vale final report

5/19/2018 Vale Final Report

1/15

Vale S.A. (VALE) KF

7/29/14

1

Recommendation: Buy

I recommend Buy on Vale equity. Vale, the largest iron ore miner, is cheap on a relative basis. It trades around

6X 2014 earnings while its competitors trade upwards of 10X. Iron ore prices have fallen 30% in 2014 due to

concerns of decreasing demand growth caused by a cooling Chinese economy, along with low cost suppliers

flooding the market with new production resulting from projects started at higher commodity prices. I expectcontinued seaborne ore demand growth from China, compounded by high cost Chinese producers being forced

out of the market, contributing to a rebound and stabilization of iron ore prices. Vales business is highly

concentrated, and thus driven by iron ore prices, which will allow it to benefit more than BHP and RIO from

rebounding ore prices. Although Vale continues to have substantial country and political risk, the recently

overturned $10bn tax dispute was a victory for Vale and may be an indication of more favorable future relations

between Vale and the government.

Iron Ore Outlook

Today, iron ore is one of the most integral resources to the global economy. The steel in everything from cars to

kitchen appliances, traffic lights to railroad tracks, is predominantly made from iron ore. Iron ore represents

over a quarter of total seaborne cargo and is half the size of the crude oil trade in terms of tonnage. Roughly 2

billion tons are mined, processed, and exported annually, with the seaborne market representing 1.2 billion tons

of the overall market. Even though many countries could mine their own ore, they find it more economical to

import higher grade ore. The seaborne iron ore market is dominated by Australia and Brazil, who export a

combined 70% of the total volume. Vale, BHP Billiton, Rio Tinto and Fortescue control more than 2/3 of that

volume.

The steel value chain has evolved over the past 10

years as profitability has shifted from steelmakers

to miners. Miners see EBITDA margins around 50%while steelmakers average 10%. In addition, high

iron ore prices over the past years incentivized

miners to invest in new projects. All big four iron

producers are bringing new, cheap production

online, effectively flooding the market. The

additional supply, along with weaker Chinese

demand, has caused iron ore prices to plummet

over 30% YTD to a low of $89/ton in mid-June. Global iron ore giants hope to gain even larger shares of the

market, making up for prices with volume. Over the next 5

years, supply growth is expected to exceed demand growth,

largely due to low cost supply from Australia and Brazil. This

new supply and lower prices will cause the iron ore cost

curve to flatten in coming years as the high cost producers

become uneconomical and big four producers capture a

larger share of the market. Bloomberg Industries estimates

that iron ore supply may increase by 50% by 2018 (600mt of


2/15

Vale S.A. (VALE) KF

7/29/14

2

which is fully financed and an additional 745mt yet to be financed). Chinas share of consumption is expected to

increase, while the big fours share of production is also expected to increase. Nearly 70% of the new supply

coming online by 2018 is from the big four producers. According to the BHP Billiton CEO, scarcity pricing that the

industry has experienced over the last ten years is unlikely to be repeated. Between 2000 and 2012, iron ore

prices soared higher, increasing by roughly 1,000%. Moving forward, the oligopolistic nature of the industry will

allow the big producers to make up for lower market prices by scaling up production. Rio Tinto CEO Sam Walsh

expects iron ore prices to remain around $100/ton. Any further rebound would incentivize higher cost Chinese

producers to come online, thus a sustained $100 level would create the best case scenario for global giants. Vale

expects apparent steel demand to increase from 3% to 3.5% in 2014 and drive demand, hopefully decreasing the

oversupply. Global steel demand historically has grown at 3.3% during the 20thcentury, experiencing a boom

since then.

Long term annual contracts were used in the iron ore market until 2009 when they were abandoned for shorter

term pricing contracts. With the growth of spot and derivative markets for commodities, spot rates replaced

quarterly and monthly contracts about a year later. The new pricing system along with strong demand from

China allowed miners to soon realize prices more than double the ~$60/ton annual contracts that ruled themarket in 2009.

Iron ore is sold in fines and in pellets or lumps. The industry wide benchmark price is the 62% Iron (Fe) content

sold in Chinese ports. Higher grade ores sell for a premium because prices are determined by how easy, time

consuming, expensive, and polluting the process is from raw material to the final steel production. Iron ore

pellets are also commonly sold. Pellets are higher in content and can be fed directly into blast furnaces, while

fines must be sintered before use, which causes a great deal of sulfur dioxide pollution. Fines undergo

concentration to upgrade the iron content and beneficiation to improve the physical properties before entering

the blast furnace along with coke, sinter, and limestone. On average, it takes 1.5 tons of iron ore to make 1 ton

of steel.

China

Chinas rapid growth is a main driver of commodity markets. Chinas rapid GDP growth fueled by investment

caused commodity prices to explode over the past few decades. China consumes more than 2/3 of the global

seaborne iron ore, up from only 16% a decade ago. As Chinas GDP growth slows and the country transitions into

a consumption driven economy, many are worrisome about lackluster demand for commodities, especially for

iron ore.

