2011

Brazil: Economic Analysis & Mining Industry Analysis

Real GDP (In Billions) Billions $2,500 Brazil (PPP GDP Per Capita)
$12,000

$2,000

$10,000

$8,000

$1,500
$6,000

$1,000
$4,000

$500

$2,000

$-

$-

Nathan Schmidt Creighton University 11/9/2011

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Executive Summary
Brazil is currently the 5th largest country in terms of population and the 7th largest global economy in the world. It is expected that once official 2011 GDP statistics are released Brazil will become the 5th largest economy in the world as well.1 Brazil has served as a net lender to the world since 2008 and built up international reserves of around $348 billion, of which around $211 billion is in United States debt.2 Efficient economic development has traditionally relied upon proper allocation of scare resources and Brazil is lucky enough to be rich in a variety of natural resources including; bauxite, gold, iron ore, nickel, phosphate, platinum, tin, uranium, petroleum, and tin. Brazil has historically relied on the United States and China for a majority of its exports, which in turn caused Brazil to experience a recession, driven by weakened international demand, following the financial crisis in the United States that lead to the collapse of Lehman Brothers. Exports recovered in 2010 and Brazils economy began to exhibit growth again while still offering high interest rates, making the country potentially attractive to foreign investors. This created a small problem for the Brazilian government during 2010 as the large inflows of capital caused the Brazilian real (R$) to appreciate, making Brazils exports more expensive. Brazil is home to the 2nd largest mining operation in the world, Vale SA. Mining operations should continue to be profitable for Brazil since they control the largest iron ore reserves in the world and there is no close substitute for iron ore in the production of steel.

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Economic Analysis
To first assess the economic environment in Brazil it is important to look at global domestic product (GDP) in purchasing power parity (PPP) adjusted GDP and in comparison to other countries; including both emerging markets and larger economies as well. The PPP GDP for any country takes the total GDP in US $ and converts this
Geometric Growth Brazil United States China Japan India Russia Mexico
Table 1

Last 5 Years 6.30% 2.26% 12.74% 1.57% 10.27% 7.09% 3.55%

Last 10 Years 6.16% 4.01% 13.19% 2.97% 10.47% 11.28% 6.71%

number to a more realistic measurement of what the value of goods and services a country could theoretically consume within its own borders. Since the PPP GDP conversion is based on US $, the United States is the only country whose PPP GDP and real GDP in US $ is always identical.

The currently accepted economic growth model purposes that smaller growing economies tend to experience faster growth until reaching a mature stage where lower levels of growth are observed as an individual economy becomes larger. As seen in (Table 1) the United States and Japan have grown at a slower rate than developing economies such as India and China; notice Brazils economic growth lies somewhere between these two groups. Taking a closer look at the last 7 years Chinas growth has outpaced the rest of the world, substantially in some years, and Brazil has shown positive growth following the last U.S. recession; seen in (Graph 1) Brazils PPP GDP growth for the last year was 8.5%.

PPP GDP: Yearly Economic Growth

18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0%

Economic Growth

03-04 8.7% 6.5% 13.2% 5.7% 11.3% 7.2%

04-05 6.6% 6.5% 15.0% 4.4% 13.0% 9.2%

05-06 7.3% 6.0% 16.4% 5.1% 12.8% 10.7%

06-07 9.2% 4.9% 17.6% 5.4% 13.0% 7.5%

07-08 7.5% 2.2% 12.0% 0.6% 7.2% 5.7%

08-09 0.3% -1.8% 10.2% -5.4% 10.1% -5.0%

09-10 8.5% 3.8% 11.4% 6.1% 10.8% 6.5%

Brazil United States China Japan India Mexico

Graph 1

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No Longer Routine Comparisons?

