Vale as a Mining Company - Essay Example

Table of Contents: Introduction……………………………………3 Analysis………………………………………..4 Conclusion……………………………………..8 Bibliography…………………………………….9 Appendixes……………………………………….11 Introduction: Vale SA is a multinational company from Brazil, and it is considered as the second biggest mining company in the world. This company is the largest logistic operator in the Brazilian market, and it is also considered as the largest company responsible for the production of iron ore pellets. The logistics segment of the company consists of a transportation system that includes ports, ships, and railroads that carter for third party cargos (Vale. 2014). Furthermore, this segment consists of 10,179 km of the infrastructure that forms the railroad, 8 terminals for the seaport, 5 terminals for cargo ports, as well as an iron ore export terminal. Vale SA is also considered as the largest producer of nickel metal. Vale is a company that also produces copper, ferroalloys, manganese, kaolin, bauxite, potash, aluminum, as well as alumina. Under the electronic energy sector, Vale SA participates in a consortium that currently operates approximately 9 hydroelectric power projects (Anac and Gozen, 2003). Currently, the shares of the company are trading in the stock markets of New York, Paris, Sao Paulo, Madrid, as well as Hong Kong. The ownership of this company is found in the form 20-A US SEC. A smaller portion of this company is under the ownership of the Brazilian government. Another significant portion of the company’s shares is held by the Brazilian national pension fund. Agtmael (2007) explains that the foreign activities of Vale SA are always based on the Cayman Islands. This is because the Island is a tax haven for multinational companies operating in it. This paper analyzes the financial position of Vale SA in the eyes of an investor who is out to acquire the company. In analyzing the financial position of this company, the researcher will use the tools of financial analysis, and this includes the use of financial ratios. In interpreting the financial performance of this company, the researcher will also analyze the micro-economic performance of the company, as well as its global performance. This paper uses the financial statement of Vale Mining Company, for the year 2013. Analysis: Vale SA was an organization that was owned by the Brazilian government, until 1997 when the company was privatized. In 2001, the company developed a plan of diversifying its operations that made it to transform into a big mining company. However, Agtmael (2007) denotes that the company has not managed to diversify its activities beyond the production of iron ore, and other related metals. Sagebien (2011) goes on to denote that Vale SA is the largest producer of iron ore, and this is depicted in 2009 when the company managed to dig 230m tones of iron ore. Ross and Westerfield (2013) goes on to assert that iron ore consists of 65% of the entire revenue that Vale gets from its business operations. Arnold (2013) explains that other mining companies always spread their risks across a variety of commodities, as well as hazardous countries. However, Vale SA acquires majority of its minerals in Brazil. Iron ore is mostly a logistic business, and it is easy to extract this ore in bulk, and at a cheaper cost. As of the year 2013, Vale mining company was able to make a gross profit of 6 billion US Dollars. This is a massive profit, and this is an indication that the business under consideration is a good venture to invest in. This is because, shareholders will be guaranteed of getting dividends. Furthermore, the company was able to achieve profits during the last three years of trading. For instance, in the year 2012, the company managed to make a profit of approximately 7 billion US dollars. On this basis, it is important to denote that the 2013 profits of the company was a decline when it is compared to the 2012 profits of the company. Despite this decline, the company has the capability of making higher profits in the coming years. This is due to its expansionist and growth strategies. A financial ratio that better explains the profitability of Vale mining is the total asset turnover ratio. For instance, the asset turnover ratio for the year 2013 was 0.06. This was an indication that for every 0.06 dollars that the company invested in its various assets, then the company was able to generate 0.06 dollars in return. The reason as to why the company has a very low asset turnover ratio is because Vale Mining Company is a capital intensive company. All capital intensive companies normally have a low asset turnover ratio. Bull (2008) explains that Vale SA has a very high debt/equity ratio. For example, as of the year 2013, the debt/equity ratio of the company stood at 0.967. Hast (2007) denotes that a debt/equity ratio that is very high is an indication that the company under consideration has been aggressive in financing its various growth activities using debts. It is important to explain that this is a very volatile situation, and this is because a volatile earning can result into an additional expenses emanating from various interests that the company has to pay when servicing the debts under