Vale S.A.

(VALE) KF
7/29/14
1

Recommendation: Buy
I recommend Buy on Vale equity. Vale, the largest iron ore miner, is cheap on a relative basis. It trades around
6X 2014 earnings while its competitors trade upwards of 10X. Iron ore prices have fallen 30% in 2014 due to
concerns of decreasing demand growth caused by a cooling Chinese economy, along with low cost suppliers
flooding the market with new production resulting from projects started at higher commodity prices. I expect
continued seaborne ore demand growth from China, compounded by high cost Chinese producers being forced
out of the market, contributing to a rebound and stabilization of iron ore prices. Vales business is highly
concentrated, and thus driven by iron ore prices, which will allow it to benefit more than BHP and RIO from
rebounding ore prices. Although Vale continues to have substantial country and political risk, the recently
overturned $10bn tax dispute was a victory for Vale and may be an indication of more favorable future relations
between Vale and the government.
Iron Ore Outlook
Today, iron ore is one of the most integral resources to the global economy. The steel in everything from cars to
kitchen appliances, traffic lights to railroad tracks, is predominantly made from iron ore. Iron ore represents
over a quarter of total seaborne cargo and is half the size of the crude oil trade in terms of tonnage. Roughly 2
billion tons are mined, processed, and exported annually, with the seaborne market representing 1.2 billion tons
of the overall market. Even though many countries could mine their own ore, they find it more economical to
import higher grade ore. The seaborne iron ore market is dominated by Australia and Brazil, who export a
combined 70% of the total volume. Vale, BHP Billiton, Rio Tinto and Fortescue control more than 2/3 of that
volume.
The steel value chain has evolved over the past 10
years as profitability has shifted from steelmakers
to miners. Miners see EBITDA margins around 50%
while steelmakers average 10%. In addition, high
iron ore prices over the past years incentivized
miners to invest in new projects. All big four iron
producers are bringing new, cheap production
online, effectively flooding the market. The
additional supply, along with weaker Chinese
demand, has caused iron ore prices to plummet
over 30% YTD to a low of $89/ton in mid-June. Global iron ore giants hope to gain even larger shares of the
market, making up for prices with volume. Over the next 5
years, supply growth is expected to exceed demand growth,
largely due to low cost supply from Australia and Brazil. This
new supply and lower prices will cause the iron ore cost
curve to flatten in coming years as the high cost producers
become uneconomical and big four producers capture a
larger share of the market. Bloomberg Industries estimates
that iron ore supply may increase by 50% by 2018 (600mt of
Vale S.A. (VALE) KF
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which is fully financed and an additional 745mt yet to be financed). Chinas share of consumption is expected to
increase, while the big fours share of production is also expected to increase. Nearly 70% of the new supply
coming online by 2018 is from the big four producers. According to the BHP Billiton CEO, scarcity pricing that the
industry has experienced over the last ten years is unlikely to be repeated. Between 2000 and 2012, iron ore
prices soared higher, increasing by roughly 1,000%. Moving forward, the oligopolistic nature of the industry will
allow the big producers to make up for lower market prices by scaling up production. Rio Tinto CEO Sam Walsh
expects iron ore prices to remain around $100/ton. Any further rebound would incentivize higher cost Chinese
producers to come online, thus a sustained $100 level would create the best case scenario for global giants. Vale
expects apparent steel demand to increase from 3% to 3.5% in 2014 and drive demand, hopefully decreasing the
oversupply. Global steel demand historically has grown at 3.3% during the 20
th
century, experiencing a boom
since then.
Long term annual contracts were used in the iron ore market until 2009 when they were abandoned for shorter
term pricing contracts. With the growth of spot and derivative markets for commodities, spot rates replaced
quarterly and monthly contracts about a year later. The new pricing system along with strong demand from
China allowed miners to soon realize prices more than double the ~$60/ton annual contracts that ruled the
market in 2009.
Iron ore is sold in fines and in pellets or lumps. The industry wide benchmark price is the 62% Iron (Fe) content
sold in Chinese ports. Higher grade ores sell for a premium because prices are determined by how easy, time
consuming, expensive, and polluting the process is from raw material to the final steel production. Iron ore
pellets are also commonly sold. Pellets are higher in content and can be fed directly into blast furnaces, while
fines must be sintered before use, which causes a great deal of sulfur dioxide pollution. Fines undergo
concentration to upgrade the iron content and beneficiation to improve the physical properties before entering
the blast furnace along with coke, sinter, and limestone. On average, it takes 1.5 tons of iron ore to make 1 ton
of steel.
China
Chinas rapid growth is a main driver of commodity markets. Chinas rapid GDP growth fueled by investment
caused commodity prices to explode over the past few decades. China consumes more than 2/3 of the global
seaborne iron ore, up from only 16% a decade ago. As Chinas GDP growth slows and the country transitions into
a consumption driven economy, many are worrisome about lackluster demand for commodities, especially for
iron ore.
