VALE S.A., formerly known as Companhia Vale do Rio Doce S.A., is a giant mining titan from Brazil. The company is part of a group of powerful listed corporations in Brazil controlled by the state including Petróleo Brasileiro S.A., better known as Petrobras, Electrobras S.A. and Banco do Brasil S.A. Currently, the Brazilian champion is the biggest producer and exporter of iron ore and nickel on the planet. Other mining areas of incursion include copper ore, manganese ore, ferroalloys, coal, platinum, bauxite, gold, cobalt and kaolin. Similarly, the miner is active in the production of fertilizers including potash, phosphates and nitrogen derived products. Founded by the federal government of the Republic of Brazil back in 1942 on the outskirts of the city of Belo Horizonte in the state of Minas Gerais, the company is today the second most profitable listed enterprise in Latin America after reporting solid profits of over $ 20 billion a year from over $ 50 billion a year in sales in its last fiscal year. Accordingly, VALE attains an unmatched profit margin of around 40%. Likewise, the Brazilian state-controlled miner is the fifth most valuable enterprise trading in Latin America after Banco BTG Pactual S.A., Petróleo Brasileiro S.A, better known as Petrobras, América Móvil S.A.B. de C.V. and Mercado Libre Corporation presently exceeding $ 60 billion in stock market value. Being a vital important star for the Republic of Brazil after filling its coffers year in and year out, the miner has strategically positioned itself in several segments of the mining industry worldwide. In fact, the company produces over 250 million metric tons of iron ore fines, over 40 million metric tons of iron ore pellets, over 300 thousand metric tons of nickel, over 350 thousand metric tons of copper ore and over 9 million metric tons of fertilizers. Altogether, iron ore mining accounts for 65% of sales whereas nickel mining accounts for 17% of sales, first in the world in the two segments. Likewise, fertilizer production accounts for 6% of sales while copper ore mining accounts for 4% of sales. The rest of the areas of mining incursion account for roughly 8% of sales when combined.
Moreover, VALE employs a very robust logistics system vertically integrating all of its mining operations nationally and abroad. As of now, the logistics of the company comprises state-of-the-art infrastructure including railways, seaports, dry bulk cargo vessels and power plants. The railway-controlled affiliate is known as VLI Multimodal S.A. and comprises the complete ownership of three railroads in Brazil and a participation in the Nacala Logistics Corridor project in Mozambique and Malawi. Overall, the affiliate has a fleet of some 1,260 locomotives and approximately 49,000 freight cars. In fact, VALE spent $ 1.3 billion in acquisitions to bolster the fleet of locomotives and freight cars of its affiliate between 2000 and 2006. By the same token, VALE also holds a 10.9% shareholding in another railway company listed in Brazil known MRS Logística S.A. Similarly, the Brazilian state-controlled miner fully owns 4 seaports in Brazil and one in Malaysia known as the Teluk Rubiah Maritime Terminal. VALE also operates 3 additional seaports under lease agreements in Brazil. Likewise, on the shipping side of the business, VALE fully owns the biggest fleet in the world of very large ore carriers currently numbering 35 vessels of 400,000 dead weight tons of capacity a piece. On the other hand, VALE is self-sufficient in its electricity consumption after controlling 8 hydroelectric power plants in Brazil, 7 of them located in the state of Minas Gerais where the bulk of its domestic mining operations are concentrated, one in Canada and another one in Indonesia. Presently, the mining titan from Brazil is financing the construction of a thermoelectric power plant on Brazilian soil in the state of Pará.
Furthermore, VALE has undergone an expansion and streamlining of its mining operations over the last two decades after going public in 1997 during a very successful IPO on the B3 stock exchange that raised a sweet $ 3.13 billion of proceeds representing the ownership of 41.73% of the company. The single largest investor in the IPO was Companhia Siderúrgica Nacional S.A., the prominent flat steelmaker controlled by the powerful Steinbruch clan of Brazil and led by Benjamín Steinbruch, son of the late matriarch of the clan who took control of the steelmaker from the Brazilian government back in 1993. Boosting its nickel presence over the last two decades through strategic acquisitions, VALE is a giant in this segment of the mining industry. Altogether, the most important acquisitions include the purchase of a non-ferrous nickel mine in Brazil for $ 865 million from a Canadian miner known as Canico Resource Corporation in 2005 and the entire ownership of a prominent nickel Canadian player for $ 18.9 billion in 2006 known then as International Nickel Company Limited, also known previously by its acronym as INCO. The latter also had sizable platinum mining operations globally. Similarly, in the iron ore side of the mining business, VALE acquired in full the third biggest iron ore player on Brazilian ground for $ 700 million in 2001 known then as Ferteco Mineração S.A. from the German steelmaker titan known as Thyssenkrupp A.G. This transaction added 15 million metric tons of iron ore output annually to the domestic mining operations in this segment of the Brazilian state-controlled miner. On the other hand, VALE sold its aluminum business to an important Norwegian aluminum smelter known as Norsk Hydro A.S.A. for $ 5.27 billion in 2014. Other strategic divestures included the sale of its ownership stake in Açominas S.A. to Gerdau S.A., the sale of its economic interest in Siderar S.A. to Ternium S.A. and the liquidation of its shareholding in Usiminas S.A. in three different transactions. VALE also had a shareholding in Companhia Siderúrgica Nacional S.A. that was liquidated accordingly as well. Overall, it is important to highlight that VALE currently spends close to $ 5 billion a year in capital expenditures or CapEx representing 10% of annual sales, a healthy level in this metric among iron ore focused miners.
