The largest Brazilian miner, VALE S.A (VALE) recently authorized the buy-back of 64.8 million common shares and 98.4 million preferred shares for a total amount of $2 billion until March 2011.
Vale also proposed a total dividend of $2.75 billion with $1.25 billion as minimum payment, $500 million as additional dividend, and $1.0 billion as extraordinary dividend. The company is trying to raise shareholders’ wealth in the present sluggish environment.
Markets are gearing up and hence the worldwide demand for steel, the finished product of iron ore, is expected to climb 10.7% in 2010 and 5.2% in 2011. Vale will largely benefit from the increase in the demand for steel, which will in turn increase the demand for raw materials, one of them being iron ore, which Vale produces. Further, the recovery in emerging markets is always greater than in the developed economies, which is encouraging.
Vale is also expected to gain from the rapid industrialization and urbanization in China, the biggest iron ore importer in the world. China’s steel consumption is expected to increase 6.7% to 579 million tons in 2010. We also believe that once the inventory in the Chinese market exhausts, the demand for iron ore will rebound. China is expected to remain the largest consumer of metals in the years to come and hence the medium-term outlook for metal commodities remains encouraging.
However, we are concerned about the instability in the Chinese market with regard to carbon emissions, which are almost, double that of the U.S. and triple that of Europe. Further, a strong exposure to international markets puts the company at a disadvantage. The bulk of Vale’s total revenues (around 85%) come from outside Brazil, exposing it to foreign currency risks. We reiterate our Neutral recommendation on the ADR. It currently retains a Zacks #3 Rank (short term “Hold rating).