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Inside Vale’s Margin Expectations

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Factors impacting Vale’s analyst estimates

Vale SA (VALE) has been aggressively trying to reduce its debt in recent years. In 1Q17 alone, it reduced its debt by $2.3 billion. But analysts are still worried about the over-indebtedness of the company because the outlook for commodity prices—especially for iron ore—remains muted.

That said, Vale’s iron ore production is expected to rise. Its S11D project started commercial production in December 2016. Unit costs, on the other hand, should drop due to economies of scale.

But one downside of this is that Vale is still in its capital deployment stage. Peers BHP Billiton (BHP), Cliffs Natural Resources (CLF), and Rio Tinto (RIO) are finished with that phase (for now).

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Sales estimates

The average consensus revenues for Vale is $32.4 billion for 2017, implying a revenue gain of 18% YoY (year-over-year). While this growth is still significant, the recent sell-off in iron ore has led analysts to pull back their estimates. Vale’s revenue estimates for 2017 have seen a downward revision of 3% in the past month.

Analysts seem to be expecting commodity prices to weaken going forward as well, which could explain the trend of analysts expecting a mere gain of 0.5% in revenues in 2018, despite the fact that Vale’s S11D project will be ramping up and should lead to significantly higher volumes.

EBITDA margin estimates

Vale’s EBITDA (earnings before interest, tax, depreciation and amortization) estimates for 2017 have also seen a downward revision of 3% in the past month, which is in line with the trend in sales estimates.

Investors should, however, note that Vale’s EBITDA still reflects a growth of 72% in 2017, due to higher volumes, higher commodity price (COMT) expectations as compared to 2016, and lower costs. The EBITDA estimate for 2017 implies an EBITDA margin of 41%, as compared to its margin of 36.7% in 2016. Vale’s margin is expected to expand going forward as volumes rise and costs shrink.

Now let’s take a closer look at Cliffs Natural Resources.

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