The logic works great for me. I wouldn't mind if it goes to $8. Then, I can average down on my current $13 cost basis. What is happening here is a fragmented market of miners is going to be consolidated into an oligopoly of a few very large miners, including VALE (unless they are acquired). Then, prices and profits will be much higher, as is the case in oligopolies. I am quite content buying at these levels, collecting the dividends and waiting because VALE will be in the $30's, $40's or $50's when the oligopoly is formed in the face of annual increases in demand.
It's all currently about the elections. A poll says it's too close to call and the stock drops. Last week, a poll said Neves was way ahead and it moved up 8%. Over time, VALE will move up and I really don't care what it does day-to-day and will gladly book the dividends along the way.
I agree with you . However, it seems that the only data point analysts have confidence in is that the majors do know what their increases in production will be. And, even they are saber rattling about their increases in hopes of convincing high cost miners to close because there is no hope the price will come back anytime soon. So, the majors hope to accelerate this process by scaring the high cost miners out of business sooner. Yet, analysts are not able to understand how much volume will come out of the market or the demand. So, they focus on what is know and that is higher production by the majors and in the face of no certainty about mine closures or demand, it makes for a negative forecasting environment re: price.
It seems all analysts expect a fairly stable IO price in 2015 and 2016 in the mid-$80s to low-$90s. So, if VALE is going to increase sales fairly dramatically (50% by 2018) of even lower cost ore, some as low at $15 to produce, ship it cheaper with VALEMAX to China and enjoy a 9 percentage point lower Brazilian tax rate, then, it would seem to me the future is pretty bright. And, if the high cost supply leaves the market and IO prices rise, then, this stock could soar.
Unless the Motley Fool analyst was wrong, the LINE board approved a $250 million unit buyback last quarter that could repurchase 11 million units at these prices and reduce future distribution outlay $32 million per year while increasing the coverage ratio 3%.
My understanding is the dividend is safe (per CEO) because they still have assets to sell and they are reigning in both operating costs (VALEMAX, lower cost ore and elimination of the 9% incremental tax in Brazil) and capital costs, both helped by the weakening Real as well as increasing volume. Even with stable IO prices, VALE should do very well with higher volumes of lower cost to produce ore and lower operating as well as capital costs. If IO prices climb, they are golden.
AAPL alone is the only single factor referenced as the primary contributor to China's export increase and the only single reference noted as a positive in US retail sales. Sure, it's correcting as hedge funds losing left and right take some profits, but it will run like crazy once this is past.
Some interesting commentary, if I can assume he has his facts straight. First, he says only about 7% of LINE's cash flow is at risk in 2015 due to an effective hedging program. Second, he stated that most investors don't realize that the LINE board approved a $250 million unit buyback last quarter that, if implemented, could purchase about 11 million units that would reduce future annual distributions by $32 million and increase the coverage ratio 3%. Finally, he said the distribution is secure and points to the 2008 crisis to illustrate just how effective LINE's hedging has been during times of crisis, and that a 20% drop is not a crisis.
Thanks for the information. Looking at the table, it appears they have are starting from a similar payout coverage as LINE is expected to have (1.15X). However, they have much less hedged than LINE, but LINE is oilier, so not sure how LINE might compare, but my guess is LINE is fully covered in 2015 at oil of $70 and NG of $4 as well. LINE has lived through earlier such price declines and never cut the distribution, so I highly doubt that is in the cards now either, at least thru 2016 or 2017.
And, VALE specific things like bringing back VALEMAX to China and bringing on higher volumes at lower costs of production while reducing capital spending should provide leverage against any meaningful increase in IO prices and improvement in Brazilian investment climate with new president.
Whether calls or just panic, I agree that a lot of people bought a 10% distribution on 2% margin and are now panicking that it's not such a great deal. Things will settle out over time, but many will trade the troughs and rises along the way. The only people making money are the traders in this market.
A little analysis or data might be helpful. From my perspective, based on the hedging situation, I think they have the distribution covered for the next 2+ years without doing anything. And, the price of oil will rise much quicker than that because too many countries need a higher price. Give it a couple of months and something will change the dynamics.
Where do you get your IO price information? I haven't had any luck finding current updates, unless there happens to be an article about it. I agree though that the rise in IO prices is the cause of the rally..........along with the fact that the huge short volume must be wondering whether it makes sense to not cover before the dividend is due when IO prices are rising and the election looks to be going towards Neves.
The elections should help all Brazilian stocks, including VALE, but the price action we are seeing now is more likely tied to IO prices where futures surged yesterday morning 4% (maximum allowed). Shorts are in a bit of a fix right now if IO prices are going up, the election is going in VALE's favor and the 3%+ dividend is coming due.
I suspect this is old, but the last I saw they did have a $17.50 PT. Perhaps the strong Chinese import/export data and Neves extending his lead in the election will get us heading in the right direction today.
Are you saying ore and oil prices will rise to create a bubble or are you saying they will fall because they are forming a bubble, even though they are down? Thx
I notice in 2010 when Brent was $75 and NG bouncing between $3.80 and $5.00 that LINE was steady at $25 and paying a $2.55 distribution quarterly. Any thoughts on why with Brent at $90 (20% higher), NG at $3.86, LINE's hedging situation, and a $2.90 distribution that LINE wouldn't be trading significantly higher, other than current market panic re: energy names in general due to the uncertainty of where oil prices may land?
Three days in a row a combination of shorts and panic has driven the stock down in the morning with opportunists and short-covering taking it back up the balance of the day until the traders close out their long positions late in the day. I have enjoyed the trade (historically hard to do with LINE due to lack of volume), but it sure is unpleasant to watch my long positions lose so much value so quickly on paper.