Schroptschop/E+ via Getty Images

Schroptschop/E+ via Getty Images

Last year's default of the Chinese real estate developer Evergrande has caused a collapse in the iron ore prices over fears of future lack of demand. Widespread fears about the entire Chinese construction industry have followed. All of that resulted in falling iron ore prices. Iron ore, which had been selling for almost $220/t in July of 2021, is currently selling for less than $100/t.

The Brazilian mining giant Vale S.A. (NYSE:VALE ) has had a tough year behind it, with its share price plunging almost 52% from July of 2021. Since then the stock went through a small recovery and is currently selling at $13.61 at "only" 41% down since the July highs.

In strictly fundamental terms, nothing has really changed in regards to the business. Commodity prices rise and fall over time and the company is in a good position with a strong balance sheet to weather the storm. For long-term focused dividend investors, this might present a great buying opportunity.

Vale is a Brazilian mining giant which is in the business of producing iron ore, copper, nickel, coal, gold and cobalt, and pellets. As per last year, the company is the world leader in iron-ore and nickel production, with almost 300mt and almost 208mt produced respectively. Furthermore, the company remains the largest producer of pallets as well.

The Brazilian-based mining powerhouse is the fourth-largest mining company in the world by revenue. It was founded back in 1942 in Rio de Janeiro as a Brazilian state-owned company. Then it was called then "Companhia Vale do Rio Doce" or the "Sweet River Valley Company".

Besides mining, the company is heavily involved in energy production and logistics. To serve its mining operations, Vale has around 2,324 MW generation capacity installed, of which 1,750 MW in Brazil, 72 MW in Canada, and 502 MW in Indonesia. Effectively 54% of the energy consumed by the company is self-generated, mainly from hydroelectric and wind sources.

Vale also owns and operates a logistical network that integrates mines, railroads, ships, and ports for the fast and cost-efficient transportation of its mined minerals. This remains to be a great competitive advantage for Vale but has also proven to be a double-edged sword from time to time, as it was seen from the two huge dam disasters.

The year 2021 is one of the best business years in Vale's long history. Analysts estimate that for the full year, the company is going to generate almost $53 billion in revenues and close to $17 billion in free cash flow. This is largely thanks to surging iron ore prices earlier in the year, with them trading at almost double the last five-year average, but also due to the increased demand for nickel.

We can see that the share price of the company has been following the iron ore prices almost by step, with more or less the same trends present in a 10-year chart as well. The recent collapse of the iron ore prices from the top has caused the share price of the company to follow. It has lost almost 40% of its stock value since July, presenting an excellent buying opportunity if one believes this will blow over.

The prices of other commodities that the company does business with such as nickel, coal or copper have largely been stable. Still, it is worth noting that as per their latest quarterly report, Iron Ore accounted for almost 75% of the company's EBITDA, so we have to understand that Vale is first and foremost an iron ore company. With the adjusted commodity prices, almost a 24% decrease in revenues is expected for 2022, followed by a 32% decline in EBITDA decline. Analysts place next year's revenues at around $43 billion, while EBITDA is expected to be $20 billion. The company is not going to be able to generate the same sort of results from last year, but there remains the question, was this large of a sell-off warranted?

As per the latest quarterly report, the company is carrying $18.58 billion in total debt, accompanied by around $5.9 billion of net debt. This is largely due to a $12.64 billion in cash the company managed to build up throughout the years, indicating a very good financial position.

Considering we are dealing with a slow-growing mining giant, most shareholders are not counting on price appreciation as a way to achieve returns on investments. Management is usually committed to creating shareholder value through either paying out dividends or through the share buyback programs it initiated lately.

As we can see in the chart, the company preferred dividends as a method of creating shareholder value for a long time. However, over the past two years, it initiated some generous buyback programs. The company had 5.13 billion shares outstanding back at the end of 2020.

Currently, it has little more than 4.89 shares outstanding. Meaning that over the last two years, management has bought back almost 240 million shares or close to 5% of the shares outstanding of the company.

We can see that management wasn't quite focused on share buybacks throughout the years, even with the relatively strong financial position. However, in their latest earnings call they have confirmed the initiation of another buyback program that is supposed to buy back another 200 million shares.

With consistency in dividend payout and with our buyback program almost a 100% complete, our Board of Directors has just approved a new buyback program. This time for up to 200 million shares, equivalent to 4.1% of outstanding shares. Our buyback program shows our confidence in Vale's potential to create value.

Eduardo De Salles Bartolomeo, CEO - Q3 Earnings Call

That the financial situation of the company is largely in order can be seen by its credit ratings as well. Rio Tinto Group is currently assigned lower medium investment-grade ratings by both Moody's, Fitch, and S&P, being rated "Baa3", "BBB" and "BBB-" respectively.

Source: Investor Relations - Debt

The Brazilian mining giant has created significant shareholder value through its dividend program. The company is currently trading at $14.04 per share, which is resulting in a very attractive difficult-to-say no to TTM 16.58% dividend yield.