Overall, Chinas growth rate may decrease but absolute
GDP growth will still drive demand for iron ore in the
upcoming years. Chinas Q2 2014 GDP annualized growth
rate of 7.5% beat consensus expectations of 7.4%,
helping to further stabilize iron ore prices to the $95/ton
level in July. Chinas industrial production growth is also
exceeding market expectations at 9.2%, further
Vale S.A. (VALE) KF
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disproving that China may be slowing. Most recent data indicates that continued demand will persist.
China does produce its own domestic iron ore, but the
quality is poor and costs are high. With iron ore prices low,
many of the high cost Chinese mines have been forced to
shut down, which is helping to increase Chinas
dependence on imported seaborne ore. Chinas pollution
issue has also pushed the country away from low grade
domestic ore because it requires more processing and
emits more pollution than higher quality ore. A recent
report by Macquarie estimates that 1/3 of Chinese
production isnt profitable and the quality has fallen to
roughly 20% compared to the 62% Fe standard. As illustrated by the red line below, Chinese domestic ore as a
percent of market share has decreased from over 70% to roughly 30% over the past decade. As of July, 20-30%
of Chinese mines in operation have shut down in 2014, with many more likely to follow suit. As more and more
domestic Chinese mines, located in the fourth quartile of the cost curve, are forced to shut down, Chinese
demand for seaborne ore should increase.
Chinas steel capacity utilization in 2013 was only 73%. Chinese steel mills are struggling due to tightening credit
and pollution issues. So long as this problem persists, Chinese mills will remain likely to favor cheaper, higher
grade imported iron ore rather than their own domestic supply. With Chinese ore being displaced from the
market due to its high cost nature, most of Chinas new and proposed steel infrastructure is being built close to
shore for easy access to seaborne imports. With this permanent capacity
put in place, Chinas use of imports should increase its dependence on
imported ore.
Many cite Chinas peaking steel intensity as proof for Chinas economy
cooling off. History shows that steel intensity of use peaks and stabilizes as
economies mature and move towards consumer led economic growth.
While Chinas current steel intensity may appear unsustainable or to be
approaching a natural inflection point, this transition will occur gradually
over many years or decades. Slowing of growth is far different than decline.
Also, lower YoY growth is now on a much larger base (10% on a small
number could be less than 5% on a big number).
Many hold that the rapid growth of shadow banking in China could compromise economic stability. The
government, concerned about overinvestment, has naturally tightened lending. Businesses that cant receive
traditional lending are forced to shadow institutions, where they are charged a higher premium to borrow.
Shadow banking assets increased more than 30% in 2013, according to Barclays estimates. Some studies claim
that credit has never grown so quickly in a country without a financial crisis as the result. Some believe that this
off balance sheet type of investment bears substantial risk, but it really may just be a natural occurrence in a
maturing financial system.
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Claims that iron ore is sitting in ports as collateral, effectively putting pressure on ore prices have not proved to
be true, as ore prices have marginally recovered. Other skeptics speak of firms allegedly pledging commodity
stockpiles as collateral for loans more than once. This illegal activity would bring about serious risk but is neither
common nor been confirmed.
Despite some concerns of slowed growth, Chinas PMI index was healthy in June at 50.7 and even stronger in
July at an 18-month high of 52, based on HSBCs preliminary flash index. Recent data has showed signs of
continued growth driven by government stimulus measures aimed to support the cooling economy.
Overall, Chinas demand growth may decrease over the coming years relative to the past few years, but any
major structural changes to their economy will take years. Chinese domestic ore will continue to phase out,
helping to offset the decreased investment driven GDP growth. Lastly, the financial situation in China should be
closely monitored but the concerns are likely overblown.
Government Control
Although Vale, a formerly state owned entity, was privatized in 1997, the government continues to have a
significant influence on Vales operations. The Brazilian government is notorious for playing very active roles in
the management of big companies that have the ability to affect the nations economy. As seen with Petrobras,
the semi-private oil giant that contributes roughly 10% of the countrys GDP, the government has no issue
prioritizing Brazils overall economic well-being over a single company, even if it means forcing it to run at a loss.
The government, mainly through the development bank BNDESs investment vehicle Valepar, owns over 60% of
the company. This grants the government the ability to hand choose the CEO and appoint 9/10 board members.
In addition, the government owns 12 golden shares, giving it the right to veto any major changes in business
operations. Although Vale is technically a private company, the government remains very much in control of the
business, especially as the Brazilian economy slows and looks to powerful companies like Vale to pick up the
slack and stimulate the economy. Issues are likely to arise when the controlling shareholding of a company also
is the regulator, such as, for example, the $15+ billion USD tax dispute that Vale is currently still resolving.
