$VALE - thesis and calculations

Hello, I've made some posts about $VALE, I am long and bullish on them and let me share my calculations and thesis. Please find errors. Vale is the industry leader - quick intro Conservatively finances ( 0.46 debt-to-equity, 196% current ratio) Best ROE, ROIC and profit margins (lowest cost producer) Management incentives and rewards are adequate, focusing on safety risks (dams) Huge moat: geographically unique high quality and abundant iron ore deposits with very efficient vertical integration (railroad system, fleet of 170 vessels with long-term 30Y oil contracts), iron has been around since 1000 b.c (iron age) and a necessaity without substitution. Upside potential from nickel due to EVs, Vale 1st or 2nd largest nickel producer among other metals worldwide. Numbers Iron ore and PPI historical data A boom-bust cycle can be determined based on iron ore prices. A relative strong correlation is also measureable between the PPI and iron ore prices. ​ Numbers used for the DCF model EBITDA/breakeven is $44.50/mt for Vale currently with production plans for 350 mt per year. Historically their EBITDA to FCF was 27.48% between 2005-2020 excluding 2015 and 2019 for the dam ruptures which were outlier events. IO Depression price: mean - standard deviation IO Average price: mean IO Boom price: mean + standard deviation ​ DCF model adjusted for cycles, 2022-2031 Based on historical cycles, I assumed 4 boom years, followed by one normal year and then 4 depression years, now 2021 is already a boom year which would only move the DCF value higher due 2021 has been enjoying high iron ore prices historically. I would suggest to use a huge margin of safety, 2/3 would do, making even $23.1 a good entry long-term. Shares outstanding: 4850 - post buyback program Required Rate of Return: 10% Perpetual Growth Rate: 2.5% ​ Dividend history 2005-2020 Their dividend history, as expected, has been irregular to say the least. Their free cashflows were low during the last boom cycle due to very high CAPEX spenditures. This will not happen again, since Vale's CEO (and other CEOs in the industry) are focusing value over value, and are prepared better for an abrupt Chinese demand drop which caused huge troubles after the previous boom cycle with overspenditure in CAPEX. Their dividend policy is pleasing - return as much value to shareholders as possible, all excess cash. 30% of EBITDA in regular dividends and excess cash in special dividends is the policy currently, and they have achieved this goal since their CEO's statement about this mindset in a 2017 report. Macro environtment China has played this card many times before, threatening to cut steel out put and going green but it is visible that they always fail to succeed due to growth pressures, nonetheless they pressure commodity prices to buy them up cheaper. We can see a relative high (0.407) correlation between the PPI and iron ore prices. The reason to use the PPI instead the CPI is that PPI represents reality better, more honestly while the CPI is rigged (OER, quality adjustments) for government interest. The US has been devaluing the USD to reduce the real debt burden on the government, as many countries did historically, and currently seems unable to meaningfully raise interest rates (the US has so much debt letting the rates raise to positive real rate area, above the CPI, 6-8% rates would be adequate at the least which would bankrupt the US), inflation seems to be the major theme for the coming decade. Many emerging countries and companies have USD denominated debt which would erode due to inflation and help emerging markets like Brazil which is the largest South American economy and Vale. These countries could focus not only on exporting their resources but also to raise their living standards, build their infrastructures.

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$VALE - thesis and calculations

bullish

Hello,

I've made some posts about $VALE, I am long and bullish on them and let me share my calculations and thesis. Please find errors.

Vale is the industry leader - quick intro

  1. Conservatively finances ( 0.46 debt-to-equity, 196% current ratio)
  2. Best ROE, ROIC and profit margins (lowest cost producer)
  3. Management incentives and rewards are adequate, focusing on safety risks (dams)
  4. Huge moat: geographically unique high quality and abundant iron ore deposits with very efficient vertical integration (railroad system, fleet of 170 vessels with long-term 30Y oil contracts), iron has been around since 1000 b.c (iron age) and a necessaity without substitution. Upside potential from nickel due to EVs, Vale 1st or 2nd largest nickel producer among other metals worldwide.

Numbers

Iron ore and PPI historical data

A boom-bust cycle can be determined based on iron ore prices. A relative strong correlation is also measureable between the PPI and iron ore prices.

Numbers used for the DCF model

EBITDA/breakeven is $44.50/mt for Vale currently with production plans for 350 mt per year. Historically their EBITDA to FCF was 27.48% between 2005-2020 excluding 2015 and 2019 for the dam ruptures which were outlier events.

IO Depression price: mean - standard deviation

IO Average price: mean

IO Boom price: mean + standard deviation

DCF model adjusted for cycles, 2022-2031

Based on historical cycles, I assumed 4 boom years, followed by one normal year and then 4 depression years, now 2021 is already a boom year which would only move the DCF value higher due 2021 has been enjoying high iron ore prices historically. I would suggest to use a huge margin of safety, 2/3 would do, making even $23.1 a good entry long-term.

Shares outstanding: 4850 - post buyback program

Required Rate of Return: 10%

Perpetual Growth Rate: 2.5%

Dividend history 2005-2020

Their dividend history, as expected, has been irregular to say the least. Their free cashflows were low during the last boom cycle due to very high CAPEX spenditures. This will not happen again, since Vale's CEO (and other CEOs in the industry) are focusing value over value, and are prepared better for an abrupt Chinese demand drop which caused huge troubles after the previous boom cycle with overspenditure in CAPEX.

Their dividend policy is pleasing - return as much value to shareholders as possible, all excess cash. 30% of EBITDA in regular dividends and excess cash in special dividends is the policy currently, and they have achieved this goal since their CEO's statement about this mindset in a 2017 report.

Macro environtment

China has played this card many times before, threatening to cut steel out put and going green but it is visible that they always fail to succeed due to growth pressures, nonetheless they pressure commodity prices to buy them up cheaper.

We can see a relative high (0.407) correlation between the PPI and iron ore prices. The reason to use the PPI instead the CPI is that PPI represents reality better, more honestly while the CPI is rigged (OER, quality adjustments) for government interest.

The US has been devaluing the USD to reduce the real debt burden on the government, as many countries did historically, and currently seems unable to meaningfully raise interest rates (the US has so much debt letting the rates raise to positive real rate area, above the CPI, 6-8% rates would be adequate at the least which would bankrupt the US), inflation seems to be the major theme for the coming decade.

Many emerging countries and companies have USD denominated debt which would erode due to inflation and help emerging markets like Brazil which is the largest South American economy and Vale. These countries could focus not only on exporting their resources but also to raise their living standards, build their infrastructures.

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read-time
3 min

25.00

Target Price

9/ 10

Confidence

6-12 Months

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