Overall, Chinas growth rate may decrease but absolute

GDP growth will still drive demand for iron ore in theupcoming years.Chinas Q2 2014 GDP annualized growth

rate of 7.5% beat consensus expectations of 7.4%,

helping to further stabilize iron ore prices to the $95/ton

level in July. Chinas industrial production growth is also

exceeding market expectations at 9.2%, further


3/15

Vale S.A. (VALE) KF

7/29/14

3

disproving that China may be slowing. Most recent data indicates that continued demand will persist.

China does produce its own domestic iron ore, but the

quality is poor and costs are high. With iron ore prices low,

many of the high cost Chinese mines have been forced to

shut down, which is helping to increase Chinasdependence on imported seaborne ore. Chinas pollution

issue has also pushed the country away from low grade

domestic ore because it requires more processing and

emits more pollution than higher quality ore. A recent

report by Macquarie estimates that 1/3 of Chinese

production isnt profitable and the quality has fallen to

roughly 20% compared to the 62% Fe standard. As illustrated by the red line below, Chinese domestic ore as a

percent of market share has decreased from over 70% to roughly 30% over the past decade. As of July, 20-30%

of Chinese mines in operation have shut down in 2014, with many more likely to follow suit. As more and more

domestic Chinese mines, located in the fourth quartile of the cost curve, are forced to shut down, Chinesedemand for seaborne ore should increase.

Chinas steel capacity utilization in 2013 was only 73%. Chinese steel mills are struggling due to tightening credit

and pollution issues. So long as this problem persists, Chinese mills will remain likely to favor cheaper, higher

grade imported iron ore rather than their own domestic supply. With Chinese ore being displaced from the

market due to its high cost nature, most of Chinas new and proposed steel infrastructure is being built close to

shore for easy access to seaborne imports. With this permanent capacity

put in place, Chinas use of imports should increase its dependence on

imported ore.

Many cite Chinas peaking steel intensity as proof for Chinas economy

cooling off. History shows that steel intensity of use peaks and stabilizes as

economies mature and move towards consumer led economic growth.

While Chinas current steel intensity may appear unsustainable or to be

approaching a natural inflection point, this transition will occur gradually

over many years or decades. Slowing of growth is far different than decline.

Also, lower YoY growth is now on a much larger base (10% on a small

number could be less than 5% on a big number).

Many hold that the rapid growth of shadow banking in China could compromise economic stability. The

government, concerned about overinvestment, has naturally tightened lending. Businesses that cant receive

traditional lending are forced to shadow institutions, where they are charged a higher premium to borrow.

Shadow banking assets increased more than 30% in 2013, according to Barclays estimates. Some studies claim

that credit has never grown so quickly in a country without a financial crisis as the result. Some believe that this

off balance sheet type of investment bears substantial risk, but it really may just be a natural occurrence in a

maturing financial system.


4/15

Vale S.A. (VALE) KF

7/29/14

4

Claims that iron ore is sitting in ports as collateral, effectively putting pressure on ore prices have not proved to

be true, as ore prices have marginally recovered. Other skeptics speak of firms allegedly pledging commodity

stockpiles as collateral for loans more than once. This illegal activity would bring about serious risk but is neither

common nor been confirmed.

Despite some concerns of slowed growth, Chinas PMI index was healthy in June at 50.7 and even stronger inJuly at an 18-month high of 52, based on HSBCs preliminary flash index. Recent data has showed signs of

continued growth driven by government stimulus measures aimed to support the cooling economy.

Overall, Chinas demand growth may decrease over the coming years relative to the past few years, but any

major structural changes to their economy will take years. Chinese domestic ore will continue to phase out,

helping to offset the decreased investment driven GDP growth. Lastly, the financial situation in China should be

closely monitored but the concerns are likely overblown.

Government Control

Although Vale, a formerly state owned entity, was privatized in 1997, the government continues to have asignificant influence on Vales operations. The Brazilian government is notorious for playing very active roles in

the management of big companies that have the ability to affect the nations economy. As seen with Petrobras,

the semi-private oil giant that contributes roughly 10% of the countrys GDP, the government has no issue

prioritizing Brazils overall economic well-being over a single company, even if it means forcing it to run at a loss.

The government, mainly through the development bank BNDESs investment vehicle Valepar, owns over 60% of

the company. This grants the government the ability to hand choose the CEO and appoint 9/10 board members.

In addition, the government owns 12 golden shares, giving it the right to veto any major changes in business

operations. Although Vale is technically a private company, the government remains very much in control of the

business, especially as the Brazilian economy slows and looks to powerful companies like Vale to pick up theslack and stimulate the economy. Issues are likely to arise when the controlling shareholding of a company also

is the regulator, such as, for example, the $15+ billion USD tax dispute that Vale is currently still resolving.