Vale is the one of the largest public companies in Brazil and accounts for 1/6 of total annual exports. However,
shareholders and the government (majority shareholder) often have different agendas. The shareholders desire
value maximization while the government influence may result in Vale performing below its potential due to
poor decisions or investments that benefit the country instead through domestic investment and labor. In the
past, the government has manipulated Vale into investing in domestic steelmaking plants and mills, fertilizer
production, and even a hydroelectric dam, none of which align properly with Vales main business model. The
former CEO, Roger Agnelli, who successfully led Vale for over a decade, was forced to leave after fallout with the
Brazilian government and president emeritus, Lula. Agnellis leadership was put to an end after he refused to
build Vales new shipping fleet in a high-cost Brazilian shipyard rather than the more economical Asian shipyard,
along with laying off hundreds of employees when the government was demanding expansion. The change in
leadership came shortly after Vale, under Agnelli, boasted record net earnings in 2010. Agnellis soft spoken, left
leaning replacement, Murilo Ferreira, is now tasked with mending terms between Vale and the government,
while upholding his fiduciary duty to the shareholders.
Vale S.A. (VALE) KF
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The upcoming elections in Brazil will likely have implications on Vale. Investors around the world are anxious to
hear whether Dilma Rousseff of the Workers Party will be reelected. She is still leading the polls, but by a
decreasing margin. According to the most recent poll, she still leads the field with 38% of the votes, followed by
Aecio Neves of the PSDB center-right party with 20% and Eduardo Campos of the socialist party. The economic
slowdown has decreased Dilmas chance of reelection, although it remains a possibility. Most investors hope
that Dilma is replaced by the pro-business Neves come October. If Dilma is ousted and replaced by the more
pro-business Neves, government influenced companies like Vale and Petrobras would benefit.
The Brazilian government last year attempted to attack large companies in effort to help reduce its budget
deficit. For Vale, this meant the government would get more aggressive on their ongoing litigation. The
government held that Vale owes taxes on profits on foreign subsidiaries. As a result, Vale reported its worst
quarterly loss ($6.45bn) since its IPO in 1997 in 3Q 2013 in order to settle a decade long dispute. Management
at Vale agreed to settle the case by paying $9.6bn so that investors would not be hesitant any longer about the
unknown outcome. In April 2014, Vale won an appeal on the initial ruling, allowing them to suspend additional
back-tax payments and seek rebate for payments they already made. However, the government could still
appeal the most recent decision and send the case to the countrys highest court. This example serves as a
testament to the tangible effect that the government can have on Vales operations and quarterly performance.
The political risk involved with Vale is difficult to quantify. Over the past decade, Brazils GDP growth has been
3.3% and inflation has averaged almost 6%. The Brazilian economy experienced a substantial slowdown in 2012
when GDP growth fell from over 7% to below 3%. The health of Brazils economy may affect the degree of
government influence in the event that they look to private
companies like Vale to help stimulate the slowing economy.
New Production
While Vale is the largest iron ore producer in terms of
production, Rio Tinto and BHP Billiton are not far behind and
Fortescue, the self-proclaimed new force in iron ore is starting
to live up to its name. All big four producers have begun
substantial CapEx cycles in order to bring more ore onto the market as a result of high ore prices in recent years.
However, it takes years for projects to be completed and to ramp up production. BHP and Rio Tinto appear to be
ahead of Vale on the most recent production increases. BHP successfully completed some major iron ore
projects and expects to bring 200mt to market this year, while Rio Tinto expects to increase production to nearly
300mt. Vales main project S11D in Brazil is half complete and expects to increase production substantially upon
completion. It aims to bring an additional 90mtpa to market when operating at full capacity in roughly 5 years.
Since 2009, Vale produced on average roughly 80% of its projected production estimates. Pulling this trend
forward, Vale would see an additional 40mtpa by 2018, when S11D is planned to ramp up. Vale expects to see
an additional 100mtpa by 2017 through their other current projects. More realistically, Vale will continue to
modestly increase production by somewhere between 40-70mtpa before they really ramp up production in
2018 with the completion of the S11D project.
Vale S.A. (VALE) KF
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Vale s S11D/Serra Sul project in northern Brazil once completed
will be the most expensive project ever in the industry at a total
cost of $20B, with more than half of the cost attributed to railroad
and port infrastructure. At the mine, trucks will be replaced with
conveyor belts, which will help reduce mine-to-port costs by
$15/ton (mine to port costs make up about half of total
operational expenses). This new technology will reduce fuel
consumption at the mine by 77% as electric conveyor belts will
replace diesel fueled trucks.
Vale produced 150mt of iron ore in 1H 2014 (up 11% YoY), putting them on track to produce modestly higher
levels than last year. Pellet production experienced similar gains YTD, while Nickel production is down 8.5%
currently due to a fatality and scheduled maintenance at Canadian facilities.
Valemax Shipping Fleet
Vale is at a competitive disadvantage due to its location relative to China. Rio
Tinto, BHP Billiton, and Fortescue, all operating mainly in Australia, are closer to
the end market. Even though Vale produces iron ore at a lower cost, they pay
roughly an additional $22/ton to transport their ore from Brazil. In order to help
remedy this disadvantage, Vale developed a state of the art shipping fleet.