The term BRICs was originally coined by Jim O'Neill of Goldman Sachs, and is used to classify the countries of Brazil, Russia, India, and China. These four countries ONeill characterized as being in similar stages of economic development in 2001. As seen in (Table 2) below the growth in India and China has outpaced Brazils economic growth. This categorization method may be losing relevance as China, India, and Brazil are likely in different stages of economic development now, taking into account the fact that each country has a unique plan in place that will attempt to create growth in their own individual economies going forward.
BRICs: PPP GDP (In Millions) 2006 2007 2008 2009 2010

Brazil Russian Federation India China

Table 2

$ 1,698,754 YoY Growth

2,138,597

$ 1,855,239 9.2%
2,387,519

$ 1,993,542 7.5%
2,878,201

$ 1,998,985 0.3%
2,677,803

$ 2,169,180 8.5%
2,812,383

YoY Growth
2,840,146

11.6%
3,210,694

20.6%
3,442,441

-7.0%
3,790,564

5.0%
4,198,609

YoY Growth
6,242,144

13.0%
7,338,183

7.2%
8,217,830

10.1%
9,056,716

10.8%
10,084,764

YoY Growth

17.6%

12.0%

10.2%

11.4%

These emerging economies have experienced expedited growth following the global financial crisis onset by the rapid decline in the United States housing market. Brazil is currently the 7th largest global economy (as measured by real GDP) and will likely overtake both France and the United Kingdom after this year, asserting Brazil as the 5th largest global economy. While the future may look bright for Brazils economy now, in the relative past things were much different when stable prices were non-existent and government was ineffective and corrupt.

Hyper-Inflation and the Brazilian real (R$)

Brazil experienced a unique monetary phenomenon prior to 1995 called hyper-inflation. This is the type of inflation consumers fear the most because at the basic retail level it forces stores to adjust prices to a new, higher cost every single day. A hyper-inflationary environment erodes consumer sentiment and ruins any chance for a stable currency in the short-term and likely damages belief that long-term inflation can be efficiently managed by officials. Beginning first in the 1950s when Brazil began increasing its money supply for the sole purpose of funding a new capital building, the stage had been set for the arrival of inflation.3 Then in 1964 the military overthrew then populist President Joao Goulart, and began instituting martial law, even acting to limit freedom of speech. The

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military held power in Brazil until 1985, but inertial inflation had already set in. Inertial inflation is simply the public perception of a persistent inflationary environment and their inability to perceive stable prices worsens the effect of hyper-inflation. As seen in (Table 3) the public had likely lost all trust in the Brazilian governments ability to avoid constant currency manipulation of one form or another.
Short Description of Brazils Currency Changes 1986 Changed the cruzeiro to the cruzado 1987 Adjusted the cruzado exchange rate 1988 - Replaced the cruzado with the cruzado novo (or New Cruzado) 1990 Changed the cruzado novo back to the cruzeiro 1992 Changed the cruzeiro to the cruzero 1994 Adopted the Real Plan with the new currency called the real
Table 3

The Plano Real relied on the idea that introducing a non-monetary currency called the Unidade Real de Valor (URV) and setting the value approximately equal to 1 US $ ($1) could help adjust consumers expectations of hyper-inflation to a more sustainable level. By displaying both URV and cruzero prices and

only adjusting cruzero prices each day with new inflation forecasts the stable URV slowly became a measure of value before being utilized as a real currency. The official new currency was only introduced after a series of contractionary fiscal and monetary policies were enacted along with rising real interest rates. These higher interest rates in turn attracted foreign investment, which aided in reducing the federal deficit as international reserves increased in Brazil. Brazils real (R$) operates as a free floating currency and the central bank manages the float of available local currency to the global currency market. While a currency appreciation is unlikely against the US $ in the immediate future, there does exist a possibility that the European debt crisis could cause an appreciation of the real (R$) to the Euro () if a solution that recapitalizes European banks is not met in the near term or once agreed upon, one that is believed to be unsustainable by market participants. This could pose a problem for Brazil because, while the US $ and the Euro () have historically been viewed as safer currencies, an appreciation of the real (R$) would make exported goods more expensive and likely drive down demand. An increase in exchange rate volatility could also negatively impact Brazils manufactured exports. As seen in (Graph 2) below the Brazilian real stayed relatively close to the initial 1:1 exchange rate with the US $ for a few years before depreciating quickly between 99-03.

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Exchange Rate for Brazilian real (R$)

$4.00 $3.50 (R$)/USD Rate $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00

BRZ/USD Rate

Graph 2

Since then, the real has slowly seen an appreciation against the US $ and other world currencies. There are a few justifiable reasons for this; Brazil is free to control its currency unlike countries within the European Union, the Central Bank is beginning to prove the observed inflation rates are in line with their set target inflation rates, and the increasing retail sales are evidence that ill effects from the most recent financial crisis have likely not affected domestic demand in Brazil. One reason the exchange rate experienced increased volatility from 02-05 was due to Brazils central government acting to set inflation targets. These new target inflation rates combined with Brazils history of problematic inflation likely caused market participants to doubt the Brazilian Central Banks ability to adhere to targeted rates and avoid potential hyper-inflation.

