Update Vale (VALE)
(I’m ratcheting up my vacation a notch next week for my annual summer recharge of my batteries and taking Jubak Picks completely dark for a week or so until August 24. I will resume my regular posting schedule when I return.)
What was most interesting about Vale’s (VALE) second quarter (July 29) earnings report wasn’t how much money the mining company made—although it made a metric ton—but what it’s doing with it.
For the quarter, net income surged to $3.71 billion or 70 cents a share from $790 million or 15 cents a share in the second quarter of 2009. That really wasn’t any surprise. Wall Street analysts had pegged earnings at 70 cents a share for the quarter on a doubling in iron ore prices from the second quarter of 2009 and an increase in production at the company. Vale sold 670 million tons of ore and ore pellets in the second quarter, a 29% increase from the second quarter of 2009. (Vale is the world’s largest producer of iron ore.)
In the last two years the iron ore industry (happily) and its customers (grudgingly) have moved away from a system of annual contracts with long-term guaranteed prices to one based on often rapidly fluctuating spot prices.
The future looks solid for Vale and its industry too. Global shipments of iron ore will rise 6% to a record 961 million tons in 2010, according to Clarkson, the world’s largest shipping broker.
So where’s Vale putting its profits?
First, into a fleet of ships and new distribution centers that will enable Vale to close some of the cost gap with Australian rival BHP Billiton (BHP) in shipping ore to China. BHP Billiton and Rio Tinto (RTP) have picked up share in the market for seaborne ore because of reduced demand in Europe and the shorter distances from Australian mines to China’s steel mills.
Second, Vale continues to invest in becoming a diversified mining company rather than just an iron ore mining company. Vale announced plans to buy Brazilian copper producer Paranapanema for $1.2 billion.
And third, Vale continues to build up speed in the race to secure a share of Africa’s iron ore deposits, the last really big undeveloped deposits of ore in the world. At the end of April Vale reached agreement to pay $2.5 billion for a 51% stake in BSG Resources to gain access to iron ore deposits in Guinea.
Not all this capital investment will come from profits or the capital markets. Vale will sell aluminum assets to Norsk Hydro for $4.9 billion in order to redeploy capital to faster growing businesses.
Vale is a member of my Jubak Picks 50 long-term portfolio (http://jubakpicks.com/jubak-picks-50/
Full disclosure: I don’t own shares of any company mentioned in this post.
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Ed you’re now just making shit up. Higher valuation than apple? WTF does that mean? Apple’s market cap is more than five times pot’s. If a pot holder was gonna take the deal at 130 they’d have sold at the open when pot treaded at 143. Reasonable minds can differ but offering opinions as facts and then making up new facts to support your opinion is what gets people so riled up.
southof8,
Based on P/E, and forward P/E, POT is valued higher than Apple.
So are about a thousand other companies. If you want to use such fungible language you’ll never be wrong. But you’ll never be right either. Your words will mean everything and nothing.
I think BHP’s buyout of POT may not happen. BHP’s initial bid was too low at $130. There’s no way the deal occurs at that price. Since POT’s prospects are looking up because now is very possibly the start of a fertilizer application up-cycle, POT will and should hold out for a much higher price. If BHP really wants POT, they would have to get to that price – various sources have ‘estimated’ at $160 to $200. If BHP bids next in that range, how could its CEO convince the BHP board and its shareholders that it’s not wildly overpaying, given that it initially bid $130?
POT is in the driver’s seat here, since they are well positioned to do well over the next 2 years (and that includes POT stock) on their own, as farmers get back to applying fertilizer and China’s growth continues. They really don’t need BHP. And POT senior management probably don’t want to risk losing their jobs if the BHP buyout goes through. Overall there’s just not much of an incentive for POT to make it easy for a BHP buyout to happen.
cjxland,
SID’s website is http://www.csn.com.br/ri/ (click top right corner for English version)
southof8,
If the market places a higher P/E on a company than Apple, then the makret is giving a better valuation in that company’s stock. Whether it’s deserved is another matter.
