Long-term stock pick: Vale

Good progress for this metals & mining company but still too much short-term risk.

By Jim J. Jubak Sep 20, 2013 7:06PM


A bulldozer picks up vegetal coal at an aluminum plant expansion area of Brazil's mining company Vale, in Barcarena, some 110 km southwest from Para's northern capital of Belem, Brazil, on August 14, 2008. Vale opened the world's biggest aluminum refinery and announced 20 billion dollars of investment in the region to boost output of several metals. (© Mauricio Lima/AFP/Getty Images)Vale (VALE) continues to make good progress in cutting costs and selling off non-core assets. But for the next year big additions to global iron ore supply are likely to keep iron ore prices -- and the price of Vale shares -- relatively depressed.

For the first half of 2013 Vale has announced cost reductions of $1.6 billion from the first half of 2012. The company looks to be on track to deliver an additional $1.2 billion in cost savings over the next twelve months.

On Friday Vale announced it would sell 36% of its logistics unit VLI to Mitsui and an investment fund managed by bank Caixa Economica for 2.7 billion reals ($1.23 billion) and that it was in negotiations with Brookfield Asset Management to sell an additional 26%. This deal follows $1.47 billion in asset sales—a coal mine in Colombia, a shipping company, and lease blocks for oil exploration—in 2012.

These efforts make Vale my favorite iron ore stock for the long run. (The stock has been a member of my Jubak Picks 50 long-term portfolio since the formation of that portfolio in December 2008.) But over the next 12 months I believe that increases in iron ore supply, as projects green-lighted as much as five years ago come on-line, are likely to keep iron ore prices at current levels or lower and result in fears among investors that lower iron ore prices will pressure earnings at Vale.

I get a potential one-year target price of $18 for these shares -- if fears over iron ore prices don’t bite too deeply into market sentiment. That’s about 11% above Friday's closing price of $16.21 for the New York traded ADRs. That’s not enough of a potential gain to make me buy these shares now, given the possible downside from a return of fears that the Chinese economy, the big driver of global commodity prices, is slowing.

There are also short-term fears hanging over the shares due to continued uncertainty in Brazil about royalty rates, the possibility of a special participation tax, and overseas tax litigation.

In other words, wait on this one for greater clarity on those issues and for a reduction in fears of falling iron ore prices as a result of either greater certainty about the rate of China’s economic growth or the market’s ability to absorb scheduled increase in iron ore production.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any company mentioned in this post as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio.

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Tags: VALE
Sep 20, 2013 10:22PM

James....It seems to me you come on here and push Vale about every 6 months...

At least once a year.

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