Vale: Good progress but still too much short-term risk in this long-term stock pick

09/20/2013 6:34 pm EST


Jim Jubak

Founder and Editor,

Vale (VALE) continues to make good progress in cutting costs and selling off non-core assets. But for the next year big additions to global iron ore supply are likely to keep iron ore prices—and the price of Vale shares—relatively depressed.

For the first half of 2013 Vale has announced cost reductions of $1.6 billion from the first half of 2012. The company looks to be on track to deliver an additional $1.2 billion in cost savings over the next twelve months.

On September 20 Vale announced that it would sell 36% of its logistics unit VLI to Mitsui and an investment fund managed by bank Caixa Economica for 2.7 billion reais ($1.23) and that it was in negotiations with Brookfield Asset Management to sell an additional 26%. This deal follows $1.47 billion in asset sales—a coal mine in Colombia, a shipping company, and lease blocks for oil exploration—in 2012

These efforts make Vale my favorite iron ore stock for the long run. (The stock has been a member of my Jubak Picks 50 long-term portfolio since the formation of that portfolio in December 2008.)  But over the next 12 months I believe that increases in iron ore supply as projects green lighted as much as five-years ago come on line are likely to keep iron ore prices at current levels or lower and result in fears among investors that lower iron ore prices will pressure earnings at Vale. I get a potential one-year target price of $18 for these shares—if fears over iron ore prices don’t bite too deeply into market sentiment. That’s about 11% above today’s closing price of $16.21 for the New York traded ADRs. That’s not enough of a potential gain to make me buy these shares now, given the possible downside from a return of fears that the Chinese economy, the big driver of global commodity prices, is slowing.

There are also short-term fears hanging over the shares due to continued uncertainty in Brazil about royalty rates, the possibility of a special participation tax, and overseas tax litigation.

In other words, wait on this one for greater clarity on those issues and for a reduction in fears of falling iron ore prices as a result of either greater certainty about the rate of China’s economic growth or the market’s ability to absorb scheduled increase in iron ore production.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any company mentioned in this post as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio at
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