Vale Retained at Neutral - Analyst Blog

On Aug 14, 2013, we reiterated our Neutral recommendation on Vale S.A. (VALE) based on its mixed second-quarter 2013 performance.

Why the Reiteration?

Vale reported mixed results for the second quarter of 2013, with a year-over-year increase in earnings, while revenues lagged. In the quarter, the company faced lower production for many of its products. While the production of iron ore, pellets, manganese, gold, coal, nickel and copper increased, potash and phosphate rock experienced a sequential decline.

Vale was able to reduce costs significantly. In the second quarter, the company saved roughly $736.0 million. Additionally, the production of base metals increased year over year in the quarter, with the help of new facilities as well as expansion of the existing ones.

Vale also has a geographical advantage to tap the immense growth potential that Brazil offers. Moreover, rapid consumption in the U.S. and the emerging markets like India and Southeast Asia as well as recovery and urbanization in China and Japan are likely to infuse further sales growth in the coming quarters.

However, in spite of a rise in the base metals production, iron ore volumes declined during the quarter due to license and permit issues. The total production dropped 9.1% year over year. The company missed its targeted iron ore production for the first half of 2013 by 2.7 metric tons.

Rising oil price and mining cost inflation have also been affecting margins. Moreover, mining and income taxation on miners including Vale have been threatening financial results for quite some time. Vale faces significant fluctuations in currency prices and suffered the negative effect of currency depreciation of the Brazilian real against the U.S. dollar in the second quarter of 2013. Moreover, Vale being a cyclical stock is largely influenced by economic activities and market movements.

Other Stocks to Consider

Vale currently carries a Zacks Rank #3 (Hold). Other stocks worth a watch in the mining industry are Ternium S.A. (TX), Nippon Steel & Sumitomo Metal Corporation (NSSMY) and Alderon Iron Ore Corp. (AXX). While Ternium and Nippon Steel carry a Zacks Rank #1 (Strong Buy), Alderon Iron carries a Zacks Rank #2 (Buy).

ALDERON IRON (AXX): Free Stock Analysis Report
TERNIUM SA-ADR (TX): Free Stock Analysis Report
VALE SA (VALE): Free Stock Analysis Report
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Zacks Investment Research
VALE Research -- Mutual Funds Top 10 Holdings include "VALE"
TX Research -- Mutual Funds Top 10 Holdings include "TX"
NSSMY Research -- Mutual Funds Top 10 Holdings include "NSSMY"
AXX Research -- Mutual Funds Top 10 Holdings include "AXX"