Targeting Inflation
After defeating hyper-inflation for the 2nd time in Brazils history the devaluation of the real (R$) started during early 1999. Political and economic uncertainly lingered in 1999 while the new President failed to find support for bills enacting budget cuts and increased austerity. Eventually many wealthy individuals began to move their assets to what they believed would be a more stable currency, during this time period domestic savings were leaving Brazil further exacerbating the problem. This political uncertainty caused Brazil to adopt a targeted inflation rate going forward. Examining the consumer price index (CPI) back to the 1985 makes it impossible to miss the hyperinflation that became the norm, keep in mind during 93-94 the currency effectively had a reset button pushed.

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The ndice Nacional de Preos ao Consumidor Amplo (IPCA) is responsible for constructing Brazils national consumer price index (NCPI).4 See (Table 4) below for the weighting of goods within this basket and notice the large percent attributable to food. Given the recent run up in commodity prices, specifically food related, it is easy to understand that Brazils expected inflation rate for 2012 might fall slightly above the targeted inflation rate, given the large weighting of food within this index. Brazils hyper-inflation is unmistakable and seen in (Graph 3) prior to 1994.
IPCA CPI Weights Food Housing Household Items Clothing Transportation Healthcare Personal Items Education Communication
Table 4 Graph 3

2500% 2000% 1500% 1000% 500% 0% % Change in CPI

23% 13% 4% 7% 19% 11% 10% 7% 6%

In order to obtain any real information of value from the inflation rate in Brazil a much shorter time frame needs to be analyzed. Starting in 2001 a long-term inflation target of 3.5%, each year, was established as the goal, but by 2003 the Central Bank of Brazil had revised the targeted rate, both short-term and long-term prospective rates, to a 4.5% target. As seen in (Graph 4) below, with only data from the most recent decade, Brazil has been able to manage inflation and fall within a reasonable distance above or below the targeted level of inflation (note: the added trend lines establish a 2% window).

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16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Dec-01
Graph 4

Targeted Inflation Rate Expected Inflation Rate % Change in CPI Upper Band Lower Band

Oct-02 Aug-03 Jun-04

Apr-05

Feb-06 Dec-06

Oct-07 Aug-08 Jun-09

Apr-10

Feb-11

Whats Attributable to Brazils Economic Growth?

The easiest way to assess where growth is coming from within a complex economy is by looking at retail sales figures. Brazil experienced a 10% increase in retail sales from 09-10 and a 9% increase from 08-09, but currently through August of this year only a 4% increase in retail sales. Keeping in mind the holiday shopping season will likely boost this figure, its unlikely to be enough to exceed last years growth. Although its a positive sign that the retail sales figures are trending upwards as seen (Graph 5) below.

Percentage Change in Retail Sales YoY

12% 10% 8% 6% 4% 2% 0% -2% -4% -6% % Change in Retail Sales
Graph 5

An obvious reason retail sales have picked up in recent years might coincide with the decrease seen in unemployment figures during the last decade. From the beginning of 2010 until midway through 2011 unemployment in Brazil improved, decreasing by nearly 1%. As seen in (Graph 6) below, Brazil has seen a substantial improvement in the unemployment rate during the last 8 years.

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Unemployment Rate 14 13 12 11 10 9 8 7 6 5 4

Graph 6

As Brazil approaches lower levels of unemployment there will become a point where the natural rate of unemployment prohibits the unemployment rate from continuing to decrease. They may be near this rate already and going forward its unlikely the unemployment rate will continue to fall.

% of Workers Unemployed

125 120 115 110 105 100 95 90 85 80

Brazil Consumer Confidence Index

During this same time period the consumer confidence index (CCI) in Brazil improved, seen in (Graph 7). Although the last year has seen a decline in the CCI from near 120 down to 112.

Graph 7

Another reason that Brazils economy has improved in recent years is due to their ability to expand industrial production and improve capacity utilization efficiently.

