Monday, May 25, 2009
Iron ore the key for Vale
Sunday, 24 May 2009
RBC Capital Markets has finally jumped on the bandwagon and picked up coverage of Brazilian mining giant Companhia Vale do Rio Doce. Analyst Fraser Phillips wrote that the company's iron ore base in Brazil remains the key for Vale's fortunes, despite its global footprint and propensity for acquisitions. He believes the stock is reasonably priced at these levels. Mr. Phillips calculated that iron ore will contribute 61% of Vale's revenue and 93% of EBITDA in 2009, and that the company will grow production by 22% to over 420 million tonnes over the next five years. Given Vale's "unparalleled" resource base in Brazil, an even bigger expansion is possible, he noted.
"Uncertainty concerning iron ore pricing and volumes in 2009 may limit performance in the near term, but we see significant longer-term
upside potential," he wrote in a note to clients.
Vale is best-known to Canadians for its acquisition of nickel giant Inco Ltd., and Mr. Phillips wrote that the nickel provides good diversification, but the outlook for that commodity is still uncertain. He projected that Vale will grow nickel production by 36% over the next five years as two mega-projects, Goro and Onca Puma, come onstream.
Vale also wants to grow in other commodities such as aluminum, copper, coal and fertilizer, and Mr. Phillips noted that the company's strong balance sheet (including US$12.2-billion in cash and plenty of undrawn credit) supports those plans.
He initiated coverage of the stock with a "sector perform" rating and a target of US$20.00 a share, just above its current level. That assumes a multiple of 17 times earnings, which is in the upper half of its trading range through the last commodity cycle. Mr. Phillips thinks it is appropriate given his "relatively depressed" earnings forecast.
Source: National Post
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