VALE is a pure play iron ore producer. It is one of four producers that have a virtual oligopoly on the seaborne iron ore export market. Vale is a bargain today because iron ore pricing will be solid in 2014, it is an undervalued way to play strong iron ore pricing, and the charts are the most decent they've been in a long time. Below is an outline of the Bull and Bear case, followed by a more detailed discussion.
BULL CASE
1. Iron Ore (IO) pricing will be solid
Strong demand from residential and commercial construction, transportation (cars, planes, rail), and machinery (US manufacturing renaissance) which comprise 80% of steel/IO demand. Strong demand from the three big IO importing markets -- China which chugs along at 7-8% GDP growth and Europe & Japan which are accelerating Iron ore producers are slashing capex which cuts supply in 2015 and beyond, while improving cash flow The Bulk Dry Index - which is a reliable signal of global growth and hence steel demand - is rocketing higher
2. Vale is the best way to play solid IO pricing
Vale has scale, competent management, and good production economics Valuation - a huge discount to peers on PE, reasonable price/book, upside surprises to recent earnings Valemax ships are cleared for takeoff - at a time that bulk dry shipping rates are booming Europe's economy is under-the-radar but accelerating and Vale is a near monopolist IO supplier to Europe Shale gas boom is driving the US's growing IO demand and Vale is well-positioned to serve that growth market
3. Technicals are strong
Vale is a great candidate for a January Effect rally Double-bottom seems to have formed
BEAR CASE
Political Risk -- While being a Brazilian company presents political risk, the recent settlement of Vale's tax liability should take the heat off for the medium term Rising supply - forecasts call for lower IO prices in the second half of 2014 due to past investments coming to fruition India - who as recently as a few years ago was a major IO exporter - could bring idled IO production back on line China - consumer of 50% of IO imports --- could have a hard economic landing
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