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Industrial Production (Base = 100)

135 125 115 105 95 85 75 65 55
U.S. IP (Base Year 2002) Brazil IP (Base Year 2002)

Graph 8

Industrial production is a significant measurement that can be used to compare an emerging markets exposure to global economic trends. As seen in (Graph 8) both the United States and Brazil experienced a significant production shock in the midst of the financial crisis that caused industrial production to plummet in 2008. Brazils industrial production recovered in a very short time frame, climbing back to levels of production observed before the financial crisis by edging above the 125 market in January 2010. The U.S. is still waiting on industrial production to pick up and exceed the levels observed before the financial crisis. The bullwhip effect, based on integrated, optimized supply chain management systems, attributed to both countries observing such a rapid decrease in industrial production. Simultaneously observing both industrial production and capacity utilization figures provides a better understanding of how the sudden decrease in demand impacted both industrial production and utilization. Brazil and the United States capacity utilization is measured as a percentage and depicted in (Graph 9) below.

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Industrial Production Capacity Utilization

85% 80% 75% 70% 65% 1/1/2003

1/1/2004

1/1/2005

1/1/2006

1/1/2007

1/1/2008

1/1/2009

1/1/2010

1/1/2011

Brazil Capacity Utilization

Graph 9

U.S. Capacity Utilization

From midway through 2008 to the middle of 2009 the U.S. observed over a 10% decrease in capacity utilization as the credit bubble had likely been inflating demand across a vast range of economic variables prior to 2008. On the other hand, Brazil had been operating at a level of higher capacity utilization since 2006 and experienced less than a 6% decrease in capacity utilization before increasing production in late 2009. Brazil has long been an emerging market investors have paid close attention to, but as Brazil continues to grow and assert itself as one of the top five economies, as measured by GDP, the major stock exchange in Sao Paolo will likely gain notoriety and attract new foreign direct investment.

Global Investor Response to Brazils Prosperity

Investors, as a whole, might be classified as smart, savvy, or informed, but often wrongly classified as efficient. With that said, evaluating a countrys historic levels of foreign direct investment (FDI) in relation to the current trend may help provide subtle hints to an astute investor as to whether new money is flowing into or out of a specific country. In January 2011, only $206 million (US $) entered Brazil, whereas a whole $16.3 billion entered Brazil in October 2010. This may be due to a recent change in the taxes levied on foreign investment income from within Brazil. In October 2010, Brazilian authorities raised the IOF tax on foreign investments in Brazilian shares and bonds to 6%. This tax increase has reduced the inflow of foreign investment in Brazilian stocks and fixed income securities. Brazils stock exchange, the Bovespa Index, has not performed well during 2011, but as the

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market price-to-earnings ratio (P/E ratio) shows in (Graph 10) Brazils earnings multiple has been steadily decreasing over the last 18 months. During the first 9 months of 2011 the P/E ratio of Brazils equity index continued to fall and the exchange currently trades at around 8.3x earnings (compared to the S&P 500 trading at 20x earnings). This is something value investors pay close attention to while trying to find investment opportunities with an adequate margin of safety.

75000
IBOVESPA Index P/E Ratio

30 25

65000

Bovespa Index & P/E Ratio

55000 45000 35000 25000 15000 20 15 10 5 0

Graph 10

Interest Rate Environment

With a target inflation rate of 4.5% the Brazilian government has been vigilant in avoiding hyper-inflation or higher than expected levels of inflation in recent years. Part of the way they have accomplished this is by keeping interest rates unusually high. As seen in (Graph 11) below, the benchmark interest rate has been trending downward during the last 10 years, but is still higher than most other developed world economies.5 It should also be clarified that Brazil has raised the benchmark rate 5 times during 2011, in an attempt to curb inflation, and has begun lowering rates in the 3rd quarter of this year. Brazil also currently offers the worlds highest real interest rate.6

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50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Brazil Benchmark Interest Rate

14% 13% 12% 11% 10% 9% 8%

Brazil Benchmark Interest Rate

Graph 11

Graph 12

(Graph 12) provides a shorter time period to observe changes in interest rates. Recent interest rate cuts, during the 1st week of November, by the European Central Bank may lead to further potential interest rate cuts in Brazil this year; although Brazilian policy makers believe inflation has peaked for the current year. Brazils central bank has lowered the (Selic) interest rate twice since August, bringing it down 100 basis points to 11.5% in an effort to protect Brazil from the global slowdown without stoking inflation. 7 In order to understand the changes in interest rates during the last 4 years examining the yield curve, as seen in (Graph 13), can be beneficial.