The Valemax bulk carriers are the largest ships ever built with capacity of 400,000
dwt. The vessels have more than twice the capacity of Vales capsize vessels that
have been used in the past. Vale started placing orders for the ships in 2008.
Most of the 35 total ships are in use but 4 are still under construction. Vale paid
over $100MM for each of the 19 ships they own, and will spend an additional
$5.8b over a 25 year contract on the leased vessels. Once all 35 are in service, if they each make 4 trips per year,
they could deliver 15% of annual seaborne iron ore. Vales new fleet will cut transportation costs by 20-25%.
Because of their enormous size, Vale has faced some issues with bringing the Valemax ships into ports, as some
simply cannot accommodate for their size. More importantly, some Chinese ports have banned Valemax ships
from docking, accusing Vale for bringing down freight rates of the entire industry. This backlash has caused
Chinese shipping companies to lobby against the Valemax ships, banning them from docking at Chinese ports all
together. If Vale were allowed to dock its Valemax ships in Chinese ports, they would save around $7/ton.
Currently, Vale is being forced to use offshore transfer stations to transfer ore from Valemax ships to smaller
ships that bring the ore ashore.




Vale S.A. (VALE) KF
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Valuation
While each of the big fours share price is more
correlated to spot iron ore prices than any other
variable, each has been affected to a different
extent by the fall in iron ore prices. If you consider
the stock prices of the big four producers
normalized against the spot iron ore price, Vale has
been hit the hardest and thus may have more
upside if and when iron ore prices rebound. This is
because Vale has 3-5X more exposure to iron ore
than the other big four producers as a percentage
of total revenue.
As of July, VALE and FMG have fallen over 5% and
20% YTD, respectively, while BHP and RIO have
gained 7.5% and 1%. Not surprisingly, Vale and
FMG both rely more heavily on iron ore, while BHP
and RIO are more diversified miners. Iron ore prices
have slightly rebounded since falling below $90/ton
in June, and so too have the miners stocks. Vale
appears cheap on a P/E and EV/EBITDA basis. The
peer group trades at 10.5X 2014 earnings, while
Vale sits around 6X. Vale also only trades around 5X
forward EBITDA multiple while Rio and BHP,
Vales closest comparisons, are valued above 7X
2014 EBITDA.
Vales healthy dividend of $0.78/share and 6%
dividend yield is the strongest among its
competitors who distributed an average yield of
4%. Iron ore prices will be the key determinant in
whether Vale will be able to support its hefty dividend in the future. According to Citigroup, asset sales and cost
cutting have assured dividend payment through 2015, but dividends beyond then will be reliant on recovering
iron ore prices. In the past, Vale has funded its dividend through its free cash flow. According to my model, Vale
will generate free cash flow to support its current dividend through at least 2015 with iron ore prices as low as
$80/ton and production of 90% expected capacity.
While Fortescue Metals Group may also appear cheap by many metrics, it is important to note the Fortescue is a
far riskier play on recovering iron ore prices. Fortescue has the highest degree of both operating and financial
leverage because its business newer and most concentrated in only iron ore, while the other players are more
diversified. FMG is also a higher cost producer, thus they will suffer immensely on both sides of the balance
sheet if iron ore prices dip further.
Valuation VALE RIO BHP FMG
EV (M) 98,035 138,230 226,773 22,551
P/S 1.4 2.1 2.7 1.2
2014 P/E 6.3 12.4 13.1 9.6
2015 P/E 8.7 11.2 13.9 6.4
2016 P/E 8.7 10.3 13.4 8.1
EV/2012 EBITDA 4.7 7.5 8.1 4.1
EV/2014 EBITDA 5.5 7.4 7.1 4.1
EV/2015 EBTIDA 5.4 6.7 7.1 4.7
EV/EBIT 5.7 9.6 10.0 4.6
EV/EBITDA-CapEx 11.0 25.3 29.4 9.9
FCF/EV 0.2% 0.8% 0.0% 1.7%
FCF/P 0.2% 1.0% 0.0% 2.8%
Di vi dend Yi el d 6.4% 3.3% 3.4% 4.4%
6,831 60 70 80 90 100 110 120 130
70% (6,597) (4,494) (2,391) (288) 1,815 3,917 6,020 8,123
80% (5,792) (3,389) (985) 1,418 3,821 6,224 8,628 11,031
85% (5,389) (2,836) (282) 2,271 4,824 7,378 9,931 12,485
90% (4,987) (2,283) 421 3,124 5,828 8,531 11,235 13,939
95% (4,584) (1,730) 1,123 3,977 6,831 9,685 12,539 15,393
100% (4,182) (1,178) 1,826 4,830 7,834 10,838 13,843 16,847
2015 AFCF
Iron Ore Spot Price
%

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Vale S.A. (VALE) KF
7/29/14
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Some hold that Vales low return on invested capital could be the reason for its discounted current price. ROIC, a
measure of how effectively invested capital is used, is crucial for capital intensive businesses. However, ROIC in
the mining industry is varies greatly depending on stages of new mine development. Vales substantial CapEx for
its only half completed S11D project is weighing down its ROIC. This may also help explain why Vale appears
cheap by certain metrics. High ROIC industry wide is also dangerous for future earnings. ROIC/ROE is mean
reverting outside of sustainable moats. Low ROIC in an industry will lead to low investment, helping to increase
future pricing.