consideration. It is important to understand that a debt/ equity ratio of 0.967 is very low, and this is an indication that Vale SA does not use debts for purposes of financing its growth and development. Gros, Alcidi and Brussels (2013) denotes that this situation presents a number of opportunities to Vale mining company, and this is because it will gain the potential of generating more revenues for its shareholders, without paying interests emanating from debts. However, scholar denotes that using debts to finance an expansion or a business growth is not a bad idea, but it is a very risky venture. It is a good idea, in case it enables the company to generate more income that the debts under consideration. In this case, the shareholders will benefit. This is because there will be more revenues, and hence the company will manage to pay high dividends to the shareholders. Sagebien (2011) denotes that shareholders main interest in a company is their rates of return on the shares that they have purchased. On the other hand, Canuto and Cavallari (2013) explains that if the revenues of the company are not able to outweigh its debts, then chances are high that the company may be unable to finance its operations. This would most definitely lead to bankruptcy, and the fall of the company. On this note, a high debt/equity ratio is not conducive for a company. A company must have the capability of financing its own operations by using its financial assets. Based on the results of the debt/equity ratio, it is therefore conducive to denote that Vale does not depend on debts, for purposes of financing its expansion. This is further proved by the low debt ratio that the company has. For example, as of the year 2013, the company managed to have a debt ratio of 0.491. Ross and Westerfield (2013) denotes that a debt ratio is able to compare the total debt of a company, with that of a company’s total assets. On this basis, a debt ratio is able to provide an understanding on the rate of leverage that a company uses. A low debt ratio is an indication that the company under consideration is able to depend on low leverage, that is, its dependence on money borrowed and owed to others is minimal. Based on these results of the company’s debt ratio, Vale mining company has a strong equity position, and its dependence on leverage is very low. Furthermore, it is important to provide an explanation that a high debt ratio is very risky for the company, and it can lead to the bankruptcy of the company under consideration. Scholar is quick to point that a debt ratio is not a pure indicator of the indebtedness of a company, and this is because this ratio includes other operational liabilities such as taxes and accounts payables. On this basis, a more accurate method of measuring the indebtedness of a company is the use of capitalization ratios. The 2013 capitalization ratio of Vale mining company stood at 0.328. This is a very low figure, and it is a confirmation that the company does not rely on debts to finance its operations, and expansion policies. Brigham and Houston (2013) denote that this ratio is an indication that the long term capital of the company is stable. On this basis, this low capitalization ratio is an indication that Vale mining company has a stable operations, and it is good company to invest in. Ross and Westerfield (2013) denotes that for purposes of ascertaining the liquidity of the company, the best ratio to use, is the current ratio. The 2013 current ratio of Vale Mining Company stood at 2.53. This is a high current ratio, and it is an indication that the company has the capability and position of paying its short term liabilities. However, scholar is quick to denote that a high current ratio is not necessarily bad or good for the company. This is because the results of these ratios are always based on the liquidation of the company’s assets and liabilities, and as a matter of fact, investors are always obligated to view a company on a going concern basis. On this note, the key to liquidity is the capability of the company to convert its working capital asset to cash in a quick manner. On this basis, Troy (2013) explains that to supplement the results of the company’s current asset ratio, there is the need of using a quick ratio. The 2013 quick ratio of Vale mining company was 1.393. Scholar explains that a high quick ratio is an indicator that the company under consideration is more liquid. Looking at this quick ratio, we can denote that it is a little bit low, when compared to the company’s current ratio of 2.53. By relying on the results of the quick ratio, it is possible to denote that the company is not as liquid as the current ratio indicates. Massari and Gianfrate (2014) further explains that when a current ratio is higher than the quick ratio, then it is an indication that the company under consideration relies heavily on inventories for purposes of conducting its businesses. In the case of Vale mining company, the current ratio of the company is higher than the quick ratio of the company by, 1.14. This is therefore an indication that Vale mining company relies heavily on its inventory assets for conducting business as opposed to liquid cash. Furthermore, scholar denotes that