14% 13% 12% 11% 10% 9% 8% 0 1 2 3 9/30/2011

Yield Curve Analysis

4 5 9/30/2010

6 7 9/30/2009

8 9 12/31/2010

10

11

Graph 13

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As of the end of September, Brazil finds itself in an environment with an inverted yield curve. This simply means that interest bearing debt due within 1 year has a better return to investors that interest bearing debt due within the 1-2 year time horizon only, in this instance (the interest bearing debt that matures over two years from now is exhibiting a very flat yield seen in the graph above). Looking specifically at the light blue line (12/31/2010) it is evident that between 9/2010 and 12/2010 the yield curve began to invert. According to Richard Bernstein, emerging markets in general are facing monstrous risks going forward and he pointed out that inverted yield curves have historically been a very accurate predictor of recessions or sharp slowdowns in economic growth. Bernstein highlighted the currently inverted yield curves in order of severity as; Greece, Ireland, Portugal, Brazil, and India, and expects these countries to have an ongoing battle with inflation and economic growth going forward.8

Brazils Economy Going Forward

In the coming years Brazil will face some of the same historic problems that have plagued the country for decades (higher than expected inflation, high real interest rates, political uncertainty), but there are positives signs as well; growing domestic demand and an improving unemployment rate. The general consensus among economists and the International Monetary Fund (IMF) is that Brazils GDP growth will begin to slow this year and continue to slow in 2012 as well.9 Below in (Table 4) are recent figures as well as forecasted real GDP growth, unemployment rates, forecasted inflation rates, forecasted interest rates, forecasted exchange rates, and lastly, forecasted returns for the Bovespa Index.
Facts and Expectations Real GDP Growth Unemployment Rate Inflation Rate Interest (SELIC) Exchange Rate (US $) Exchange Rate (Euro ) Bovespa Index Return
Table 4

2009 0.27% 8.08% 4.31% 10.14% $ 1.9932 2.7731 77%

2010 8.5% 6.7% 5.91% 9.91% $ 1.7601 2.3354 1.0%

2011E 4.0% 6.3% 5.5% 11.0% $ 1.65 2.30 -23%

Q1 2012E 1.8%

10.5%

2.5%

2012E 3.5% 6.5% 6.0% 10.0% $ 1.70 2.20 7%

2013E 4.0% 5.5% 5.5% 9.0% $ 1.65 2.00 11%

Given the analysis and information presented, I believe that Brazils mining industry is well positioned in the global economy and should experience continued growth that outpaces that of the market.

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Industry Analysis
Brazil is home to the 2nd largest mining operation in the world, Vale SA. Headquartered in Rio de Janiero, Brazil Vale SA is the worlds largest producer of iron ore, iron ore pellets, and the 2nd largest producer of nickel. Brazils rich plethora of domestic natural resources provides a competitive advantage in the mining industry. Since 1974 Vale SA has been the largest exporter of iron ore and continues to control much of the available resources for iron ore production as seen in (Table 5).
Iron Ore Reserves (Millions of Metric Tons) Anglo American PLC Assore Ltd BHP Billiton ltd Cliff Natural Resources Ferrexpo PLC Rio Tino PLC 2010 514 600 4044 914 1502 2595 Market Share 2% 2% 15% 3% 6% 10%

Vale
Vedanta Resources PLC
Table 5

16130
90

61%
0%

Vale SA holds a dominant position controlling ~61% of iron ore reserves estimated in the world. Going forward the efficient management and timely depletion of these reserves will be a critical factor for Vale SAs success if they hope to persist as the leading iron ore producer in the world. Firms generating a majority of earnings from their mining operations compete in an industry that has trademark characteristics of both an oligopoly and monopolistic competition. There is very little pricing power in the mining industry, little product differentiation, but very high barriers to entry exist, only a handful of firms are engaged in mining worldwide, and there exists imperfect information. This information gap makes it difficult for new firms to enter the market because mining operations, similar to Vale SA, are reluctant to share trade secrets about the production process of iron ore, how their geologists determine the supply of iron ore, how they determine the supply that can be unearthed within a given time period, or where else around the globe a certain natural resource may be plentiful. (Table 6) displays the HerfindahlHirschman Index (HHI) for the mining industry based upon iron ore shipment from 2010.10