Vale is the one of the largest public companies in Brazil and accounts for 1/6 of total annual exports. However,

shareholders and the government (majority shareholder) often have different agendas. The shareholders desire

value maximization while the government influence may result in Vale performing below its potential due to

poor decisions or investments that benefit the country instead through domestic investment and labor. In the

past, the government has manipulated Vale into investing in domestic steelmaking plants and mills, fertilizer

production, and even a hydroelectric dam, none of which align properly with Vales main business model. The

former CEO, Roger Agnelli, who successfully led Vale for over a decade, was forced to leave after fallout with the

Brazilian government and president emeritus, Lula. Agnellis leadership was put to an end after he refused to

build Vales new shipping fleet in a high-cost Brazilian shipyard rather than the more economical Asian shipyard,

along with laying off hundreds of employees when the government was demanding expansion. The change in

leadership came shortly after Vale, under Agnelli, boasted record net earnings in 2010. Agnellis soft spoken, left

leaning replacement, Murilo Ferreira, is now tasked with mending terms between Vale and the government,

while upholding his fiduciary duty to the shareholders.


5/15

Vale S.A. (VALE) KF

7/29/14

5

The upcoming elections in Brazil will likely have implications on Vale. Investors around the world are anxious to

hear whether Dilma Rousseff of the Workers Party will be reelected. She is still leading the polls, but by a

decreasing margin. According to the most recent poll, she still leads the field with 38% of the votes, followed by

Aecio Neves of the PSDB center-right party with 20% and Eduardo Campos of the socialist party. The economic

slowdown has decreased Dilmas chance of reelection, although it remains a possibility. Most investors hope

that Dilma is replaced by the pro-business Neves come October. If Dilma is ousted and replaced by the more

pro-business Neves, government influenced companies like Vale and Petrobras would benefit.

The Brazilian government last year attempted to attack large companies in effort to help reduce its budget

deficit. For Vale, this meant the government would get more aggressive on their ongoing litigation. The

government held that Vale owes taxes on profits on foreign subsidiaries. As a result, Vale reported its worst

quarterly loss ($6.45bn) since its IPO in 1997 in 3Q 2013 in order to settle a decade long dispute. Management

at Vale agreed to settle the case by paying $9.6bn so that investors would not be hesitant any longer about the

unknown outcome. In April 2014, Vale won an appeal on the initial ruling, allowing them to suspend additional

back-tax payments and seek rebate for payments they already made. However, the government could still

appeal the most recent decision and send the case to the countrys highest court. This example serves as atestament to the tangible effect that the government can have on Vales operations and quarterly performance.

The political risk involved with Vale is difficult to quantify. Over the past decade, Brazils GDP growth has been

3.3% and inflation has averaged almost 6%. The Brazilian economy experienced a substantial slowdown in 2012

when GDP growth fell from over 7% to below 3%. The health of Brazils economy may affect the degree of

government influence in the event that they look to private

companies like Vale to help stimulate the slowing economy.

New Production

While Vale is the largest iron ore producer in terms ofproduction, Rio Tinto and BHP Billiton are not far behind and

Fortescue, the self-proclaimed new force in iron ore is starting

to live up to its name. All big four producers have begun

substantial CapEx cycles in order to bring more ore onto the market as a result of high ore prices in recent years.

However, it takes years for projects to be completed and to ramp up production. BHP and Rio Tinto appear to be

ahead of Vale on the most recent production increases. BHP successfully completed some major iron ore

projects and expects to bring 200mt to market this year, while Rio Tinto expects to increase production to nearly

300mt. Vales main project S11D in Brazil is half complete and expects to increase production substantially upon

completion. It aims to bring an additional 90mtpa to market when operating at full capacity in roughly 5 years.

Since 2009, Vale produced on average roughly 80% of its projected production estimates. Pulling this trend

forward, Vale would see an additional 40mtpa by 2018, when S11D is planned to ramp up. Vale expects to see

an additional 100mtpa by 2017 through their other current projects. More realistically, Vale will continue to

modestly increase production by somewhere between 40-70mtpa before they really ramp up production in

2018 with the completion of the S11D project.


6/15

Vale S.A. (VALE) KF

7/29/14

6

Vale s S11D/Serra Sul project in northern Brazil once completed

will be the most expensive project ever in the industry at a total

cost of $20B, with more than half of the cost attributed to railroad

and port infrastructure. At the mine, trucks will be replaced with

conveyor belts, which will help reduce mine-to-port costs by

$15/ton (mine to port costs make up about half of total

operational expenses). This new technology will reduce fuel

consumption at the mine by 77% as electric conveyor belts will

replace diesel fueled trucks.

Vale produced 150mt of iron ore in 1H 2014 (up 11% YoY), putting them on track to produce modestly higher

levels than last year. Pellet production experienced similar gains YTD, while Nickel production is down 8.5%

currently due to a fatality and scheduled maintenance at Canadian facilities.

Valemax Shipping Fleet

Vale is at a competitive disadvantage due to its location relative to China. Rio

Tinto, BHP Billiton, and Fortescue, all operating mainly in Australia, are closer to

the end market. Even though Vale produces iron ore at a lower cost, they pay

roughly an additional $22/ton to transport their ore from Brazil. In order to help

remedy this disadvantage, Vale developed a state of the art shipping fleet.

