Will BHP Billiton's (BHP) Defense of Iron Ore Output Increase Affect Vale Stock?

NEW YORK (TheStreet) -- Shares of Brazilian iron ore producer Vale  (VALE) were flat at $7.11 in early afternoon trading Thursday after peer company BHP Billiton  (BHP) defended its strategy of increasing iron ore output during a global oversupply.

The company stood by its approach even as iron ore prices have declined approximately 40% in the past 12 months.

"This is a market which is highly competitive. It's cyclical, and so our performance will be dependent on being the most efficient supplier and it shouldn't be dependent on supply restraint," BHP iron ore marketing VP Alan Chirgwin said at a conference, according to Bloomberg.

Chirgwin added that global iron ore supply could grow by 100 million to 110 million metric tons this year, but demand is only estimated to grow by 30 million to 40 million metric tons. He also noted that "supply growth over the last 12 months has outpaced demand growth and that will keep pressure on prices next year."

Separately, TheStreet Ratings team rates VALE SA as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate VALE SA (VALE) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. Among the areas we feel are negative, one of the most important has been a generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • VALE's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 42.15%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, VALE is still more expensive than most of the other companies in its industry.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Metals & Mining industry and the overall market on the basis of return on equity, VALE SA underperformed against that of the industry average and is significantly less than that of the S&P 500.
  • VALE SA reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, VALE SA increased its bottom line by earning $0.13 versus $0.01 in the prior year. For the next year, the market is expecting a contraction of 107.7% in earnings (-$0.01 versus $0.13).
  • VALE's debt-to-equity ratio of 0.67 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 0.85 is weak.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 18.2%. Since the same quarter one year prior, revenues fell by 15.7%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • You can view the full analysis from the report here: VALE Ratings Report

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