In the last year alone, the company paid out $13.44 billion in dividends, amounting to $2.70 dividends per share. Vale distributed almost 90% of its 2021 free cash to its shareholders. However, this dividend yield and such dividends commitments might be somewhat misleading moving forward.

With Vale being in the commodity business with prices changing year to year so do the dividends. The company doesn't have defined regular dividends, it mostly follows commodity prices and the market situation. The last two years were brilliant for Vale and it is going to be difficult to repeat the same results. In fact, the upcoming dividend payments are most likely going to be significantly lower.

Last year, we've returned 90% of our free cash to shareholders, right? So we appreciate and I fully recognize there is no better investment, so they didn't buy back my shares, right? So we have that very clearly. And we'll make sure that we will continue to be extremely disciplined on how we allocate every dollar out of this company, right? So this has been the case. I think we have a very attractive dividend policy, right, 30% of EBITDA means sustaining.

Gustavo Duarte Pimenta, VP of Finance and Investor Relations

The management set out a goal of paying out 30% of EBITDA in dividends, a goal they describe as long-term sustainable. If we go back to the EBITDA estimates for the 2022-2024 range, we can see that the company is supposed to be generating roughly $20 billion in EBITDA for the next three years. If the two estimates hold true, investors can expect roughly $6 billion in dividends per year to be paid out. That is around $1.27 per share in dividends if management comes through with the buyback plan. All of this means that the current dividend yield is closer to 9.14%, which is still immensely attractive.

As mentioned before, Vale has been hit hard with controversy after two catastrophic dam collapses that occurred back in 2016 and 2019. The two collapses are known as the Mariana and Brumadinho dam disasters. In the two disasters combined, more than 300 people lost their lives and immeasurable environmental damage has taken place.

The company has been hit hard in both cases, both when taking a look at the stock prices which saw a 25% decline, as well as the following fines and reparations it had to pay. The two disasters cost Vale more than $10 billion and the financial and social governance effects are felt to this day. The company took a noticeably more progressive and regulator-friendly approach with capital management since the disasters have taken place.

The even worse thing is that the catastrophe could easily happen again. The dams were built with similar technology and safety in mind, so the flaws that were affecting the two are affecting the rest as well. If we take a look at the current dam safety analysis, we can see that as of today, three more dams are considered L3(high risk) emergency level dams. We still have years ahead before we can put this danger out of the way. It is estimated currently that by 2025 all of the dam critical flaws will be attended to. Unfortunately, anything can happen up until that point. This comes as one of the major risks being associated with Vale.

Taking a look from a strictly financial sense, if everything goes as planned, Vale has some $2.4 billion in further commitments for all of the projects associated with the dam disasters. In the next year alone, $500 million will be diverted to various disaster-related projects.

One of the most interesting things about Vale is its increasingly attractive valuation. Let us take a look at some of the similar mining stocks and how well do they compare to our company.

Rio Tinto Group (RIO) on the other hand is probably the best comparable with Vale. Currently, it is being valued at $112.11 billion and is assigned a $113.83 billion total enterprise value. Another situation where we have a strong cash position. However, it does seem to have a slight premium trading at 6.20 NTM P/E. Doing a similar calculation, we can expect the company to produce a 6-8% dividend yield for the next couple of years, slightly less than Vale. However, we might also point out that the company has a better revenue source diversification when compared to Vale, possibly warranting the slight premium.

BHP Group (BHP) is the largest of the three currently valued at a $155.39 billion market cap. The TEV for BHP is set at $165.64 billion, which suggests a far worst debt situation when compared to the other two companies. Furthermore, it also sells at a premium to both Vale and RIO. It sells for an NTM P/E of x8.21 as well as an NTM TEV/EBITDA of x4.39. The company is offering a TTM dividend yield of 10.78%, which is probably going to largely hold considering the mining giant's exposure to iron-ore is far less when compared to the other two.

We can see that Vale is trading at very attractive valuations at NTM P/E of x4.78 and NTM MC/FCF of x6.57. Its current market cap of just $66.59 billion, combined with the TEV of 72.98B, once again points to the strong cash positions and good financial situation in which the company finds itself. The company offers a huge 16.58 TTM dividend yield, but as we have roughly estimated, "only" a 9.14% forward dividend yield. When compared directly, the company does seem to be the best value on paper, but we again need to point out the better diversification and less iron-ore exposure of the other companies. Furthermore, a slight "Brazilian" discount is generally applied to Brazilian-based companies.

If you plan to invest in the company, there are several things that you should keep in mind:

With an impressive dividend policy and a newly formed strong share buyback program, Vale seems to be on a path of generating a lot of shareholder value over the course of the next couple of years. It would not be reasonable to expect the same sort of results that were produced over the last two years, but Vale remains to be an attractive investment.

The recent selloff the company has gone through has only made an arguably already attractively priced company even more attractive in terms of valuations. Even when we price in the expected decline in the top and bottom lines, Vale still seems to have much to offer to potential investors. For dividend-seeking investors who are in it for the long term, Vale could easily be one of the better investment opportunities of the year.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.