The Valemax bulk carriers are the largest ships ever built with capacity of 400,000

dwt. The vessels have more than twice the capacity of Vales capsize vessels that

have been used in the past. Vale started placing orders for the ships in 2008.

Most of the 35 total ships are in use but 4 are still under construction. Vale paid

over $100MM for each of the 19 ships they own, and will spend an additional$5.8b over a 25 year contract on the leased vessels. Once all 35 are in service, if they each make 4 trips per year,

they could deliver 15% of annual seaborne iron ore. Vales new fleet will cut transportation costs by 20-25%.

Because of their enormous size, Vale has faced some issues with bringing the Valemax ships into ports, as some

simply cannot accommodate for their size. More importantly, some Chinese ports have banned Valemax ships

from docking, accusing Vale for bringing down freight rates of the entire industry. This backlash has caused

Chinese shipping companies to lobby against the Valemax ships, banning them from docking at Chinese ports all

together. If Vale were allowed to dock its Valemax ships in Chinese ports, they would save around $7/ton.

Currently, Vale is being forced to use offshore transfer stations to transfer ore from Valemax ships to smaller

ships that bring the ore ashore.


7/15

Vale S.A. (VALE) KF

7/29/14

7

Valuation

While each of the big fours share price is more

correlated to spot iron ore prices than any other

variable, each has been affected to a different

extent by the fall in iron ore prices. If you considerthe stock prices of the big four producers

normalized against the spot iron ore price, Vale has

been hit the hardest and thus may have more

upside if and when iron ore prices rebound. This is

because Vale has 3-5X more exposure to iron ore

than the other big four producers as a percentage

of total revenue.

As of July, VALE and FMG have fallen over 5% and

20% YTD, respectively, while BHP and RIO havegained 7.5% and 1%. Not surprisingly, Vale and

FMG both rely more heavily on iron ore, while BHP

and RIO are more diversified miners. Iron ore prices

have slightly rebounded since falling below $90/ton

in June, and so too have the miners stocks. Vale

appears cheap on a P/E and EV/EBITDA basis. The

peer group trades at 10.5X 2014 earnings, while

Vale sits around 6X. Vale also only trades around 5X

forward EBITDA multiple while Rio and BHP,

Vales closest comparisons, are valued above 7X2014 EBITDA.

Vales healthy dividend of $0.78/share and 6%

dividend yield is the strongest among its

competitors who distributed an average yield of

4%. Iron ore prices will be the key determinant in

whether Vale will be able to support its hefty dividend in the future. According to Citigroup, asset sales and cost

cutting have assured dividend payment through 2015, but dividends beyond then will be reliant on recovering

iron ore prices. In the past, Vale has funded its dividend through its free cash flow. According to my model, Vale

will generate free cash flow to support its current dividend through at least 2015 with iron ore prices as low as

$80/ton and production of 90% expected capacity.

While Fortescue Metals Group may also appear cheap by many metrics, it is important to note the Fortescue is a

far riskier play on recovering iron ore prices. Fortescue has the highest degree of both operating and financial

leverage because its business newer and most concentrated in only iron ore, while the other players are more

diversified. FMG is also a higher cost producer, thus they will suffer immensely on both sides of the balance

sheet if iron ore prices dip further.

Valuation VALE RIO BHP FMG

EV (M) 98,035 138,230 226,773 22,551

P/S 1.4 2.1 2.7 1.2

2014 P/E 6.3 12.4 13.1 9.62015 P/E 8.7 11.2 13.9 6.4

2016 P/E 8.7 10.3 13.4 8.1

EV/2012 EBITDA 4.7 7.5 8.1 4.1

EV/2014 EBITDA 5.5 7.4 7.1 4.1

EV/2015 EBTIDA 5.4 6.7 7.1 4.7

EV/EBIT 5.7 9.6 10.0 4.6

EV/EBITDA-CapEx 11.0 25.3 29.4 9.9

FCF/EV 0.2% 0.8% 0.0% 1.7%

FCF/P 0.2% 1.0% 0.0% 2.8%

Dividend Yield 6.4% 3.3% 3.4% 4.4%

6,831 60 70 80 90 100 110 120 130

70% (6,597) (4,494) (2,391) (288) 1,815 3,917 6,020 8,1

80% (5,792) (3,389) (985) 1,418 3,821 6,224 8,628 11,0

85% (5,389) (2,836) (282) 2,271 4,824 7,378 9,931 12,4

90% (4,987) (2,283) 421 3,124 5,828 8,531 11,235 13,9

95% (4,584) (1,730) 1,123 3,977 6,831 9,685 12,539 15,3

100% (4,182) (1,178) 1,826 4,830 7,834 10,838 13,843 16,8

2015 AFCF

Iron Ore Spot Price

%C

ap.

Utilization


8/15

Vale S.A. (VALE) KF

7/29/14

8

Some hold that Vales low return on invested capital could be the reason for its discounted current price. ROIC, a

measure of how effectively invested capital is used, is crucial for capital intensive businesses. However, ROIC in

the mining industry is varies greatly depending on stages of new mine development. Vales substantial CapEx for

its only half completed S11D project is weighing down its ROIC. This may also help explain why Vale appears

cheap by certain metrics. High ROIC industry wide is also dangerous for future earnings. ROIC/ROE is mean

reverting outside of sustainable moats. Low ROIC in an industry will lead to low investment, helping to increase

future pricing.