the use of cash ratio in analyzing the liquidity position of Vale mining company is not conducive. This is because most companies normally do not hold cash in their reserves, as they would either give out to shareholders as dividends, or even plough back the money into the market for purposes of expanding its business operations. Conclusion: In conclusion, Vale mining company is a very stable and profitable company that an investor should seek to acquire. Based on the ratios identified, we can denote that the company does not operate under debts, and it uses its own resources to finance its activities. This is a very important characteristic of a successful business organization. This is because companies that normally operate under debts will not be able to achieve their objectives of profitability. This is mainly because they will be engaging in paying off the debts of the company, at the expense of paying shareholders some dividends. Based on the size of the company, and on these ratios, we can therefore denote that the company has stable operations, and its long term venture may be successful. Further on, the liquidity capability of the company is not bad. This is as depicted in the quick and current ratios. From these rations, we can denote that Vale mining company has liquid money that makes it possible for the company to finance its short term liabilities. This is important information to investors, it depicts that the current operations of the company are going on smoothly, and hence the company has the capability of meeting its own objectives. Bibliography: Agtmael, A. W. (2007). The emerging markets century: how a new breed of world-class companies is overtaking the world. New York: Free Press. Anac, S., & Gozen, M. (2003). An analytical approach to develop hedging strategies for mining companies. Mining Technology: Transactions of the Institution of Mining and Metallurgy, Section A, 112(2), 131-134. Arnold, G. (2013). Corporate financial management (5th ed.). Harlow, England: Pearson. Brigham, E. F., & Houston, J. F. (2013). Fundamentals of financial management (13th ed.). Mason, Ohio: South-Western ;. Bull, R. (2008). Financial ratios: how to use financial ratios to maximise value and success for your business. Oxford: CIMA. Canuto, O., & Cavallari, M. (2013). Brazilian exports climbing down a competitiveness cliff. Washington, D.C.: World Bank. Gros, D., Alcidi, C., & Brussels, B. (2013). Brazil and the EU in the global economy. Brussels: Centre for European Policy Studies. Hast, A. (2007). International directory of company histories. Chicago: St. James Press. Massari, M., & Gianfrate, G. (2014). The Valuation of Financial Companies Tools and Techniques to Measure the Value of Banks, Insurance Companies and Other Financial Institutions.. Hoboken: Wiley. Ross, S. A., & Westerfield, R. (2013). Corporate finance (10th ed.). New York, NY: McGraw- Hill/Irwin. Sagebien, J. (2011). Governance ecosystems: CSR in the Latin American mining sector. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan. Troy, L. (2013). 2014 almanac of business and industrial financial ratios (45th annual ed.). Englewood Cliffs, N.J.: Prentice-Hall. Vale. (n.d.). Vale (Vale S.A.) | Brazil | Company Information Profile | Contacts - BNamericas. BNamericas. Retrieved May 16, 2014, from http://www.bnamericas.com/company- profile/en/Vale_S,A,-Vale Finance. (n.d.). VALE BALANCE SHEET. YAHOO FINANCE. Retrieved May 16, 2014, from http://finance.yahoo.com/q/bs?s=VALE+Balance+Sheet&annual Appendixes: Profits: Total Assets – Total Liabilities Total Assets = 124,597,000 Total Liabilities = 61,272,000 Profits = 63325000 Debt/Equity Ratio (Finance, 2014): Debt/Equity Ratio = Total Liability/Shareholders equity 2013 Total Liability of Vale = 61,272,000 2013 Total Shareholders Equity = 63,325,000 Debt/ equity ratio = 0.967 Debt Ratio (Finance, 2014): Debt Ratio = Total Liabilities/ Total Assets 2013 Total Assets = 124,597,000 2013 Total Liabilities = 61,272, 000 Debt Ratio = 0.491 Capitalization Ratio (Finance, 2014): Capitalization Ratio = Long Term Debts/ (Shareholders Equity + Long Term Debts) Long Term Debts = 30,942,000 Share holders equity = 63,325,000 Shareholders equity + Long Term Debts = 94,267,000 Capitalization ratio = 0.328 Current Ratio (Finance, 2014): Current ratio = Current Assets/ Current Liabilities 2013 Current Assets = 24,377,000 2013 Current Liabilities = 9,612, 000 Current Ratio = 2.53 Quick Ratio (Finance, 2014): Quick Ratio = (Cash + Short Term Investments + Account Receivable) / Current Liabilities. Cash and its Equivalents = 5,723,000 Short Term Investments = 3,000 Account Receivables = 7,668,000 Current Liabilities = 9,612,000 Quick Ratio = 1.393 Cash Ratio (Finance, 2014): Cash Ratio = Cash + Cash Equivalents + Invested Funds)/ Current Liabilities. Cash and its Equivalents = 5,723, 000 Invested Funds = 4, 125,000 Current Liabilities = 9,612,000 Total Asset Turnover Ratio: Total Asset Turnover = Net Sales/ average total assets. Net Sales = 7,668,000 Average total assets = (124,597,000 + 130,577,000 )/ 2 = 127587000 Total Asset Turnover = 0.06 N/B: These financial statements are derived from Yahoo Finance, and the reference is contained in the bibliographic section. Read More