Vale ( VALE ), the world's largest iron ore miner, recently posted Q2 net earnings of $6.5 billion that was up more than 70% compared to the same period in 2010. The booming demand for iron ore in China helped the company reach its record revenues of $15.3 billion in the second quarter - a gain which was partially offset by rising fuel and labor costs that hurt its margins. Vale competes internationally with other mining giants like Rio Tinto ( RIO ) and BHP Billiton ( BHP ).
We have a $40.90 price estimate for Vale , which is roughly 40% ahead of market price. Shares are down around 6% today which is in line with the sector average as renewed concerns of a double dip are getting stronger.
Growth in China Will Drive Sales
China will continue to be the single largest consumer of iron ore in the world. A major driver for steel and iron ore consumption is the housing sector, which is looking rather robust for the years to come. China's five-year plan for 2011-2015 is set to drive demand for commodities including iron ore, coal and copper. As part of the social housing program, China plans to construct 36 million units - of which 10 million will be constructed in 2011 and another 10 million in 2012. Moreover, the urbanization of Central and Western China will involve large investments in infrastructure, boosting the demand for iron ore and steel.
Higher Costs a Drag on Vale
Vale's second quarter results were marked with a decline in the industrial output growth coupled with high fuel and labor costs. The raw material costs and the cost of services are expected to stay at higher levels in the years to come, which may hurt Vale's margins. In addition, high quality iron ore is becoming increasingly scarce around the globe, which contributes to increasing mining and processing costs. In a recent article , we detailed how iron-ore oversupply could reduce the market price of iron-ore, hurting Vale and other iron ore miners globally.
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