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Vale (NYSE: VALE) is among the top iron ore miners on the planet, with operations especially in Brazil. Plus, they are the largest nickel producer on the planet and also mine some copper as well, both of which have a lot of potential in the long-term.
Vale is a very good example of a commodity company. When the price of iron was high, they were making even $20 billion in a year, the dividend was very high, massive buybacks and so on. However, during the lower part of the cycle, they can make around $3 to $5 billion per year, and even if they are profitable, the stock can easily crash to half of what it is today or even less.
They are investing a bit more than usual, and in the long-term, the average that they make during a cycle should go up.
They have one of the lowest costs of production and some of the best iron mines on the planet, but there is also a downside to mining in these jurisdictions, as you are about to see in a bit.
They have current assets of $18.7 billion, which cover the current liabilities. Overall, they are fine from a financial point of view, but we can see a lot of de-characterization liabilities, provisions and stuff like that, but more on that in a bit. Keep in mind however, and this is something we’ve seen a lot recently, that if the price of iron falls, the value of the assets, especially the inventories can also fall, but even then I don’t think this would be such a big issue.
Vale has a dividend policy where they try to pay 30% of EBITDA minus the current investments, which so far in good years has been very significant.
As with any mining company out there, there is the risk of dam failures and lawsuits and other environmental issues. Vale actually has quite a few things to worry about from this point of view. You saw the de-characterization liabilities a bit earlier and this is going to cost a lot in the long-term. It’s mandatory in Brazil and there is no way to dodge it, so you know that it’s coming. Also, Vale and BHP face a couple of massive - and I mean very very big - lawsuits related to a dam failure from about a decade ago. Sure, they won’t have to pay everything at once, but even a $20 billion fine on top of all the already existing environmental liabilities can eat a significant amount of money. This has the potential to basically nullify the company’s growth or even result in negative growth for a while.
Iron, probably more than almost any other commodity, depends a lot on China, because the country represents a huge chunk of the demand. The country accounts for about 70% of the demand for iron ore. Even if Vale didn’t have the largest ore carriers on the planet just to be able to compete with Australian miners in sending iron to China, the country would’ve still had a massive impact. So, the price of iron will - for the foreseeable future - depend on China, meaning that Vale will indirectly be affected by the Chinese economy, which can be both a good and a negative thing.
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