Overall, Vale will be able to weather the low iron ore price environment due to its low cost production. Vale will
benefit from Chinese producers being knocked offline resulting in big four producers capturing a larger share of
the market.









Vale S.A. (VALE) INDUSTRY: Iron Ore RECOMMENDATION: EQUITY: BUY Analyst: Kyle Fischer
Corporate Ratings: Moody's : Baa2 8/8/2014
Business Description:
Investment Considerations:
Negatives:
2. Big 4 producers will gain larger shares of the market due to low prices displacing high cost producers 2. Uncertainty of Chinese demand driven by steel market and investment driven GDP
4. Chinese pollution and location of permanent steel infrastructure will drive demand for high quality seaborne ore 4. Very concentrated business with revenue from iron ore and pellets
5. Brazilian government heavily influences business decisions through 60% equity share and ability to appoint CEO
6. Major production increase are still distant as S11D project stands only half complete
7. Many Chinese ports have banned Valemax ships and blamed Vale for disruption of dry bulk shipping rates
Production FY2011 FY2012 FY2013 2014E 2015E 2016E 2017E Capital Structure (MM) as of 8/8/14 Key Variables
Iron Ore Cash and Equivalents 7,067 Iron Ore 100 $
Capacity (million tons) 321 348 376 411 $3B Credit Facility due 2016 - Pellets 120 $
Production (million tons) 323 320 310 305 331 357 390 $2B Credit Facility due 2018 - Nickel 22,000 $
% Cap. Utilizaton 95% 95% 95% 95% 6.25% Senior Notes due 2016 1,000 % Capacity 95%
Sales (million tons) 257 258 265 261 270 305 319 6.25% Senior Notes due 2017 1,250
% Sold 80% 81% 85% 85% 82% 85% 82% 5.625% Senior Notes due 2019 1,000
Realized price/ton (net of shipping) 113 84 91 100 100 100 100 4.625% Senior Notes due 2020 1,000
Revenue Iron ore (net of shipping) 36,416 26,931 28,137 30,495 33,060 35,720 39,045 4.375% Senior Notes due 2022 2,250
COGS 8,443 9,880 9,153 9,149 9,918 10,716 11,714 6.875% Senior Notes due 2036 2,500
COGS/ton 26 31 30 30 30 30 30 6.875% Senior Notes due 2039 1,000
Cash Cost Breakdown 5.625% Senior Notes due 2042 1,500
Ferrous Revenue $MM 43,890 32,270 35,267 36,735 39,540 42,440 45,765 Other Notes 13,757
Ferrous Minerals EBITDA $MM 31,630 19,333 21,759 22,041 23,724 25,464 27,459
% margin 72% 60% 62% 60% 60% 60% 60% LT Debt 25,257
Cash Cost (Rev-EBITDA)$MM 12,260 12,937 13,508 14,694 15,816 16,976 18,306 Undrawn Credit Facility 5,000
Cash cost/ton $ 38 40 44 - - - - Total Debt 30,257
Cash Cost Reported* $ - - 23 23 23 23 23 Stock Price 13.77 $
Shipping $ - - 21 21 21 21 21 Shares Outstanding 5,150
Spot price $ 167 117 135 100 100 100 100 Market Cap 70,916
Avg sale price $ 171 125 133 141 146 139 143
Pellets Enterprise Value 94,106
Production (million tons) 52 56 50 52 54 56 56
Realized price/ton 153 117 120 120 120 120 120 Valuation Metrics
Revenue 7,938 6,560 6,000 6,240 6,480 6,720 6,720 EV (M) 94,106
COGS 3,311 2,644 2,299 2,392 2,484 2,576 2,576 P/S 1.4X
COGS/ton 64 47 46 46 46 46 46 2014 P/E 6.3X
Nickel 2015 P/E 8.7X
Production (thousand tons) 240 237 260 265 270 275 280 2016 P/E 8.7X
Realized price/ton 33,825 25,211 22,458 22,000 22,000 22,000 22,000 EV/2012 EBITDA 4.7X
Revenue 8,118 5,975 5,839 5,830 5,940 6,050 6,160 EV/2014 EBITDA 5.5X
COGS 4,067 3,835 3,657 3,975 4,050 4,125 4,200 EV/2015 EBTIDA 5.4X
COGS/ton 16,946 16,181 14,065 15,000 15,000 15,000 15,000 EV/EBIT 5.7X
Other EV/EBITDA-CapEx 11.0X
Revenue 16,589 13,999 13,235 13,500 13,500 13,500 13,500 FCF/EV 0.2%
COGS 9,613 9,251 9,318 8,775 8,775 8,775 8,775 FCF/P 0.2%
