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Do Earnings Estimates for Vale Have an Upside?

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Factors impacting analysts’ estimates

Two major factors are driving estimates for Vale (VALE). Going forward, its total volumes should see a significant boost from iron ore volumes as its S11D project ramps up. This boost will also lower its overall iron ore unit costs.

These factors are positive for the company, but analysts are still worried about the capital needed to finance the project as well as its ability to maintain a strong balance sheet.

Compared to its peers BHP Billiton (BHP), Cliffs Natural Resources (CLF), and Rio Tinto (RIO), Vale is in the process of deploying capital for S11D, its expansion project.

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Higher sales estimates

Wall Street analysts covering Vale are projecting sales of $27.2 billion for 2016, implying a revenue rise of 4.4% year-over-year (or YoY). The recent strength in commodity prices has prompted analysts to raise their estimates for miners such as Vale.

Going forward, analysts expect higher sales revenue. Consensus estimates indicate revenue rises of 5.9% for 2017 and 2.6% for 2018. Most of this growth will likely be attributable to the startup of S11D. 

EBITDA margin estimates

Analysts have significantly raised their EBITDA (earnings before interest, tax, depreciation, and amortization) estimates for Vale for 2016 and 2017. The rise comes on the back of strength in commodity prices (COMT) and Vale’s cost-cutting measures. The EBITDA estimate for 2016 implies a YoY rise of 37.0%. The EBITDA estimate for 2017, on the other hand, implies a rise of 1.3%.

Analysts also expect an EBITDA margin of 36.0% for Vale in 2016, compared to its margin of 26.0% in 2015. Vale’s margin is expected to expand going forward as volumes rise and costs shrink with the ramp-up of S11D.

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