Sahil Alvi

Tag: Anglo American

Value Investing Ideas: Edition #1

by sahilalvi on Mar.30, 2012, under Finance

With a view to informing the readers of this blog of value (and sometimes, ‘deep value’) investment opportunities on a regular basis, I am launching this blog-stream that will offer up a few specific investment ideas.

Before I get into specific names, let me define ‘value’ as I see it. There are certain metrics which — either in combination or on their own – will qualify specific investments as deep value in my view:

1. P-E Ratio: Any equity trading less than P-E ratio of 10 or less.

2. 52-Week Trading Range: Any equity that trades within 25% of its 52-week low (in combination with the other metrics).

3. Dividend Yield: Any company that offers a Dividend Yield of more than 3%  (in combination with the other metrics).

4. Positive Cashflow Entity’s Negative Event-driven Moves: Any cashflow positive company with net margins of 10% or more  whose equity has seen more than a 20% price reversal within a week (in combination with the other metrics). Such equities are particularly well-suited for tactical, opportunistic, event-driven ’snap-back’ trades.

Now that we’ve defined ‘value,’ let us move on to the first edition of ‘value’ recommendations. In this edition, I would like to cover a few mining stories:

1. Vale (NYSE: VALE):

  • The world’s largest iron ore producer trades at a modest P-E multiple of less than 6.0
  • This Brazilian miner offers a generous dividend yield of 5.1%
  • The stock is currently trading roughly 15% above its 52-week lows

2. Anglo American (PINK: AAUKY)

  • This large, diversified global miner trades at a P-E multiple of a little over 7.5
  • It trades within roughly 20% of its 52-week lows

3. Cliffs Natural Resources (NYSE: CLF)

  • This American-headquartered miner trades on a multiple that is a little over 6.0
  • It offers a healthy dividend yield of 3.5%

4. Barrick Gold (NYSE: ABX)

  • The world’s largest gold producer trades on P-E of just over 9.0
  • The stock is trading within 5% of its 52-week lows

5. BHP Billiton – ADR (NYSE: BHP / NYSE: BBL)

  • The world’s largest miner trades both its ADR’s on NYSE below P-E multiples of 8.5
  • Both of the company’s ADR’s provide a dividend yield higher 3%

In the coming weeks and months, more such ‘deep value’ investing ideas are to follow.

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Vale: The performance and promise of Brazil and Basic Materials packed into one

by sahilalvi on Dec.04, 2010, under Economics, Finance

Vale

According to the company itself: “Vale is the world leader in iron ore and pellet production and the second biggest nickel producer.”

Coming out of The Great Recession, Vale (NYSE: VALE) is poised to gain from expansion of the manufacturing base — particularly in markets like China, India, Asia-Pacific, Middle East, and Latin America. The second-biggest miner in the world already, Vale has a growing global footprint of 38 countries with an exposure to most of the world’s high growth markets — not in the least its home country of Brazil.

Furthermore, there are very real geological and geo-political constraints on the supply of minerals Vale (or any of its competitors) can extract, process and sell on the world markets. This demand-supply dynamic has both secular as well as a cyclical themes interwoven. Hence, the global demand-supply dynamic for Vale’s products bodes well for the company’s growth prospects and profit margins for a long-time to come.

Vale is also showing an enormous appetite for bottom-line results with Net Profit Margin almost doubling from a 2009 margin of 21.6% to the Q3, 2010 figure of 40.9% . Even as of 2009, the company was only 310 basis points (in net profit margins) behind the industry’s most profitable of the large mining and metals companies: BHP Billiton.

Vale’s Net Profits are just as noteworthy because the Brazilian company generates revenues that are approximately half compared with another industry leader Rio Tinto — whose top-line figure for 2009 was US$ 41.8 billion compared to Vale’s US$ 23.3 billion. Yet, Vale’s 2009 Net Profits were US$ 5 billion compared with Rio Tinto’s US$ 5.8 billion — which makes Vale’s profits merely 15%  less that that of Rio Tinto’s.

