VALE: A wild Brazilian company that has long made me happy
A mining company with a high dividend, big geopolitical risk and a wild history? That's exactly the VALE we're looking at today!
VALE $VALE-1.0% is a Brazilian mining company that focuses on a portfolio of many metals, including nickel, copper, cobalt, platinum, rhodium, ruthenium, iridium, gold and silver. It is a company that has demonstrated slow and steady growth through 2026.
It also produces and exports iron ore and pellets, nickel, manganese ore, copper, ferroalloys, metallurgical and thermal coal, copper and cobalt. The company also produces platinum group metals and other precious metals such as gold and silver. But interestingly, it also secures some of the infrastructure. It operates logistics systems in Brazil and other regions of the world, including railways, marine terminals and ports. The company owns and operates a distribution center to support iron ore shipments around the world. It also invests in energy and steel businesses through its subsidiaries and joint ventures. The company operates in the Americas, Europe, Asia, the Middle East, Africa and Oceania.
As you can see, there is a mixed story of significant growth metrics, but since 2020, operating income growth and net income have strengthened. Therefore, it's crucial that earnings per share rise as they have over the past two years.
It is safe to say that Vale will not lose ground compared to other stocks in the basic materials category. Moreover, there has been no dilution since 2017, which maintains the quality of this stock. Finally, Vale has significantly reduced its debt over the past year.
The outlook through 2026 is also interesting. Here, earnings per share start to grow significantly in 2023. Also, earnings before interest, taxes, depreciation and amortization strengthen with solid growth in 2023 and continue through 2026.
It is critical that large market cap stocks, especially those in the mining industry, get better sustainability ratings. If a company's ESG rating is not favorable, it will be difficult to obtain financing from the two largest asset managers, Blackrock and Vanguard. Their competitors in the large-cap space will most likely have these outperforming ratings as well.
For the most recent quarter, Vale reported revenues of 52.1 billion. With a net profit of 23.3 billion, it achieved a profit margin of nearly 45%. For the first nine months of the year, the profit margin was almost 41%, so this is not just a quarterly fluke. These profit margins help support the generous dividend, which currently stands at 8.5%.
Given the impending slowdown in the global economy, which is likely to depress commodity prices somewhat, as well as the relatively high inflation rate, which is declining despite an already likely slowing global economy, Vale's profit margins are likely to decline going forward. For this reason, from a shareholder perspective, it is good that its financial position is generally solid as it should help keep the dividend afloat if the downturn is not too sharp or too long.
As we can see, net debt should end up somewhere between $10 billion and $20 billion this year, with a likely expected result of $13 billion. Last quarter's net income of $23.3 billion in Brazilian currency ($4.55 billion in dollar terms). In other words, its net debt is equal to its net profit for roughly two and a half quarters, only slightly more than its last quarter's revenue. This is a comfortable debt level that should help it weather the coming global economic downturn and perhaps higher production costs as prices for most inputs continue to rise.
I have the company in my portfolio and have been buying at really nice prices. I still like it given its solidity, reasonable valuation and high and stable dividend. But nothing is quite so rosy. The company needs to be watched closely due to geopolitical risks, state ties and potential problems arising from that.
Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.