Tainted by two mining accidents over the last decade, VALE has responded responsibly and in a concerted effort in one of them after being a shared mining project. These two mining accidents are the “Mariana Dam Disaster” and the “Brumadinho Dam Disaster”. The former is also known as the “Bento Rodrigues Dam Disaster” and is a joint iron ore mining concession between VALE and the Australian mining colossus known as BHP Group Limited. Causing great environmental damage after taking place on November 5th, 2015, the disaster killed 19 people and displaced hundreds of them after polluting the Doce River and affecting downstream towns and cities that depend on the river for drinking water. Formally known as Samarco Mineração S.A., the mining accident was caused by design flaws that led to a tailings dam collapse. This tailings dam collapse is the largest ever recorded in Latin America with pollutants spreading along 415 miles of waterways and with toxic brown mudflow reaching beaches near the mouth of the river before entering the Atlantic. Altogether, the companies have paid $ 1.55 billion already in compensation while addressing a lawsuit seeking further damages for a staggering amount of $ 55 billion.
The Brumadinho Dam Disaster, on the other hand, was substantially deadlier but much less damaging to the environment. The mining accident happened when the dam was breached destroying the iron ore mine’s cafeteria where workers were present having lunch and flooding the nearby town of Brumadinho located downstream. Accordingly, the mining accident happened on January 25th, 2019 killing 270 workers and flooding the nearby area. Overall, VALE has agreed to pay the victims’ families up to $ 7 billion in compensation for wrongful death. In the same fashion, sixteen top brass executives including the former CEO of the company himself back then were charged with involuntary manslaughter right after the mining accident took place when Brazilian authorities investigating the tailings dam disaster uncovered that VALE has falsified safety reports for at least 10 of its dams. In fact, domestic state prosecutors went further ahead and charged the ex-CEO of the Brazilian state-controlled miner along with the other fifteen executives with 270 counts of outright homicide the following year. As a result, the legal criminal case is now being litigated in Brazilian federal courts. In addition, the German contractor responsible for doing the pertinent inspections of the mines in question and having a role in the falsified safety reports is presently being prosecuted as well.
To conclude, it is worth noting that over its history VALE has been run by very capable executives. One of them, for instance, was Eliezer Batista, the late father of former Brazilian mining billionaire Eike Batista, who led the company as CEO twice in two nonconsecutive terms between 1961 and 1986 attaining over 10 years of leadership at the company. Fluent in six languages and trained as a railway engineer, Eliezer was also twice Minister of Mines and Energy during the administrations of former Brazilian presidents João Goulart and Fernando Collor de Mello. By the same token, the Brazilian state-controlled miner currently trades in five countries including the B3 at home in Brazil, the Euronext Paris, Indonesia, the BME in Spain and as an ADR on the NYSE under the ticker symbol (VALE). Accordingly, trading at a big discount of close to three times earnings, I think the stock is a very strong (BUY) at this juncture in time. In fact, pending the outcome of the $ 55 billion lawsuit brought in by authorities in Brazil for environmental damage and the corresponding cleanup from the Mariana Dam Disaster, the company has a lot of value waiting to be unleashed. Likewise, having removed the two CEOs in charge at the time back then when the two mining accidents happened, this miner has done everything right except for the two dam disasters described just earlier. Consequently, I think the market is penalizing VALE way too harshly because sooner rather than later, reality will take hold among the investing public, both domestically and abroad. In sum, this miner is a national champion in Brazil and now is the precise time to believe in it after being a bargain by offering such an upside stock price potential along with juicy dividends down the road.