There has been a lot of bad press about Vale SA (ADR) (NYSE:VALE) in the last couple of weeks. When Vale’s revenues fell to a four-year low, it got a lot of people talking about why Vale is a ‘sell’ and not a ‘hold.’ Of course, journalists and analysts have been kind enough to acknowledge that Vale’s difficulties did not arise from something wrong with the company, but rather were the result of external conditions.
What’s up with Vale?
Vale SA (ADR) (NYSE:VALE)’s biggest buyer is China, but Vale is based in Brazil, one of the most bureaucratic countries in the world, in spite of becoming one of the major economies of the world. However, things are not as bad as they seem. In this article, I shall explain why Vale is not a bad stock and is, in fact, a good long-term option. Vale is the second-largest mining company in the world; it produces iron ore, nickel, copper, potash, aluminum and several other materials. Of these, its biggest business is iron ore, the largest buyer for which is China, which, unfortunately, is reeling from economic difficulties. Vale is particularly hit by Chinese misfortunes because the Asian giant is its largest market. As China is moving towards becoming a consumer rather than an investor, many mining companies have felt the pinch.
China reassures mining companies
However, in a recent conversation with BHP Billiton’s CEO Andrew Mackenzie, the Chinese Premier Li Keqiang stated that his country will not stop or reduce purchasing resources. He highlighted the importance of agriculture, industry and construction sectors in China, all of which will continuously require materials for several years. Though Keqiang assured BHP’s Mackenzie, the very same reassurances hold good for Vale SA (ADR) (NYSE:VALE) as well. Just 2 days ago, I had written that Chinese reassurances rejuvenated not only BHP Billiton but also Vale and Rio Tinto, all of which sell their resources to China.
Vale has not turned into an ugly duckling
Paul Kiernan with The Wall Street Journal writes that Vale SA (ADR) (NYSE:VALE) is turning into a “particularly ugly duckling.” Reuters reported that Brazilian stocks slipped along with Vale, because of the country’s bad economic state. While people may quickly jump to the conclusion that Vale SA (ADR) (NYSE:VALE) finds itself in a tight spot, which it actually does, it is not the end. In fact, I see this as an opportunity to purchase more of Vale’s shares, if you already own Vale. If you do not own Vale, this might actually be the right time to purchase, as for a while now, Vale will be affordable.
Vale is a great long-term investment, and those who own Vale should not panic and sell their shares. Fluctuations are common for companies that are based in developing countries. The BRIC nations (Brazil, Russia, India and China) are all known for economic volatility, and we are talking about a company that is headquartered in a BRIC nation and that sells much of its resources to another BRIC nation. Obviously, there will be short-term fluctuations that incite panic in some people. But now is not the time to get manipulated; instead, it’s your window of opportunity.
At $14, Vale is as cheap as a mining stock can get. With a profit margin of 10% and an operating margin of 29%, Vale is managing its own costs rather well. It is a golden opportunity for investors to get hold of some Vale shares when it is easy to do so.