Vale (NYSE: VALE) is an almost $70 billion mining giant that’s focused on generating value for its shareholders. The company is one of the largest mining companies in the world with a spread of incredibly valuable assets. As we will see throughout this article, the company’s assets, its increasing efficiency, and its financials make it a strong investment.
Vale Company Assets
Vale has an impressive portfolio of assets, assets that generate the company significant cash flow. The company is the largest producer of iron ore and nickel in the world, both massive industries with huge demand.
Vale Production Volumes - Vale Investor Presentation
Vale produces a massive amount of iron ore and nickel, producing roughly 365 million tons per annum of iron ore and roughly 263 kilotons per annum of nickel production. The company has updated its nickel capex plan to only use nickel spot prices to approve capital projects. As a result, the company is decreasing its capex by $1.6 billion for the next two years, decreasing production but improving profitability.
From now until 2019, Vale anticipates it’ll increase its iron production by 10%, as a result of growth in the Northern System. On top of this, the company anticipates it’ll increase its nickel production by 7%, and by 2022, its nickel production will be in line with previous decreases. That means that overall this decision will give the company significant increases in profitability with lower capex.
Vale EBITDA Improvement - Vale Investor Presentation
On top of the company’s increasing volume, the company is fighting to achieve every bit of profitability in its value chains. The company anticipates that its iron ore profitability will increase EBITDA of ferrous metals by $1.2-$2.0 billion over the next several years by 2020. The company anticipates this will come from a $4/ton gain in EBITDA, an incredible and impressive increase in EBITDA.
Vale is a company with a market cap of almost $70 billion, meaning the company is a good sized one. A $1.6 billion increase in EBITDA (average) for ferrous metal profitability increases will increase Vale’s earnings by double-digits. That’s something that gives Vale investors a huge future leg up.
Vale Copper Aspirations - Vale Investor Presentation
Vale is also moving into another massive mining opportunity, one that has been incredibly profitable for other companies, copper mining. Vale has several different copper mining projects. The company’s Salobo 3 project had a significant expansion to 36 million tons per year and plans to produce 50 thousand tons per year of copper concentrate by crushing existing stockpiles. This will be profitable production.
The company also has the high grade Sudbury basin assets that has the potential to produce over 500 kilotons of copper and 200 kilotons of nickel. These projects have the potential to generate $3 billion of copper revenue and $4 billion of nickel revenue, or revenue worth 10% of Vale’s market cap. On top of that, these are high grade ores with significant potential going forward.
Lastly, the company has the Hu’ru project in Indonesia that is 80% owned by Vale. The feasibility for this project will be concluded by the 1Q 2019, and that conclusion could reveal a significant project for Vale. Indonesia is a country that already has a significant copper mine, the Glasgow mine. This mine could become another major project and generate billions.
Vale Increasing Efficiency
On top of Vale’s incredible assets, the company is also focused on increasing the efficiency of its operations. That will bring an incredibly increase in profits going forward.
Vale Efficiency Improvements - Vale Investor Presentation
Vale has been increasing the efficiency of its operations significantly. The company has increased its EBITDA / ton significantly from the start of the commodity / oil crash. The company has managed to increase EBITDA in terms of $/ton from $27 in 2014 to $38 in 2017, a stunning 41% increase. The company plans to continue that further by 2020 bringing a significant increase in profits. That increase is impressive.
Vale Moatize Volumes - Vale Investor Presentation
For example, looking at the company’s Moatize coal mine, the company has ramped up production incredibly quickly. The company has re-optimized its portfolio while increasing production and shipment volumes. As a result, the company’s production in 2017 doubled from last year and is anticipated to almost double again by 2021. That increase combined with a more than 10% drop in costs is very impressive.
Coal has never been the world’s favorite fuel source. It’s dirty and polluting, pollution that kills millions of people per year. Countries are looking to get away from this, in fact, the coal markets in 2040 are anticipated to be a similar size to coal markets today. But money still exists in this market and will continue to earn billions for the company’s with the correct scale. Vale is one of those companies.
Vale Efficiency Improvements - Vale Investor Presentation
Nickel demand is anticipated to grow rapidly in the coming years as a result of growing demands for nickel from electric vehicles. At the same time, existing major mines are slowing down meaning they will need to be replaced with new production. The company anticipates decreasing costs across its portfolio with a significant reduction in fixed costs and an overall reduction in costs per ton.
Those costs should help Vale’s income to increase significantly as the company continues to focus on its existing assets. And that’ll make Vale an impressive investment for the long term.
Vale Financials
Vale has an incredibly strong portfolio of assets and is significantly increasing the efficiency of its operations. That increase in efficiency will support the company’s financials which is what makes the company a premium mining player.
Vale EBITDA Midpoints - Vale Investor Presentation
Here’s a glimpse of the Vale of 2020, a Vale less than 3 years away. Taking the midpoint of the company’s operations and the company should have EBITDA of roughly $16 billion. That’s incredibly impressive for a company that’s currently worth less than $70 billion. The company anticipates that this will turn into significant profits, and without significant share price growth will have a P/E well below the market.
The company has a significant amount of assets, and the company’s iron ore and nickel operations are the most valuable assets. The company is having a tough time with its nickel operations. These are valued at almost $20 billion but only generate $1.2 billion in middle of the scenario in EBITDA even with its recent price adjustments. Earnings are earnings but I would like to see the company improve this portfolio.
Vale Return Anticipations - Vale Investor Presentation
This shows Vale’s plan for shareholder returns. The company anticipates growing EBITDA along with decreasing net debt. The company has continued to hold onto its dividend of just over 3%, dividends that will lead to significant growing accumulated dividends. As a result, Vale anticipates the middle range of its shareholder returns to be roughly 22%, very respectable shareholder returns in just over 2 years.
Even the bottom range of shareholder returns shows 12% returns over the next couple of years. Those increases are impressive and show that Vale will reward shareholders well. Those rewards make Vale a respectable investment.
Conclusion
Vale’s stock price steadily dropped from 2011 highs of more than $36 to early-2016 lows of just over $2 per share. That drop was caused by a rapid decline in commodity prices a significant punishment for investors. Since then, the company’s stock price has recovered by almost five-fold, but it still remains at just over one-third of its pre-crash prices.
Vale is working on reducing its costs and decreasing efficiency while increasing the value of its assets. That work means that the company is becoming increasingly valuable. As a result, Vale anticipates bottom range returns of roughly 12% with up to 31% of top range returns. Those returns mean good thing for investors who invest today, even on the bottom end, and make Vale a strong investment.
Disclosure: I am/we are long VALE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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