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Top Iron Ore Producers Vale Rio Tinto Ltd BHP Billiton Ltd Fortescue Metals Group Ltd Anglo American PLC Mitsui Kumba Iron Ore Cliff Natural Resources Total Shipments
Table 6

2010 Shipments 294,414 184,629 128,542 41,694 49,895 43,700 43,109 35,492 821,475

Market Share 36% 22% 16% 5% 6% 5% 5% 4%

1,284 505 245 26 37 28 28 19

HHI

2,172

A HHI of 2,172 indicates a concentrated industry and further consolidation could potentially lead to anti-trust concerns, in the United States, if the firm was able to utilize monopoly pricing power. Mining operations are not cyclical in natural and exhibit one consistent trend over time, exposure to the market as a whole. Since mining operations sell at the spot price and demand is heavily influenced by various levels of economic activity its understandable that a firm like Vale SA produces and ships more iron ore in periods of strong growth and less in periods where both growth and demand are contracting. As the mining industry generally follows the market as a whole the most logical buying opportunity for investors is in time periods just after demand has experienced a rapid decrease, or alternatively when a specific firms supply on hand is relatively large there may exist an opportunity to profit from the liquidation of inventory if demand is picking up. Porters five forces are detailed in (Table 7). Michael Porters 5 Competitive Forces: Iron Ore Mining Industry Analysis
Bargaining Power of Buyers Very High Even though there exists a high concentration in the iron ore mining industry firms are exposed to the markets changes in demand for steel based products and only act as price takers, selling iron ore at the spot price. Although potential fixed price contracts could aid in securing profits a specific price level. The mining industry relies on heavy, specialized excavation and logistical transportation machinery, but needs so substantial inputs for their process of turning mined iron ore into an input available for sale. Iron ore procurement and production is a very integrated process requiring high levels of capital expenditure in order to compete globally. There also exists a finite supply of iron ore reserves in the world and if any land exists available for purchase, for the purpose of mining, it would be very costly. Competitors in the mining industry are always looking for ways to improve efficiency, lower costs, and eliminate potential opportunities for competitors. Although, since they are all price takers and dependent upon demand for metal products each firm has no incentive or ability to fix prices of mined materials; such as iron ore. There are currently very few alternatives to iron ore when looking at the steel production industry. Currently about 98% of iron ore is used to produce steel and iron ore may be the 2nd most valuable resource after oil. Technological advances could change this in the future, but certainly not the near future.

Bargaining Power of Suppliers Barriers to Entry

Low

Very High

Degree of Rivalry

Low

Threat of Substitution

Low

Table 7

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Vale SA is currently an attractive investment in the mining industry given their strong profitability and return on equity (ROE) in recent years; (Graph 14) displays an industry comparison over the last five years and (Table 8) displays Vale SAs individual performance during the last five years.

5 Year Average ROE, ROA, & Profit Margins

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% ROE
Graph 14

Vale SA BHP Billiton PLC Rio Tinto PLC Anglo American PLC Xstrata PLC Freeport-McMoRan Copper & Gold Inc.

ROA

Profit Margin

Vale SA ROE ROA Profit Margin

Table 8

2006 52.7% 15.6% 33.2%

2007 54.4% 17.2% 36.7%

2008 43.2% 16.9% 35.3%

2009 11.9% 5.7% 21.1%

2010 32.0% 15.4% 36.1%

Averages 38.8% 14.2% 32.5%

During 2011 Vale has decreased the financial leverage below 2, in line with most competitors in the mining industry, as seen in (Graph 15). This decrease improved Vale SAs interest coverage ratio as seen in (Graph 16).