Overall, Vale will be able to weather the low iron ore price environment due to its low cost production. Vale will

benefit from Chinese producers being knocked offline resulting in big four producers capturing a larger share of

the market.


9/15

Vale S.A. (VALE) INDUSTRY: Iron Ore RECOMMENDATION: EQUITY: BUY Analyst: Kyle Fischer

Corporate Ratings: Moody's : Baa2 8/8/2014

Business Description:

Investment Considerations:

Negatives:

2. Big 4 producers will gain larger shares of the market due to low prices displacing high cost producers 2. Uncertainty of Chinese demand driven by steel market and investment driven GDP

4. Chinese pollution and location of permanent steel infrastructure will drive demand for high quality seaborne ore 4. Very concentrated business with revenue from iron ore and pellets

5. Brazilian government heavily influences business deci sions through 60% equity share and ability to appoint

6. Major production increase are still distant as S11D project stands only half complete

7. Many Chinese ports have banned Valemax ships and blamed Vale for disruption of dry bulk shipping rates

Production FY2011 FY2012 FY2013 2014E 2015E 2016E 2017E Capital Structure (MM) as of 8/8/14 Key Variables

Iron Ore Cash and Equivalents 7,067 Iron Ore $

Capacity (million tons) 321 348 376 411 $3B Credit Facility due 2016 - Pellets $

Production (million tons) 323 320 310 305 331 357 390 $2B Credit Facility due 2018 - Nickel $

% Cap. Utilizaton 95% 95% 95% 95% 6.25% Senior Notes due 2016 1,000 % Capacity

Sales (million tons) 257 258 265 261 270 305 319 6.25% Senior Notes due 2017 1,250

% Sold 80% 81% 85% 85% 82% 85% 82% 5.625% Senior Notes due 2019 1,000

Realized price/ton (net of shipping) 113 84 91 100 100 100 100 4.625% Senior Notes due 2020 1,000

Revenue Ir on or e (net of shipping ) 36,416 26,931 28,137 30,495 33,060 35,720 39,045 4.375% Senior Notes due 2022 2,250

COGS 8,443 9,880 9,153 9,149 9,918 10,716 11,714 6.875% Senior Notes due 2036 2,500

COGS/ton 26 31 30 30 30 30 30 6.875% Senior Notes due 2039 1,000

Cash Cost Breakdown 5.625% Senior Notes due 2042 1,500

Ferrous Revenue $MM 43,890 32,270 35,267 36,735 39,540 42,440 45,765 Other Notes 13,757Ferrous Minerals EBITDA $MM 31,630 19,333 21,759 22,041 23,724 25,464 27,459

% margin 72% 60% 62% 60% 60% 60% 60% LT Debt 25,257

Cash Cost (Rev-EBITDA)$MM 12,260 12,937 13,508 14,694 15,816 16,976 18,306 Undrawn Credit Facility 5,000

Cash cost/ton $ 38 40 44 - - - - Total Debt 30,257

Cash Cost Reported* $ - - 23 23 23 23 23 Stock Price 13.77$

Shipping $ - - 21 21 21 21 21 Shares Outstanding 5,150

Spot price $ 167 117 135 100 100 100 100 Market Cap 70,916

Avg sale price $ 171 125 133 141 146 139 143

Pellets Enterprise Value 94,106

Production (million tons) 52 56 50 52 54 56 56

Realized price/ton 153 117 120 120 120 120 120 Valuation Metrics

Revenue 7,938 6,560 6,000 6,240 6,480 6,720 6,720 EV (M) 94,106

COGS 3,311 2,644 2,299 2,392 2,484 2,576 2,576 P/S 1.4X

COGS/ton 64 47 46 46 46 46 46 2014 P/E 6.3X

Nickel 2015 P/E 8.7X

Production (thousand tons) 240 237 260 265 270 275 280 2016 P/E 8.7X

Realized price/ton 33,825 25,211 22,458 22,000 22,000 22,000 22,000 EV/2012 EBITDA 4.7X

Revenue 8,118 5,975 5,839 5,830 5,940 6,050 6,160 EV/2014 EBITDA 5.5X

COGS 4,067 3,835 3,657 3,975 4,050 4,125 4,200 EV/2015 EBTIDA 5.4XCOGS/ton 16,946 16,181 14,065 15,000 15,000 15,000 15,000 EV/EBIT 5.7X

