Vale (VALE -2.96%) is one of the largest iron ore producers in the world. And that's been a rough place to be over the last couple of years. However, the company is getting ready for the future and surviving the present, and management wants you to know it.
A survivor
According to Vale CEO Murilo Ferreira, "Vale delivered a strong operational performance in the second quarter with the best results ever for iron ore production ... Despite lower iron ore price[s], we generated strong cash flows and [we were] able to pay $2.1 billion in dividends and [maintain] our gross debt and cash position at similar levels to first quarter."
In other words, despite the difficult market environment for a product that accounted for roughly 70% of the company's sales in the second quarter, Vale is holding its own. Yes, underlying earnings (which excludes some one-time items) fell about 25% year over year in the first half, but the miner is still profitable and its financial condition is stable.
(Source: Black Tusk, via Wikimedia Commons)
We'll prove it to you...
Ferreira goes on to note that his company wants to expand through "world-class project[s]." However, when such projects aren't available, "we prefer to pay dividends and to reduce our debt. Again it's our priority to give the best return to our shareholders."
The company has a number of projects going right now that fit its profile of a "world-class project," but it is also looking at showing just how financially strong a company it is. And that's included committing to a roughly $0.80 a share dividend (give or take a little based on currency conversion values at the time of the payments) in 2014. It's already paid the first half of that. That equates to a roughly 5.5% dividend yield. In other words, Vale is paying you to wait for the iron ore market to recover.
We aren't sitting still
That said, Vale isn't sitting still. The CEO noted during the second quarter conference call that, "We have big projects ramping up." In fact, while most of the additional iron ore supplies this year are likely to come from Australian miners, José Carlos Martins, head of the company's iron ore group, claimed, "next year the main source of this additional volume will be Brazil and specifically Vale."
And while adding more supply to an already oversupplied market sounds like a bad choice, according to Martins the company's new projects will help reduce costs and improve product quality. Moreover, while demand may not be keeping up with the growth in supply, iron ore demand hasn't gone away. Vale expects demand to increase roughly 3% to 3.5% this year, with long-term demand still being driven by industrializing emerging markets like China (about half of second quarter iron ore sales).
Costs matter to us
While the company is spending on growth, it isn't doing so haphazardly. The company's stable debt levels and dividend payments are proof of this. Another supporting factor is that, according to CEO Ferreira, "SG&A decreased by over 25% versus our 10% reduction target for the year." And capital expenditures were down nearly 30% in the first half.
Moreover, the CEO went on, "I am happy to say that not only [do] we believe that those levels are sustainable but we are actually already building plans for further reductions in the future." That speaks to a company that is building its future, but doing so in a controlled fashion.
Costs are as important as supply
Martins, head of the iron ore group, also stated that, "I believe that the market is really in good condition ... I am not very much concerned like many people are about China. Sure that China will not go grow so fast as what [it] used to grow but we'll continue moving." So demand is still there, just not as robust as it was in the past.
However, Martins points out another key factor: "we are increasing volumes [and] we are reducing cost so the drivers of our result will depend much less on price." In other words, the company is working for the future by increasing production, but also preparing for today's world of relatively low iron ore prices by lowering its costs along the way. And when prices start to move higher again, as low prices drive more expensive producers out of the market, a better Vale will be in prime position to benefit.
We are more than just iron ore
And last but not least, Martins makes it clear that iron ore is just one product that Vale sells. Yes, it is the most important product, but the company also mines for copper, coal, and fertilizers, among other things. Those products make up a notable 30% of sales. According to Martins, "the other businesses we have are [also] delivering better results." He's of the opinion that these businesses aren't getting enough credit.
So, Vale is getting better in its core iron ore business at the same time as it's preparing for still solid, though slower growing, long-term demand. And it's doing so in a financially responsible way that allows it to reward shareholders with sizable dividends. Moreover, the iron ore business is, perhaps rightly so, overshadowing good things taking place throughout the company. Vale is probably worth a deeper dive for dividend and value investors alike.
