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Vale SA (ADR) (VALE): A High-Yielding Industrial Giant for Your Portfolio

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Emerging countries including India, China and Brazil are expected to grow at a rapid pace. Their rising industrial production, coupled with the recovering US economy, present a bullish case for industrial plays. Their respective governments are trying hard to revive their growth engines, and their trade policy easing is attracting a lot of foreign investments. Moreover, China’s $156 billion infrastructure spending plan will further pump up infrastructure activity, which makes companies like Vale SA (ADR) (NYSE:VALE), BHP Billiton Limited (ADR) (NYSE:BHP) and Cliffs Natural Resources Inc (NYSE:CLF) appear all the more attractive.

Vale SA (ADR) (NYSE:VALE)Reasons to Buy Vale

Vale is the world’s largest producer of iron ore, and it accounts for nearly 25% of the global iron ore supply. Talking about its coal segment, the company was losing margins on overseas shipments, so it expanded in Africa (Moatize mine). But it in November, its management cut the FY13 coal production target for the mine by 50% (2.6 million tonnes), due to the limited railroad transportation capacity.

However, the management also said that it expects 5 million tonnes of coal exports in the next year, once the upgrade and construction work on Sena Railway Line is complete. Upon completion, the railway line would be able to carry up to 6.5 million tonnes of coal annually, up by 2 million tonnes. This also leaves some headroom to ramp up its production.

The company also has an asset divestment program under way. According to the management, this would help the company to realign itself with its long-term goals, and allow it focus on its core competencies. The details of the divestment program were not revealed, but the management assured investors that it is well aware of its assets’ valuations, and there won’t be a fire sale to raise money.

On Feb. 6, Silver Wheaton Corp. (USA) (NYSE:SLW) announced that it has entered in a binding agreement with Vale, under which Silver Wheaton will acquire its gold mines in Brazil and Sudbury. For the 20-year agreement, Vale would receive $1.9 billion in cash and 10 million Silver Wheaton warrant with a strike price of $65. Since the fears of a fiscal cliff are behind us, and major economies around the globe are showing signs of recovery, gold is expected to lose its lustre. Thus I believe that such divestments are good for Vale.

Reasons to Miss the Peers

But having positive catalysts is not enough. Examining the fundamentals is also important, as they give an insight to the company’s financial health. Here are the financial metrics of Vale, BHP Billiton and Cliffs Natural Resources.

Company Forward P/E Net Profit Margin Debt/Equity Yield
Vale 8.6x 24.53% 38% 3.13%
BHP Billiton 18.27x 21.50% 43% 2.84%
Cliffs Natural Resources 9.36x 16.28% 61% 8.48%
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