% 58% 66% 70% 65% 65% 65% 65% Dividend Yield 6.4%
Total Revenue 61,123 46,905 47,211 56,065 58,980 61,990 65,425
COGS 25,434 25,610 24,427 24,291 25,227 26,192 27,265 Comp Valuations
Gross Profit 35,689 21,295 22,784 31,775 33,753 35,798 38,161 VALE RIO BHP FMG
% 58% 45% 48% 57% 57% 58% 58% EV 98,035 131,603 226,773 22,551
SG&A 6,976 7,861 5,188 6,167 6,488 6,819 7,197 P/S 1.4X 2.0X 2.7X 1.2X
% of sales 11% 17% 11% 11% 11% 11% 11% 2014 P/E 6.3X 11.3X 13.1X 9.6X
EBITDA 34,183 17,612 21,761 25,607 27,265 28,979 30,964 EV/EBITDA 4.7X 7.1X 8.1X 4.1X
margin 56% 38% 46% 46% 46% 47% 47% EV/2014 EBITDA 5.5X 6.5X 7.1X 4.1X
Less Cash interest 1,019 1,263 1,393 1,072 1,072 1,072 1,072 EV/EBIT 5.7X 9.4X 10.0X 4.6X
Less Cash Taxes 6,258 1,133 2,195 2,195 2,195 2,195 2,195 EV/EBITDA-CapEx 11.0X 24.1X 29.4X 9.9X
Less WC&Other 3,127 (1,787) 3,178 (814) 467 (330) 1,035 Dividend Yield 6.4% 3.7% 3.4% 4.4%
CFO 23,779 17,003 14,995 23,154 23,531 26,043 26,661 Sensativity Analysis:
Less Dividends 9,062 6,006 4,357 4,200 4,200 4,200 4,200
Less CapEx 15,764 15,968 13,280 13,800 12,500 9,500 9000 6,831 60 $ 70 $ 80 $ 90 $ 100 $ 110 $ 120 $ 130 $
AFCF (1,047) (4,971) (2,642) 5,154 6,831 12,343 13,461 70% (6,597) (4,494) (2,391) (288) 1,815 3,917 6,020 8,123
Operating Income 30,206 13,434 17,596 80% (5,792) (3,389) (985) 1,418 3,821 6,224 8,628 11,031
Non- op Income (expense) 1,298 8,622 9,283 85% (5,389) (2,836) (282) 2,271 4,824 7,378 9,931 12,485
Interest Exp 1,395 1,251 1,339 90% (4,987) (2,283) 421 3,124 5,828 8,531 11,235 13,939
Tax Exp 5,101 (1,334) 7,093 95% (4,584) (1,730) 1,123 3,977 6,831 9,685 12,539 15,393
Other (243) 189 189 100% (4,182) (1,178) 1,826 4,830 7,834 10,838 13,843 16,847
Net Income 22,656 5,084 54
EPS 4.32 0.99 0.01
Balance Sheet Major Shareholders: % Outstanding
Cash 3,538 5,818 5,278 Valepar* 53%
Debt 25,210 32,977 32,670 BDNESPAR (BNDES)** 6%
Net Debt 21,672 27,159 27,392 Total Gov't Ownership 59%
*an investment vehicle owned by BNDES, appoints 9/10 board members
Brazilian gov't owns 12 golden shares giving it veto power over all major decisions
2015 AFCF
Iron Ore Spot Price
%

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Vale is a Brazilian multinational diversified metals and mining company and one of the largest companies in Brazil. Vale is the leading producer of iron ore fines and iron ore pellets, and the second largest producer of Nickel.
Vales business is highly concentrated in iron ore, which accounts for roughly 75% of total revenues. Although Vale has the best quality ore and is the lowest cost producer at mine level, Vales location in Brazil relative to the
main end market in China increases shipping costs, resulting in comparable all in costs to the other big four producers who operate mainly in Australia. In order to combat this competitive disadvantage, Vale owns and leases
the largest ships at sea, which have a capacity two times that of traditional capesize vessels. The Brazilian government effectively owns and operates Vale with 60% equity share, 9/10 seats on the board, and ability to
appoint the CEO. Vale will increase production with the S11D project, the largest and most expensive iron ore project in the industry, which is expected to ramp up in 2H2016. Iron ore prices have fallen dramatically recently
due to concerns about Chinas future growth in combination with all major producers bringing on more supply through projects that were started when prices were higher. The market will likely experience oversupply for
some time, but mining majors will remain profitable through higher volumes and cost cutting.
