Rising Nickel Prices Unable to Pull Vale SA Shares Higher

Iron ore price concerns continue to play a decisive role for Vale's valuation.

May 13, 2014 at 4:43PM

Nickel prices have been surging over the last month as tensions in Ukraine and possible sanctions on Russia raised concerns over the supply of the metal. Nickel supply is also hurt by the Indonesian ore export ban, the same ban that hurt Freeport-McMoRan's (NYSE:FCX) first quarter copper sales. Vale SA (NYSE:VALE), which produced 67,500 tons of nickel in the first quarter, is a clear winner from the current nickel market. The nickel price increase was unable to pull Vale's shares into positive territory, however, and they continue to trade at levels lower than at the beginning of the year.

Nickel accounted for less than 10% of revenue in the first quarter
Iron ore has the biggest share in Vale's revenue mix. The company's ferrous minerals segment accounted for 71.7% of its revenue in the first quarter, down from 76.7% in the fourth quarter of 2013; lower iron ore prices, combined with lower sales volumes, hurt the segment revenue. Nickel was the largest contributor in Vale's base metals segment, accounting for 9.6% of first quarter revenue and growing its share from 7.2% in the fourth quarter of 2013.

Despite the growth of nickel's share in total revenue, Vale's ferrous minerals segment results are a much bigger driver of the company's valuation. The most dramatic nickel price move happened in April, during the second quarter. We can expect nickel's revenue share to increase going forward. Even with such an increase, iron ore will play a dominant role in determining Vale's fate.

Concerns over Chinese shadow banking system put more pressure on iron ore prices
Iron ore prices found themselves under increased pressure as China's banking regulator decided to investigate iron ore financing deals. The possible outcome of this investigation could be a massive sale of iron ore, a move that would pressure prices further. During the recent earnings call, Vale's management was asked about the amount of Chinese iron ore inventories that are tied up in financing arrangements. Vale stated that it was difficult to assess the exact quantity of such inventories, but showed cautious optimism that the number was not huge.

It's highly likely that nobody knows the exact answer to such a question. This fact adds to the nervousness of the market and pushes prices lower. China is Vale's largest customer, so negative news from the country will put additional pressure on Vale's shares.

Also on the iron ore front, Rio Tinto (NYSE:RIO) is suing Vale over the loss of rights over the Simandou project in Guinea. However, it's too early to assess the possible impact of the lawsuit as it has just been filed. The only thing that one can say for sure is that this lawsuit has the necessary characteristics to become a lengthy and possibly costly battle between the two giants.

Bottom line
Despite the rise in nickel prices, all eyes are on the iron ore market. Vale's high exposure to China adds to investors' concerns, but the company's low cost profile must support the current valuation. It's difficult to imagine that iron ore prices will dive deeper for a prolonged period of time, though, as too much production will become uneconomic.

You don't want to miss this
The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information