Brazilian mining giant Vale SA (VALE), a producer of iron ore and iron ore pellets, is set to benefit from structural changes in the global iron ore market and from a manufacturing boom which is underway for the metal industry as suggested by the substantial increase in MII and steel consumption.
The global economic recovery set in motion an increase in steel prices which have been rising. After falling for twelve consecutive quarters, global stainless steel output is rebounding strongly, growing at an annual seasonally adjusted rate of 34.3% in 1Q’10. Prices of billets traded on the London Metal Exchange increased by more than 135% during Q1’10, and global crude steel output returned in March 2010 to the all-time high level of June 2008, at 1.4 billion metric tons, on a seasonally annualized basis.
With synchronized above-trend global economic growth to continue over the next quarters, we believe shares of the mining giant Vale — which has a strong financial position, supported by large cash holdings of more than $11 billion, availability of significant credit lines and a low-risk debt portfolio — will hit $39 per share by the end of 4Q’2010. In our view, Vale is poised to uptrend from its current mid-$27 level based on the co.’s strong balance sheet which is reflected in key financial ratios: Revenues generated trailing twelve reached almost $27 billion with a net income of $5.50 billion. Operating margins came in at 27.10%. Currently, return on assets stands at 4.30% followed by a 10.5% return on equity. Profit margins posted 21% return.
Adding to the positive aspect of these number is also the fact that the company is expected to raise iron ore prices about 35% to as much as $145 per metric ton in July as part of a switch to quarterly pricing, according to a report published today by Brazil’s ‘O Estado de Sao Paulo’ newspaper.
Given the current market trends for the metals and mining industry, and Vale’s favorable fundamental factors, we believe the company has by far the best and the largest growth potential in the global iron ore space.
Vale is set to report 2Q’10: July 28, 2010.
Disclosure: author owns VALE shares