I don’t think I was vague in what I said, nor was I waffling.
creativekev,
From a strictly business perspective, you’re 100% correct. I would even go so far as to say that Potash will be worse off under BHP. The only problem is that POT is not currently worth $130. It may be worth that sometime in the next 2 years, but not now.
Ed, a higher pe means only that the market is paying more for anticipated earnings. nothing more. To say something is more “valuable” based solely on pe ratios, forward or trailing, is myopic and misleading, to be charitable. Again, fungible language allows you to say you’re never wrong.
Didn’t Bob Dylan write a song about that?
southof8,
When did I say I was never wrong?
Seriously, you tell me: How do you value a stock? Market cap is meaningless as a means to evaluate a stock. That’s like saying a pound of potash is worth more than an ounce of gold, simply because it weighs more.
I have very much enjoyed-and appreciated-most of the comments/perspectives expressed in the blog. Checking egos at the door would be appreciated. I commend Jim-whom I have known since we were 10-for the even-handed ,analytic tone he achieves.More of that tone would be terrific.
Ed, in answer to your question, it depends on the company, the industry, why I’m buying, what I’m looking for. For me, the PE for POT is not meaningful. The reserves, market position (20% of the market), ability to control their production to meet demand and keep prices high are all factors. What some analyst predicts it will earn next year doesn’t mean much because all the inputs are so variable. In my view, POT is a great play on the expanding middle class in emerging markets. You get the exposure of their increasing standard of living without all the risk that goes with investing in Banana Republics (no offense to anyone from those countries- I just mean they don’t have developed legal systems where private property rights are generally respected). So I’m willing to pay a premium. So are most investors. POT has traded at a premium PE pretty much forever.
To say company X has the same valuation as company Y because they have the same PE is looking at a very small slice of the pie. Particularly when you’re talking about buying the entire company (the context of our discussion)- then it’s even more misleading. It’s value is its current market cap. Period. If BHP wants to buy it, to get management to go along (or shareholders to sell into a tender offer if it goes hostile), it’s gonna have to offer the equivalent of market cap, assuming a control premium has been baked into the market price. Maybe at 148 it has and maybe it hasn’t. Differing minds make a market. But to assume it’s going to go back to where it was on Monday simply because management has said pound sound and the shareholders didn’t all jump off the train at 130 is mystifying to me.
And Paul, you don’t get any extra love because you’ve been Jim’s buddy for 40 years. Participate or not, it’s a free country.
When people are afraid to disagree because someone else might get their panties in a ruffle is when the comments slow to a trickle and people stop paying attention as a result.
So I say bring it on. And if someone’s “tone” ain’t as sweet as Lightnin Hopkins’, well, we can’t all be Lightnin’ now can we? For all the disagreement on this sight very rarely does it get personal.
“Ed you’re now just making shit up. Higher valuation than apple? WTF does that mean? Apple’s market cap is more than five times pot’s.”
Actually, South, Ed’s statement included the correct jargon. Higher valuation means just what he said in industry speak.
southof8,
I certainly agree that there is more to a full evaluation of a company than simply P/E. But when you evaluate any company, you have to do so within the context of the market. If the market is bearish, the P/E for a growth company won’t be quite as high, although it should still be over 15.
Within the context of the current market, Apple is the gold standard for growth. Since it carries such a heavy trading volume, it’s valuation should be fairly close to accurate.
All things considered, Apple should have greater growth than POT (which is not to denigrate POT’s growth prospects). Considering POT’s growth prospects are half of what Apple’s are, one would expect the P/E for POT should at least be less than Apple’s P/E.
My main point is that absent the takeover, POT would not be valued where it is now. Without the driving force of takeover speculation, POT will drop.
On the other hand, you could say I’m comparing apples to…potash?
paralelo70
Thanks- much appreciated- obrigado
Hope Jim gets back soon, this blog is going to …uhhh…welll…
POT [no position, no opinion, no interest- glad someone is- give it a couple months, we'll see how it turns out: winner takes all.]