Vale's Growth Prospects Bright Despite Macroeconomic Risks

We issued an updated research report on Vale S.A. (NYSE:VALE) on Aug 30, 2016. Established in 1942, the company is currently the largest exporter and importer of iron ore and pellets in the global mining market. This premium industrial metals and minerals company has significantly enhanced the scale of its business through calculated business moves. However, Vale has been facing certain macroeconomic headwinds of late.

Scopes for Improvement

Vale has been trying to reduce its exploration and mining expenses by maximizing the productivity of major mines. The company’s largest ferrous mineral and coal projects are on the verge of completion. The new iron ore mine and processing plant – built under the Carajás Serra Sul S11D project – is estimated to be operational from the second half of 2016. Also, aggregate production of coal is expected to increase after the completion of the Moatize II project within the next six months. Completion of these projects is anticipated to boost the company’s aggregate productivity in the near term.

Though pricing conditions are unfavorable in the mining industry, prices of major core metal, iron ore are likely to improve in the near term on the back of higher steel demand in China. This, in turn, is projected to boost Vale’s top line in the upcoming quarters. It implements a progressive dividend policy in its business, which indicates its commitment to enhance shareholders’ wealth.

Problems to Consider

Weak pricing conditions in the mining market are currently weighing on Vale’s revenues and margins. In second-quarter 2016, the company’s earnings plummeted from the year-ago tally by 36.4%. Economic slowdown of several emerging markets is lowering the global demand for core metals required for infrastructural development. However, the industry has failed to reduce the supply of these metals in sync with the low demand.

Mining giants like BHP Billiton (LON:BLT), Vale and Rio Tinto (LON:RIO) continue to augment productivity for greater cost efficiency. Also, high environmental cleanup expenses required after the closing of a mine prevent shutdowns. Moreover, Vale’s business is exposed to intense competition in the mining market. Extensive competition exposes the company to risks of market share loss. Market rivalry also forces the company to undertake price-cutting programs that ultimately weigh on its total revenue.

Stocks to Consider

Vale currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are Kumba Iron Ore Ltd. (OTC:KIROY) , Fortescue Metals Group Limited (OTC:FSUGY) and Barrick Gold Corporation (NYSE:ABX) . All the companies currently hold a Zacks Rank #2 (Buy).

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