y Dimitra DeFotis
Leverage is an increasing concern for investors in Brazil mining giant Vale ( VALE) as commodity prices fall and the Brazilian real weakens.
Vale shares are rallying this morning as iron ore prices and the Brazilian real strengthen. In U.S. trading Vale shares were climbing in late morning trading; they were up 4.8% to $5.24. Other miners were also higher: BHP Billiton ( BHP) rose 2.9% and Rio Tinto ( RIO) was up 2%.
In a fresh sensitivity analysis, Morgan Stanley analysts Carlos De Alba and Lulica Rocha note that Vale's total debt has not increased, but clients are concerned about borrowings. Morgan Stanley conclude that if prices for iron ore - Vale's key export -- remain at $50 per ton between 2015 and 2017, Vale's net debt to earnings before interest, taxes, depreciation and amortization could peak at 5.7 times in 2016 from a multiple of 5.1 times today. But the company continues to reinvest in its business, and faces a free cash flow gap until 2017. Morgan Stanley examined the possibility that Vale could need cash that is earmarked for payouts. Here's what they conclude:
" ... if Vale didn't pay the second tranche of this years' dividends ($1 billion) and failed to close the project financing for Nacala by year--end ($2.4 billion in our model), the company would end the year with a negative free cash flow post--dividends of $3.8 billion. Note that on this exercise we are not considering possible divestments ..."
Morgan Stanley analysts have an Underweight rating on Vale's U.S.-traded shares and a $5.80 price target, implying roughly 10% upside on the U.S.-traded shares. Vale stock recently moved below $5 for the first time in a decade. But Morgan Stanley thinks the shares are overvalued:
"Vale trades at 16.7 times the average 2016--18e EPS derived at current spot prices, significantly above its historical average multiple of 8 times. Under a scenario of current spot commodity prices and BRL, and keeping all other assumptions unchanged, we calculate the company would post EPS of US$0.08 in 2016, US$0.23 in 2017 and US$0.59 in 2018."
See our post, " Brazil Miner Vale Dips Below $5 For First Time In Decade." Vale last week reported its second-highest quarterly iron ore production in history. For more, see Vale's second quarter production report in PDF form.
More at Barron's Emerging Markets blog,
http://blogs.barrons.com/emergingmarketsdaily/