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Interest Coverage Ratio

35 30 25 20 15 10 5 0
Interest Coverage (Latest Quarter)
Graph 16

Total Assets/Total Equity

3.5 3.0

Vale SA BHP Billiton PLC Rio Tinto PLC Anglo American PLC Xstrata PLC

2.5 2.0 1.5 1.0 0.5 0.0

Financial Leverage (Latest Quarter)
Graph 15

Interest Coverage (Latest Year)

Financial Leverage (Latest Year)

Both (Table 9) and (Table 10) provide comparisons between Vale SA and other large mining operations.
Industry Comparison Vale SA BHP Billiton PLC Rio Tinto PLC Anglo American PLC Xstrata PLC Freeport-McMoRan Copper & Gold Inc. GMK Norilsk Nickel Southern Copper Corporation Grupo Mexico SAB de CV Kumba Iron Ore Limited
Table 9

Return YTD -19% -20% -21% -28% -32% -30% -14% -32% -22% 31%

Revenue Growth 72% 36% 35% 34% 34% 26% 50% 38% 57% 65%

EPS Growth 194% 88% 144% 169% 544% 53% 110% 68% 77% 104%

Dividend Yield 0.87% 3.52% 2.32% 0.79% 2.04% 2.44% 3.01% 8.87% 4.16% 8.46%

P/E 6.1 7.4 6.7 5.4 8.8 6.9 6.6 11.6 10.6 6.9

P/B 1.67 2.96 1.72 1.35 1.09 2.50 2.15 6.42 2.65 9.81

P/S 2.36 2.44 1.79 1.50 1.39 1.71 2.60 4.00 2.36 3.61

P/CF 14.52 9.86 8.78 17.09 37.54 5.84 9.07 16.08 8.27 9.19

Competitive Positioning

Market Cap (Billions)

Quick Ratio

Financial Leverage

Interest Coverage Ratio

Debt/Equity

Vale SA BHP Billiton PLC Rio Tinto PLC Anglo American PLC Xstrata PLC Freeport-McMoRan Copper & Gold Inc. GMK Norilsk Nickel Southern Copper Corporation Grupo Mexico SAB de CV
Industry Averages
Table 10

$136,859 $193,035 $112,335 $50,336 $47,735 $38,864 $37,394 $26,673 $22,254

$73,943

1.331 0.832 1.136 1.549 0.648 1.970 2.373 3.249 2.858

1.772

1.699 1.783 1.937 1.905 1.708 2.086 1.469 1.947 1.959

1.832

24.28 8.68 3.16 10.05 15.55 79.63 8.91 20.68 15.67

20.734

31.5 27.5 26.2 32.6 21.5 19.6 15.8 66.6 39.2

31.168

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Vale SA is in line with most industry ratios and has an attractive P/E ratio of 6.1. Given the large share of the iron ore reserves, consistent industry leading profit margins, and long-term expected increases in the demand for steel I believe Vale SA should provide investors with a strong mining operation investment.

Works Cited & Endnotes 2005 Bloomberg L.P. Used with permission by Bloomberg L.P.
Note: All financial information, economic data, and ratios were obtained using Bloomberg L.P.

1 CIA Factbook. https://www.cia.gov/library/publications/the-world-factbook/geos/br.html 2 International Reserves. http://en.mercopress.com/2011/08/08/brazil-world-s-fifth-largest-economy-is-ready-to-face-the-crisis-says-rousseff 3 NPR Segment. http://www.npr.org/blogs/money/2010/10/04/130329523/how-fake-money-saved-brazil
4

CIA Factbook. https://www.cia.gov/library/publications/the-world-factbook/geos/br.html

5 Global Rates. http://www.global-rates.com/interest-rates/central-banks/central-bank-brazil/bacen-interest-rate.aspx 6 FT Wary Investors Spy Trouble. http://www.ft.com/intl/cms/s/0/04511554-96a0-11e0-baca-00144feab49a.html#axzz1d34HbvXp 7 Bloomberg. http://www.bloomberg.com/news/2011-11-04/brazil-futures-yields-fall-as-lower-growth-boosts-rate-cut-bets.html 8 Monstrous risks in Emerging Markets. http://uk.reuters.com/article/2011/06/08/us-investment-summit-bernstein-emergingmidUKTRE7576LW20110608 9 IMF Forecast Change. http://www.bloomberg.com/news/2011-06-17/imf-cuts-brazil-gdp-forecast-to-4-1-in-2011-3-6-for-2012.html
10

The Herfindahl-Hirschman Index. http://www.justice.gov/atr/public/testimony/hhi.htm