A Mining Stock for All Investors

03/23/2012 10:15 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

There are usually compelling reasons to buy mining stocks as cyclical plays on the global economy, but rarely do mining stocks become attractive for investors of all stripes, writes Jim Trippon of Dividend Genius.

Brazil-based miner Vale (VALE) is a well-known commodity play and a strong Asian play. But it also presents unique possibility for value, growth, and income investors, something not often seen for a huge mining and resources conglomerate.

The diversified company is the world’s largest iron ore miner, and is the second largest miner in the world after BHP Billiton (BHP). Vale is also a producer of other metals, coal, and fertilizer. Vale produces nickel, copper, and aluminum, and is involved in aluminum trading.

Less well known than its metals and mining is Vale’s transportation and logistics business. Vale is involved in cargo transportation with Brazilian infrastructure such as railroads and ports related to its mining operations.

Vale is not only a participant in Brazil’s booming economy, but is affected strongly by the global economy, as Vale’s operations are highly international.

Brazil, it should be noted, had a GDP growth rate of 7.5% in 2010, with an average annual growth rate of about 5% in the previous decade. Its GDP has fluctuated, and its inflation has been relatively high at 6.5%, which exceeds the government’s target rate of 4.5%. To stem the inflation, Brazil’s interest rates have historically been high, with its recent benchmark rate set by the central bank at 10.5%.

Vale has a $130 billion market cap, trades at a trailing P/E of less than 6, and generates nearly $60 billion annually in revenue, with nearly $23 billion in net income. It has cash of nearly $3.5 billion and debt of more than $21.5 billion, with operating cash flow of $24.5 billion.

The stock has traded in a range of $20.46 to $34.95 in the last 52 weeks, with a recent close at $25.54. It sells at a price-to-sales of 2.17, with a price-to-book of 1.65, and its PEG on a five-year projection is 2.47.

The company has grown earnings roughly 25% in the last five years. Analyst estimates have scaled down earnings projections somewhat for this year and next, given the slowdown in the global economy and the sluggishness of some of the commodity trade.

The company has paid an increasing dividend over the past several years, with a recent increase that puts the yield at over 7%. So let’s examine its dividend along with the company’s growth prospects.

The dividend payout will be $1.77 annually per ADR, which represents a payout ratio of less than 25%.The January 17 announcement increasing the dividend represented an additional $6 billion toward the dividend for 2012.

CEO Murilo Ferreira spoke of his "capital discipline" regarding his company, which has rewarded shareholders not only with increased dividends, but with extra dividends, called "interest on shareholders’ equity," or ISEs, from time to time. This is a strong commitment to returning cash to shareholders.

In the last several years, Vale has paid a combination of dividends and special ISE payments as follows: In 2011, it paid a total of $1.73, then 57 cents in 2010, 53 cents in 2009, 56 cents in 2008, and 39 cents in 2007.

Some years include a varied number of total dividend and ISE payments, usually from three to five, so this is not a strictly regular quarterly deal for investors. But they shouldn’t overlook the high cash payments and the overall trend for more. Vale’s pattern of increasing its dividend as well as adding special payments is an encouraging one.

A lot of the outlook on Vale will be tempered by the overall outlook of the global economy and the commodity sector. At the risk of oversimplification, there are three main views of commodities right now.

  • One, that we’re in a cyclical downturn.
  • Two, that we are in a structural rise.
  • Three, that we are in a structural fall.

These views are not mutually exclusive, and can be quite complex, so we’ll sketch it out in regard to Vale.

View No. 1 includes the global slowdown and the pullback in usage for iron ore and other metals. View two argues that longer term, the demand is going significantly higher, and that the pullback is short-term. View three is more radical; it says long-term demand will fall, and is a favorite of some China bears, for example.

Which Is It?
We feel scenario two is the real story, and that view No. 1, the cyclical downturn, is contained within that story. China and Asia’s long term demand is real and will grow, despite its temporary slowdown.

Vale is positioned extremely well to export to the Asian markets and will feed its own growing economy at home, as well. As a resource value, growth, and income play—a rare combination—Vale will be a long term winner.

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