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Would Asset Sales Help This Mining Company?

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It has certainly been a difficult year for miners. Most metals' prices remain depressed and show little signs of a rebound. No wonder some miners turn to asset sales to strengthen their positions. Vale (NYSE: VALE  ) has recently agreed to sell its stake in the VLI cargo unit to Mitsui for $1.2 billion. Vale CEO Murilo Ferreira said that the company was considering selling its stake in aluminum producer Norsk Hydro ASA. He added that Vale also considered a surprise sale that he would not reveal immediately. Are these potential sales a good sign?

Concentrating on iron ore
Vale is engaged in the production of multiple materials. The company produces iron ore, iron ore pellets, manganese, ferroalloys, coal, nickel, copper, aluminum and fertilizer nutrients. However, in the second quarter of this year its ferrous minerals segment, which consists mostly of iron ore and iron ore pellet production, has brought in 94.8% of EBITDA.

It's not surprising that Vale wants to get rid of its underperforming assets. Another sign that Vale is going to concentrate on iron ore is that the company is in talks to sell iron ore pellets to a customer in the U.S. United States is the only major market where Vale is not present at all.

Iron ore is the major earnings driver not only for Vale, but for Cliffs Natural Resources (NYSE: CLF  ) and Rio Tinto (NYSE: RIO  ) as well. Although Cliffs Natural Resources is concentrated on the production of iron ore and iron ore pellets, it received 17.67% of its second quarter revenue from met coal. However, less than 3% of EBITDA came from the coal segment. Cliffs was not active on the asset sales front so far, and there are no signs that this will change in the near future.

Rio Tinto received 84.4% of EBITDA from iron ore in the second quarter. Rio Tinto is using the same asset selling strategy as Vale. The company tries to sell its coal mines Blair Athol and Clermont in Australia. However, it would not be the easiest thing to do, as buyers remain cautious.

Fresh news from China does not help either. The country's official PMI rose just 0.1 to 51.1 in September, which was below expectations. Chinese demand is crucial to help iron ore, coal and other materials prices to pick up.

Would this strategy bring bright future to Vale?
Investors require returns. Vale's stock is down more that 20% this year, a fact that can't please any investor. I think that we'll see Vale concentrating on iron ore even more, as this is the only meaningfully profitable segment for the company. 

The fact that the sales have been successful so far is a good sign. Not everyone is able to sell in this tough market. For example, Rio Tinto recently received three bids for its stake in the Clermont mine, but they fell short of the company's expectations.

Vale expects iron ore prices in the range of $120-$130 in the fourth quarter of this year, slightly below current levels. If you look at other materials that Vale produces, the iron ore outlook is probably the most stable.

Bottom line
Vale is making a shift to iron ore, which is the sole segment that brings real profits to the company. I think that this process is sound and will bring value to shareholders. Currently, Vale trades at 7.7 times future earnings and yields 4.82%. This is a superior yield compared with Cliffs' 2.88% yield and Rio Tinto's 3.46% yield.

Successful asset sales, concentration on iron ore, and a hefty dividend make Vale an interesting candidate for your portfolio. 

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Related Tickers

8/30/2016 4:03 PM
CLF $5.75 Down -0.28 -4.64%
Cliffs Natural Res… CAPS Rating: ***
RIO $30.60 Down -1.09 -3.44%
Rio Tinto CAPS Rating: ***
VALE $5.44 Down -0.17 -3.03%
Companhia Vale CAPS Rating: ****