Other EV/EBITDA-CapEx 11.0X

Revenue 16,589 13,999 13,235 13,500 13,500 13,500 13,500 FCF/EV 0.2%

COGS 9,613 9,251 9,318 8,775 8,775 8,775 8,775 FCF/P 0.2%

% 58% 66% 70% 65% 65% 65% 65% Dividend Yield 6.4%

Total Revenue 61,123 46,905 47,211 56,065 58,980 61,990 65,425

COGS 25,434 25,610 24,427 24,291 25,227 26,192 27,265 Comp Valuations

Gross Profit 35,689 21,295 22,784 31,775 33,753 35,798 38,161 VALE RIO BHP

% 58% 45% 48% 57% 57% 58% 58% EV 98,035 131,603 226,773

SG&A 6,976 7,861 5,188 6,167 6,488 6,819 7,197 P /S 1.4X 2.0X 2.7X

% of sales 11% 17% 11% 11% 11% 11% 11% 2014 P/E 6.3X 11.3X 13.1X

EBITDA 34,183 17,612 21,761 25,607 27,265 28,979 30,964 EV/EBITDA 4.7X 7.1X 8.1X

margin 56% 38% 46% 46% 46% 47% 47% EV/2014 EBITDA 5.5X 6.5X 7.1X

Less Cash interest 1,019 1,263 1,393 1,072 1,072 1,072 1,072 EV/EBIT 5.7X 9.4X 10.0X

Less Cash Taxes 6,258 1,133 2,195 2,195 2,195 2,195 2,195 EV/EBITDA-CapEx 11.0X 24.1X 29.4X

Less WC&Other 3,127 (1,787) 3,178 (814) 467 (330) 1,035 Dividend Yield 6.4% 3.7% 3.4%

CFO 23,779 17,003 14,995 23,154 23,531 26,043 26,661 Sensativity Analysis:

Less Dividends 9,062 6,006 4,357 4,200 4,200 4,200 4,200Less CapEx 15,764 15,968 13,280 13,800 12,500 9,500 9000 6,831 60$ 70$ 80$ 90$ 100$ 110$ 120$ 130$

AFCF (1,047) (4,971) (2,642) 5,154 6,831 12,343 13,461 70% (6,597) (4,494) (2,391) (288) 1,815 3,917 6,020 8,123

Operating Income 30,206 13,434 17,596 80% (5,792) (3,389) (985) 1,418 3,821 6,224 8,628 11,031

Non- op Income (expense) 1,298 8,622 9,283 85% (5,389) (2,836) (282) 2,271 4,824 7,378 9,931 12,485

Interest Exp 1,395 1,251 1,339 90% (4,987) (2,283) 421 3,124 5,828 8,531 11,235 13,939

Tax Exp 5,101 (1,334) 7,093 95% (4,584) (1,730) 1,123 3,977 6,831 9,685 12,539 15,393

Other (243) 189 189 100% (4,182) (1,178) 1,826 4,830 7,834 10,838 13,843 16,847

Net Income 22,656 5,084 54

EPS 4.32 0.99 0.01

Balance Sheet Major Shareholders: % Outstandin

Cash 3,538 5,818 5,278 Valepar* 53%

Debt 25,210 32,977 32,670 BDNESPAR (BNDES)** 6%

Net Debt 21,672 27,159 27,392 Total Gov't Ownership 59%

*an investment vehicle owned by BNDES, appoints 9/10 board members

Brazilian gov't owns 12 golden shares giving it veto power over all major decisions

2015 AFCF

Iron Ore Spot Price

%C

ap.

Utilization

Vale is a Brazilian multinational diversified metals and mining company and one of the largest companies in Brazil. Vale is the leading producer of iron ore fines and iron ore pellets, and the second largest producer of N

Vales business is highly concentrated in iron ore, which accounts for roughly 75% of total revenues. Although Vale has the best quality ore and is the lowest cost producer at mine level, Vales location in Brazil relativ

main end market in China increases shipping costs, resulting in comparable all in costs to the other big four producers who operate mainly in Australia. In order to combat this competitive disadvantage, Vale owns and

the largest ships at sea, which have a capacity two times that of traditional capesize vessels. The Brazilian government effectively owns and operates Vale with 60% equity share, 9/10 seats on the board, and ability t

appoint the CEO. Vale will increase production with the S11D project, the largest and most expensive iron ore project in the industry, which is expected to ramp up in 2H2016. Iron ore prices have fallen dramatically re

due to concerns about Chinas future growth in combination with all major producers bringing on more supply through projects that were started when prices were higher. The market will likely experience oversupply

some time, but mining majors will remain profitable through higher volumes and cost cutting.

1. Weak iron ore prices combined with flood of supply coming to market

3. Vale's location in Brazil relative to China results in shipping costs $10-15/ton more than Australian miners

1. Vale produces high quality ore at low costs (~$45/ton CFR)

3. Chinese domestic ore has steadily decreased in both market share and quality

5. Vale pays the largest dividend among its peers of $0.78/share, currently a 6% yield

6. New Valemax ships 400,000dmt capacity will continue to cut shipping costs

ProjectedHistorical

7. Electric conveyor belts will replace trucks, decreasing fuel consumption by 70% at future mines

Positives:


