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Factors that Are Impacting Vale SA’s Earnings Estimates

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Mar. 22 2017, Updated 10:36 a.m. ET

Factors impacting analysts’ estimates

Vale SA (VALE) recently announced that it would merge its two existing classes of stocks. This move would enable all shareholders to carry voting rights, up from the current ~61%. This shift is seen as a major governance overhaul, which is intended to enhance transparency and equal rights for all shareholders. This move would also reduce the potential for government interference.

Vale’s iron ore production is expected to rise as its S11D mining complex started commercial production in December 2016. This boost could also lower its overall iron ore unit costs.

These factors are positive for Vale, but analysts still seem concerned about the capital needed to finance the project, as well as the company’s 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 $33.5 billion for 2017, implying a revenue rise of 22% YoY (year-over-year). The recent strength in commodity prices has prompted analysts to raise their estimates for miners like Vale.

Analysts seem to be expecting commodity prices to weaken going forward, which could explain the trend of analysts expecting a 7% fall in revenues in 2018.

EBITDA margin estimates

Analysts have significantly raised their EBITDA[1. earnings before interest, tax, depreciation, and amortization] estimates for Vale for 2017. These estimates have seen a revision of 90% in the last six months. The rise comes on the back of strength in commodity prices (COMT) and Vale’s cost-cutting measures. The EBITDA estimate for 2017 implies a YoY rise of 44.0%.

Analysts also expect an EBITDA margin of 43.7% for Vale in 2017, compared to its margin of 36.7% in 2016. Vale’s margin is expected to expand going forward as volumes rise and costs shrink as S11D ramps up.

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