Vale Upgraded to Outperform - Analyst Blog

We upgrade our rating on Vale S.A. (VALE) from Neutral to Outperform based on the rising iron-ore demand in China, world's largest iron-ore importer, and the expectations of higher iron-ore price in fiscal 2011.

Iron-ore demand in China is growing and is expected to behave in the same manner in the medium term due to its continued economic growth and urbanization. Currently the total urban population of China is around 500 million and is estimated to double in the next 15 years.

China's steel consumption is expected to increase 3.5% in 2011. China is touted to remain the largest consumer of metals in the future. Hence, the medium-term outlook for the metal remains encouraging and should have a positive impact on iron-ore companies like Vale, Rio Tinto plc. (RIO), and BHP Billiton Ltd. (BHP).

Decline in Indian exports of iron ore also favors Vale. We believe that the stock has a significant long-term upside potential due to the company's position as a low cost metal producer and the improvement in economic conditions. Vale's huge capital budget of $24 billion in fiscal 2011 supports numerous strategic acquisitions, which arelikely to be beneficial in the long run.

Further, Vale reported excellent results during the third quarter of fiscal 2010 with an EPADS of $1.13 compared with only $0.31 in the year-ago quarter. It also surpassed the Zacks Consensus Estimate of $1.03.

The reason for the increase was a considerable increase in prices of metal and minerals, attributable to the huge leap in metal demand driven by the global economic recovery. With the expectation of a continued rise in iron-ore demand and prices, fiscal 2011 estimates went up by 16 cents per share. Thus, the stock also currently retains its short term “Buy” rating (Zacks #2 Rank).

 
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