Vale - Cheapest base metal producer And possible TRQ arbitrage

Vale has a strong competitive advantage especially with infrastructure. They also have nickel and copper assets that are on hold currently but the ability to ramp up if prices rise from here. They are also the second largest Nickel miner in the world and has major deals with auto makers for nickel. Management seems to be doing the right thing and focusing on end markets with good economics, cutting cost and increasing net free cash flow (NFCF). The shares outstanding have been consistent, so your investment will not get watered down over the years.

Here is a breakdown of the financials.

Revenue:

80% iron ore 

12% nickel 

8% copper 

$32b ferrous metals

$7b base metal

$5b nickel

$2b copper

Cash flows:

$5.6B fourteen year average NFCF

$4.4B fourteen year average NFCF if you exclude the bumper year of 2020

$5.1B fourteen year average NFCF if you exclude the lowest year (2015) and 2020

Dividend:

$0.87 average per share dividend over the previous 15 years

$0.76 if you remove the largest and smallest dividend over that time period

At the current stock price you are looking at a dividend of ~6%

Conclusion:

With a current market capitalization of $68.6b and a range of possible cash flows between $4.4b and $5.6B, Vale is an attractively priced base metal company. Olde World Investment believes the company has growth opportunities in their base metal portfolio and sustainable cash flows in the ferrous metals.

TRQ ARBITRAGE

Rio Tinto made a cash offer for the shares outstanding of Turquoise Hill (TRQ). The arbitrage is currently offering $1.43 per share (buyout at $31.29 minus current price of stock $29.89). That is 4.8% gain in less than 2 mounts. Its always hard to tell who will vote for the buyout, but finding the valuation of TRQ will give us some confidence, since we will be holding the stock if shareholders do not vote for the proposal. I will look into the TRQ valuation in later post and hopefully some other interesting topics.