1. Weak iron ore prices combined with flood of supply coming to market
3. Vale's location in Brazil relative to China results in shipping costs $10-15/ton more than Australian miners
1. Vale produces high quality ore at low costs (~$45/ton CFR)
3. Chinese domestic ore has steadily decreased in both market share and quality
5. Vale pays the largest dividend among its peers of $0.78/share, currently a 6% yield
6. New Valemax ships 400,000dmt capacity will continue to cut shipping costs
Projected Historical
7. Electric conveyor belts will replace trucks, decreasing fuel consumption by 70% at future mines
Positives:
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Appendix:
Company Vale S.A. Rio Tinto plc
BHP Billiton
Limited
Fortescue
Metals Group
Limited
Iron Ore Exposure 77% 51% 31% 97%
Price 14.43 $ 56.91 $ 36.16 $ 4.33 $
52wk low 12.29 $ 49.13 $ 32.04 $ 3.34 $
52wk high 17.14 $ 62.77 $ 37.36 $ 5.84 $
Balance Sheet
Cash 7,201 10,216 10,947 2,924
Debt 33,226 28,474 38,035 11,553
Market Cap 70,061 105,263 192,488 13,478
EV 98,035 131,603 226,773 22,551
Income Statement
Revenue 45,491 51,171 67,835 10,669
COGS 24,313 36,104 47,425 5,737
SG&A 2,942 948 1,000 179
EBITDA 20,698 18,471 28,111 5,442
EBIT 16,556 12,962 20,448 4,720
Net Income (78) 3,665 14,897 2,982
EPS (0.02) 1.98 2.80 0.96
Cash Flows
CFO 14,811 15,078 24,840 6,171
CapEx 11,821 13,001 20,388 3,171
FCF 2,990 2,077 4,452 3,000
Leverage
Debt/Market Cap 47% 27% 20% 86%
CFO/Total Debt 45% 53% 65% 53%
FCF/Total Debt 0% 4% 0% 3%
Debt/EBITDA 1.6X 1.5X 1.4X 2.1X
Debt/EBITDA-CapEx 3.7X 5.2X 4.9X 5.1X
Valuation
EV 98,035 131,603 226,773 22,551
P/S 1.4X 2.0X 2.7X 1.2X
2014 P/E 6.3X 11.3X 9.6X
EV/EBITDA 4.7X 7.1X 8.1X 4.1X
EV/2014 EBITDA 5.5X 6.5X 7.1X 4.1X
EV/EBIT 5.7X 9.4X 10.0X 4.6X
EV/EBITDA-CapEx 11.0X 24.1X 29.4X 9.9X
FCF/EV 0.2% 0.8% 0.0% 1.7%
FCF/P 0.2% 1.0% 0.0% 2.8%
Dividend Yield 6.4% 3.7% 3.4% 4.4%
Operating Stats
% gross 47% 29% 30% 46%
SG&A % Rev 6% 2% 0% 2%
% EBITDA 45% 36% 41% 51%
FCF % Rev 0.3% 2.2% 0.0% 3.5%
CFO% Rev 33% 29% 37% 58%
Inventory Turnover 5 6 8 5
A/R Turnover 9 15 10 18
DIO 72 61 48 67
DSO 39 24 38 21
DPO 54 33 80 62
Cash Collection Cycle 164 118 165 149
ROA 8% 7% 9% 14%
ROIC 1% 9% 18% 18%
ROE -1% 2% 21% 55%
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2009 `10 `11 `12 `13 `14 `15 `16 `17 2018
Val e 238 307 323 320 310 321 348 376 411 453
Ri o Ti nto 172 185 192 199 209 208 295 320 340 370
BHP Bi l l i ton 114 125 134 159 170 217 210 230 250 280
Fortescue 27 40 41 58 81 135 155 160 165 170
Bi g Four Total 551 657 690 736 770 881 1008 1086 1166 1273
Worl d 2000 2120 2240 2367 2501 2642 2792 2950 3117 3293
YoY % 6% 5% 5% 5% 5% 5% 5% 5% 5%
Iron Ore Production
Hi stori cal Projected
Owner Project Mtpa Completion
Vale Carahas +40 40 2013
Vale Serra Sul S11D 90 2018
Vale/BGSR Zogota 50 2015
BHP Billiton Inner Harbor 85 2013
BHP Billiton Outer Harbor 100 2017
Fortescue Chichester Hub exp 35 2012
Fortescue Solomon 60 2012
Rio Tinto Hope Downs 4 15 2013
Rio Tinto Pilbara 290 53 2013
Rio Tinto Pilbara 360 70 2015
Rio Tinto Simandou 90 2015
Rio Tinto IOC CEP 5 2013
Big 4 Projects
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VALE RIO BHP FMG Avg VALE RIO BHP FMG Avg
FY2007 15% 7% 22% -5% 10% FY2007 32% 28% 45% -52% 13%
FY2008 11% 4% 20% -25% 3% FY2008 21% 16% 39% 1222% 325%