In light of the positive fundamentals, the company is on massive expansion drive with a planned capital outlay of US$ 24 in 2011 alone. To contextualize Vale’s ambitious growth plans, Xtrata — the Anglo-Swiss rival has planned capital outlays of US$ 23 billion over 6 years from 2011 through 2016.

In
2009, Chinese demand represented 68% of global demand for seaborne iron ore, 44% of global demand for
nickel, 39% of global demand for aluminum and 40% of global demand for copper. The percentage of our
operating revenues attributable to sales to consumers in China was 38% in 2009.

There are — however — large, concentrated, inter-connected and material risks to Vale’s growth story. Two that are particularly noteworthy:

1. China, and

2. Steel.

According to Vale’s 2009 annual report:

“In 2009, Chinese demand represented 68% of global demand for seaborne iron ore, 44% of global demand for nickel, 39% of global demand for aluminum and 40% of global demand for copper. The percentage of our operating revenues attributable to sales to consumers in China was 38% in 2009.”

If China slows down, Vale’s (and most metals and mining companies’) revenues and profits decline. Furthermore, the company’s heavy exposure to the global steel market makes it vulnerable to fluctuations in the fortunes of this industry — particularly from a downstream steel consumption perspective in industries like infrastructure, transportation, construction and real estate.

The annual report goes on to say:

“Iron ore and iron ore pellets, which together accounted for 59% of our 2009 operating revenues, are used to produce carbon steel. Nickel, which accounted for 14% of our 2009 operating revenues, is used mainly to produce stainless and alloy steels…The prices of different steels and the performance of the global steel industry are highly cyclical and volatile, and these business cycles in the steel industry affect demand and prices for our products.”

There are other lesser risks such as:

  • Price volatility of nickel, copper and aluminum that are actively traded on global commodity markets;
  • Capacity expansion gestation periods and consequent constraints to meet demand in the short-to-medium term;
  • Geo-political considerations given that many of the mineral-rich countries have unstable political and regulatory regimes.

All that said, the company has a growing and diversified geographic market with 50% of its sales coming from the growing continent of Asia. Vale also has a swath of valuable mines being developed in resource-rich Latin America, Africa and Central Asia, among other mineral-rich locations around the world. Over several decades, the company has developed an extensive, defensible, and hard-to-replicate production and distribution capability — again with a global span. With the insatiable demand for basic materials in developing and frontier markets, Vale is a growth story based on strong fundamentals.

Not to mention, given the company’s healthy cash flow generation capability, Vale can be expected to pay out steady dividends in the forthcoming years.

As of December 3, 2010, Vale’s ADR (NYSE: VALE) traded at approximately 14.2 times earnings compared with its other global metals and mining peers’ ADRs:

  • Rio Tinto (NYSE:RIO): 14.9
  • BHP Billiton plc (NYSE:BBL): 16.8
  • BHP Billiton Ltd (NYSE:BHP): 19.5
  • Xstrata (LON:XTA): 29.1
  • Anglo American plc (PINK:AAUKY): 40.2

Since I added Vale’s ADR to my simulation portfolio on Sept 17, 2010, the position has gone up by 23% in merely two and half months (as of Dec 3, 2010).

Moreover, it is a highly liquid ADR — consistently ranking as one of the highest traded ADR’s on NYSE.

The target P/E one could set for the ADR is a value of 20 times its earnings per share compared with its current P/E of 14.2. Even at a P/E of 20, it is worth “taking stock” (no pun intended) rather than sell-off the entire position.

Given Vale’s exposure to the twin forces of Brazil’s breathtaking economic expansion coupled with the insatiable global demand for minerals and metals that Vale produces, the company’s stock and ADR are poised for a significant upside.

In essence, Vale is really a “buy and hold” play over the medium-to-long run.

Disclosure: The author owns no stock of Vale and has written this research note purely based on publicly available information.

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