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TheStreet Open House

Look at This Big Brazilian Miner Before It's Too Late

Stocks in this article: VALE

The one-year chart below gives a picture that suggests the bottom might be in place for VALE's stock and the reasons why the stock may finally be able to do like the old song by the Doors suggests: "Break on Through to the Other Side." VALE.P Chart VALE.P data by YCharts

Our own Research Director Stephanie Link and Jim Cramer wrote to those of us who subscribe to ActionAlertsPlus on Monday (they were not a day late): "Vale shares are below our cost basis, the dividend yield is now at 4.7% and the valuation is cheap at 5 times earnings before interest, taxes, depreciation and amortization.


They went on to write: "Last week we wrote that a preliminary ruling from Brazil's Supreme Court was favorable for the company, with the tax law implications less onerous than what had been expected. The final ruling will likely come this week, and we believe the news will trigger a re-rating on the stock, as well a narrowing in its discount vs. its peers.

"While iron ore prices are expected to come down this year, given slower global growth, Vale continues to do internal restructuring with asset sales and a focus on profitability. We like the risk-reward scenario here."

Today, a report emerged that a Brazilian newspaper said the government is "... working to change how it taxes its companies' foreign subsidiaries."

The report cited the same Merrill Lynch analysts mentioned above. The analysts are in essence saying that Brazil's government is considering ways to "reduce past tax liabilities," including allowing them to postpone tax payments five years, "with less interest and fewer penalties."

This is extremely beneficial for Vale because it "creates a more coherent and stable taxation," the analysts say. To be specific, the Merrill analysts wrote: "Out of the $30.5 billion real liability for Vale, $18.7 billion real is from interest and penalties. If Vale has to pay only the $11.9 billion real (U.S. $5.9 billion) balance in five years, the NPV would decline to just U.S. $4.5 billion."

To add to the stream of good news Vale received an operating permit to expand its capacity for its maritime terminal in Carajas. The above referenced analysts noted: "The announcement is positive, as it is another sign that the company is delivering on its promises, but expected. In the short term, the most important license is the construction permit at Serra Sul (90mt project in Carajas), which should be received in the next few months." So more good news is forthcoming and this could boost shares.

These Merrill Lynch analysts maintained their "buy" rating on VALE and have a $23 one-year price target. I'm looking for the stock to retest its $23.98 52-week high and break through above $24 before the end of the year.

Even at $18.28 per share, the dividend yield-to-price is still a plump 4.27%, and if the rest of 2013 is profitable with reasonable sales growth, it wouldn't surprise me to eventually see VALE raise the dividend so it can be closer to 5%.

So don't ever be "a day late and a dollar short" if you can help it. With VALE's forward price-to-earnings ratio less than 8, consider "nibbling" on some shares soon and then buy more if the stock has a temporary correction back below $18. The future looks bright for Brazil (home of the 2014 Olympics) and for VALE.

Disclosure: As of the time of publication, the author was long shares of VALE.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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