative winners among a great many losers in raw materials industries. Vale ADR shares have had a good run in the past 30 days and price strength looks set to continue. The completion of an adjustment to a new normal for Vale may just be beginning, but now may be the time for investors to take advantage of it.
In the hedge fund industry, some of Vale’s top supporters include Ken Fisher (+215%), Cliff Asness (+42%), and Steven Cohen (+1466%), who were all upping their stakes in the miner last quarter. Here’s a longer look at Ken Fisher’s portfolio, while Steven Cohen’s other top stock picks can be seen on SAC Capital’s profile page on Insider Monkey.