10/15

Vale S.A. (VALE) KF

7/29/14

10

Appendix:Company Vale S.A. Rio Tinto plc

BHP Billiton

Limited

Fortescue

Metals Group

Limited

Iron Ore Exposure 77% 51% 31% 97%

Price 14.43$ 56.91$ 36.16$ 4.33$52wk low 12.29$ 49.13$ 32.04$ 3.34$

52wk high 17.14$ 62.77$ 37.36$ 5.84$

Balance Sheet

Cash 7,201 10,216 10,947 2,924

Debt 33,226 28,474 38,035 11,553

Market Cap 70,061 105,263 192,488 13,478

EV 98,035 131,603 226,773 22,551

Income Statement

Revenue 45,491 51,171 67,835 10,669

COGS 24,313 36,104 47,425 5,737

SG&A 2,942 948 1,000 179

EBITDA 20,698 18,471 28,111 5,442

EBIT 16,556 12,962 20,448 4,720

Net Income (78) 3,665 14,897 2,982

EPS (0.02) 1.98 2.80 0.96

Cash Flows

CFO 14,811 15,078 24,840 6,171

CapEx 11,821 13,001 20,388 3,171

FCF 2,990 2,077 4,452 3,000

Leverage

Debt/Market Cap 47% 27% 20% 86%

CFO/Total Debt 45% 53% 65% 53%

FCF/Total Debt 0% 4% 0% 3%

Debt/EBITDA 1.6X 1.5X 1.4X 2.1X

Debt/EBITDA-CapEx 3.7X 5.2X 4.9X 5.1X

Valuation

EV 98,035 131,603 226,773 22,551P/S 1.4X 2.0X 2.7X 1.2X

2014 P/E 6.3X 11.3X 9.6X

EV/EBITDA 4.7X 7.1X 8.1X 4.1X

EV/2014 EBITDA 5.5X 6.5X 7.1X 4.1X

EV/EBIT 5.7X 9.4X 10.0X 4.6X

EV/EBITDA-CapEx 11.0X 24.1X 29.4X 9.9X

FCF/EV 0.2% 0.8% 0.0% 1.7%

FCF/P 0.2% 1.0% 0.0% 2.8%

Dividend Yield 6.4% 3.7% 3.4% 4.4%

Operating Stats

% gross 47% 29% 30% 46%

SG&A % Rev 6% 2% 0% 2%

% EBITDA 45% 36% 41% 51%FCF % Rev 0.3% 2.2% 0.0% 3.5%

CFO% Rev 33% 29% 37% 58%

Inventory Turnover 5 6 8 5

A/R Turnover 9 15 10 18

DIO 72 61 48 67

DSO 39 24 38 21

DPO 54 33 80 62

Cash Collection Cycle 164 118 165 149

ROA 8% 7% 9% 14%

ROIC 1% 9% 18% 18%

ROE -1% 2% 21% 55%


11/15

Vale S.A. (VALE) KF

7/29/14

11

2009 `10 `11 `12 `13 `14 `15 `16 `17 2018

Vale 238 307 323 320 310 321 348 376 411 453

Rio Tinto 172 185 192 199 209 208 295 320 340 370

BHP Bil l iton 114 125 134 159 170 217 210 230 250 280

Fortescue 27 40 41 58 81 135 155 160 165 170

Big Four Total 551 657 690 736 770 881 1008 1086 1166 1273

World 2000 2120 2240 2367 2501 2642 2792 2950 3117 3293

YoY % 6% 5% 5% 5% 5% 5% 5% 5% 5%

Iron Ore Production

Historical Projected

Owner Project Mtpa Completion

Vale Carahas +40 40 2013

Vale Serra Sul S11D 90 2018

Vale/BGSR Zogota 50 2015

BHP Billiton Inner Harbor 85 2013

BHP Billiton Outer Harbor 100 2017

Fortescue Chichester Hub exp 35 2012

Fortescue Solomon 60 2012

Rio Tinto Hope Downs 4 15 2013

Rio Tinto Pilbara 290 53 2013

Rio Tinto Pilbara 360 70 2015

Rio Tinto Simandou 90 2015

Rio Tinto IOC CEP 5 2013

Big 4 Projects


12/15

Vale S.A. (VALE) KF

7/29/14

12

VALE RIO BHP FMG Avg VALE RIO BHP FMG Avg

FY2007 15% 7% 22% -5% 10% FY2007 32% 28% 45% -52% 13%

FY2008 11% 4% 20% -25% 3% FY2008 21% 16% 39% 1222% 325%FY2009 6% 5% 7% 12% 8% FY2009 10% 11% 14% 60% 24%

FY2010 14% 13% 14% 11% 13% FY2010 26% 22% 26% 39% 28%

FY2011 16% 5% 23% 12% 14% FY2011 26% 10% 41% 42% 30%

FY2012 4% -3% 12% 10% 6% FY2012 6% -5% 23% 41% 16%

FY2013 0% 3% 8% 8% 5% FY2013 0% 7% 15% 33% 14%

VALE RIO BHP FMG Avg VALE RIO BHP FMG Avg

FY2007 26% 14% 39% -6% 18% FY2007 21% 8% 32% -1% 15%

FY2008 19% 11% 39% -31% 9% FY2008 12% 19% 33% 1% 16%

FY2009 11% 8% 19% 16% 14% FY2009 6% 7% 21% 10% 11%