FY2009 6% 5% 7% 12% 8% FY2009 10% 11% 14% 60% 24%
FY2010 14% 13% 14% 11% 13% FY2010 26% 22% 26% 39% 28%
FY2011 16% 5% 23% 12% 14% FY2011 26% 10% 41% 42% 30%
FY2012 4% -3% 12% 10% 6% FY2012 6% -5% 23% 41% 16%
FY2013 0% 3% 8% 8% 5% FY2013 0% 7% 15% 33% 14%
VALE RIO BHP FMG Avg VALE RIO BHP FMG Avg
FY2007 26% 14% 39% -6% 18% FY2007 21% 8% 32% -1% 15%
FY2008 19% 11% 39% -31% 9% FY2008 12% 19% 33% 1% 16%
FY2009 11% 8% 19% 16% 14% FY2009 6% 7% 21% 10% 11%
FY2010 22% 21% 28% 14% 21% FY2010 17% 16% 20% 18% 18%
FY2011 23% 10% 41% 16% 23% FY2011 17% 19% 31% 25% 23%
FY2012 6% 0% 23% 15% 11% FY2012 9% 7% 19% 15% 12%
FY2013 1% 9% 17% 11% 9% FY2013 11% 11% 12% 11% 11%
VALE RIO BHP FMG Avg
FY2007 21% 11% 33% -6% 15%
FY2008 15% 7% 32% -31% 6%
FY2009 7% 7% 11% 16% 10%
FY2010 19% 18% 20% 14% 18%
FY2011 20% 7% 34% 15% 19%
FY2012 5% -4% 17% 13% 8%
FY2013 0% 5% 11% 10% 6%
Iron Ore Returns
NOPAT ROIC Return on Invested Capital
Return on Assets
Return on Capital
Return on Equity
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VALE RIO BHP FMG
FY2007 36,374 29,700 47,789 -
FY2008 30,465 54,264 59,801 139
FY2009 27,814 40,262 50,535 1,831
FY2010 50,123 55,171 52,810 3,220
FY2011 53,961 60,529 71,766 5,442
FY2012 44,554 50,942 72,254 6,716
FY2013 42,971 51,171 65,953 8,120
1 Year CAGR -4% 0% -9% 21%
3 Year CAGR -5% -2% 8% 36%
6 Year CAGR 3% 9% 6% 97%
FY2007 54% 30% 71% 0%
FY2008 54% 31% 73% 35%
FY2009 43% 20% 72% 26%
FY2010 59% 36% 76% 34%
FY2011 59% 40% 80% 49%
FY2012 45% 26% 79% 40%
FY2013 48% 29% 28% 37%
FY2007 52% 35% 48% 0%
FY2008 46% 34% 46% 23%
FY2009 39% 26% 43% 30%
FY2010 56% 41% 46% 40%
FY2011 54% 44% 52% 52%
FY2012 40% 30% 45% 43%
FY2013 46% 36% 38% 40%
Revenue
%EBITDA
% Gross
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2010 2011 2012 2013 2014 2015 2016 2017
Sales 47343 61123 46905 47211 56065 58980 61990 65425
COGS 19202 25434 25610 24427 24291 25227 26192 27265
Accounts & Notes Receivable 8411 8527 6778 5655 8150 8574 9011 9511
% of Sales 18% 14% 14% 12% 15%
Inventories 4573 5277 5038 4090 5284 5559 5842 6166
% of Sales 10% 9% 11% 9% 9%
Other Current Assets 2640 4205 4841 9150 5909 6216 6534 6896
% of Sales 6% 7% 10% 19% 11%
Accounts Payable 3496 4750 4518 3740 4241 4405 4573 4760
% of COGS 18% 19% 18% 15% 17%
Short-Term Borrowings 3620 1528 3462 1760 2768 2875 2985 3107
% of COGS 19% 6% 14% 7% 11%
Other Short-Term Liabilities 11789 4824 4550 4031 6961 7229 7506 7813
% of COGS 61% 19% 18% 17% 29%
Net Working Capital -3282 6908 4127 9364 5372 5839 6323 6891
Change in Working Capital 10190 -2781 5238 -3992 467 483 568
Working Capital Projections
VALE RIO BHP FMG
FY2007 36,374 29,700 47,789 -
FY2008 30,465 54,264 59,801 139
FY2009 27,814 40,262 50,535 1,831
FY2010 50,123 55,171 52,810 3,220
FY2011 53,961 60,529 71,766 5,442
FY2012 44,554 50,942 72,254 6,716
FY2013 42,971 51,171 65,953 8,120
1 Year CAGR -4% 0% -9% 21%
3 Year CAGR -5% -2% 8% 36%
6 Year CAGR 3% 9% 6% 97%
FY2007 54% 30% 71% 0%
FY2008 54% 31% 73% 35%
FY2009 43% 20% 72% 26%
FY2010 59% 36% 76% 34%
FY2011 59% 40% 80% 49%
FY2012 45% 26% 79% 40%
FY2013 48% 29% 28% 37%
FY2007 52% 35% 48% 0%
FY2008 46% 34% 46% 23%
FY2009 39% 26% 43% 30%
FY2010 56% 41% 46% 40%
FY2011 54% 44% 52% 52%
FY2012 40% 30% 45% 43%
FY2013 46% 36% 38% 40%
Revenue
%EBITDA
% Gross
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