FY2010 22% 21% 28% 14% 21% FY2010 17% 16% 20% 18% 18%

FY2011 23% 10% 41% 16% 23% FY2011 17% 19% 31% 25% 23%

FY2012 6% 0% 23% 15% 11% FY2012 9% 7% 19% 15% 12%

FY2013 1% 9% 17% 11% 9% FY2013 11% 11% 12% 11% 11%

VALE RIO BHP FMG Avg

FY2007 21% 11% 33% -6% 15%

FY2008 15% 7% 32% -31% 6%

FY2009 7% 7% 11% 16% 10%

FY2010 19% 18% 20% 14% 18%

FY2011 20% 7% 34% 15% 19%

FY2012 5% -4% 17% 13% 8%

FY2013 0% 5% 11% 10% 6%

Iron Ore Returns

NOPAT ROICReturn on Invested Capital

Return on Assets

Return on Capital

Return on Equity


13/15

Vale S.A. (VALE) KF

7/29/14

13

VALE RIO BHP FMG

FY2007 36,374 29,700 47,789 -

FY2008 30,465 54,264 59,801 139

FY2009 27,814 40,262 50,535 1,831

FY2010 50,123 55,171 52,810 3,220

FY2011 53,961 60,529 71,766 5,442FY2012 44,554 50,942 72,254 6,716

FY2013 42,971 51,171 65,953 8,120

1 Year CAGR -4% 0% -9% 21%

3 Year CAGR -5% -2% 8% 36%

6 Year CAGR 3% 9% 6% 97%

FY2007 54% 30% 71% 0%

FY2008 54% 31% 73% 35%

FY2009 43% 20% 72% 26%

FY2010 59% 36% 76% 34%

FY2011 59% 40% 80% 49%

FY2012 45% 26% 79% 40%

FY2013 48% 29% 28% 37%

FY2007 52% 35% 48% 0%

FY2008 46% 34% 46% 23%

FY2009 39% 26% 43% 30%

FY2010 56% 41% 46% 40%

FY2011 54% 44% 52% 52%

FY2012 40% 30% 45% 43%

FY2013 46% 36% 38% 40%

Revenue

%EBITDA

% Gross


14/15

Vale S.A. (VALE) KF

7/29/14

14

2010 2011 2012 2013 2014 2015 2016 2017

Sales 47343 61123 46905 47211 56065 58980 61990 65425

COGS 19202 25434 25610 24427 24291 25227 26192 27265

Accounts & Notes Receivable 8411 8527 6778 5655 8150 8574 9011 9511

% of Sales 18% 14% 14% 12% 15%

Inventories 4573 5277 5038 4090 5284 5559 5842 6166

% of Sales 10% 9% 11% 9% 9%

Other Current Assets 2640 4205 4841 9150 5909 6216 6534 6896

% of Sales 6% 7% 10% 19% 11%

Accounts Payable 3496 4750 4518 3740 4241 4405 4573 4760

% of COGS 18% 19% 18% 15% 17%

Short-Term Borrowings 3620 1528 3462 1760 2768 2875 2985 3107

% of COGS 19% 6% 14% 7% 11%

Other Short-Term Liabilities 11789 4824 4550 4031 6961 7229 7506 7813

% of COGS 61% 19% 18% 17% 29%

Net Working Capital -3282 6908 4127 9364 5372 5839 6323 6891

Change in Working Capital 10190 -2781 5238 -3992 467 483 568

Working Capital Projections

VALE RIO BHP FMG

FY2007 36,374 29,700 47,789 -

FY2008 30,465 54,264 59,801 139

FY2009 27,814 40,262 50,535 1,831

FY2010 50,123 55,171 52,810 3,220

FY2011 53,961 60,529 71,766 5,442

FY2012 44,554 50,942 72,254 6,716

FY2013 42,971 51,171 65,953 8,120

1 Year CAGR -4% 0% -9% 21%

3 Year CAGR -5% -2% 8% 36%

6 Year CAGR 3% 9% 6% 97%

FY2007 54% 30% 71% 0%

FY2008 54% 31% 73% 35%

FY2009 43% 20% 72% 26%

FY2010 59% 36% 76% 34%

FY2011 59% 40% 80% 49%

FY2012 45% 26% 79% 40%

FY2013 48% 29% 28% 37%

FY2007 52% 35% 48% 0%

FY2008 46% 34% 46% 23%

FY2009 39% 26% 43% 30%

FY2010 56% 41% 46% 40%

FY2011 54% 44% 52% 52%

FY2012 40% 30% 45% 43%

FY2013 46% 36% 38% 40%

Revenue

%EBITDA

% Gross


15/15

Vale S.A. (VALE) KF

7/29/14

15

vale final report

Documents

iron ore representsover

iron ore costcurve

iron ore outlooktoday

seaborne iron ore market

highiron ore prices

global iron ore giants

largest iron ore miner

rio fromrebounding ore