Investing Thoughts : March 2021
The effects of corporate governance are captured in the investment and financing choices made by the firm (with reinvestment and ROIC measuring the investment policy and the debt mix in the cost of capital reflecting financing policy). While Vale is nominally an independent company, the Brazilian government reserves the right to intrude in its management, and that power can be used to good and bad effects. It is also undeniable that currency movements in your favor will make a bad investment into a good one, just as currency movements against you can turn a good investment into a bad one. While it is easy to make the argument that commodity prices move in cycles and that what goes down has to go back up again, these cycles are unpredictable and can stretch over long time periods. Research in the area of trendy boutique market cycles that are driven by other external phenomena is a very fruitful area of research that can lead to substantial benefit.
The major downfall with poly tanks is once they become brittle, there is no repairing that can be done to the stock tank. There is also a wild card in this equation in the form of a golden share that is owned by the Brazilian government, giving it veto power over major decisions and the line between corporate and political governance becomes a fuzzy one. Whether there will be a continued increase in Manufacturing profits and revenue and a turnaround result in the trading arm as stated by management. When choosing your broker, select an able, reputable and qualified broker to ensure hassle-free stock trading. 0.73 during the trading day on Thursday. Financials: Was this a one day dip in the financials or the start of a bigger pullback? The stock broke through one major resistance level located at $2.85 but stopped at $3.10. Here again, the last decade has been a good one for both Russia and for Lukoil, as lower country risk (measured with the CDS spread) for the former has gone with higher market capitalization for the latter.
Much of Vale's success in the last decade came from a willingness on the part of the Brazilian government to give it free rein to be run as a profit-making entity, but the machinations leading up to the last election (where the incumbent, Dilma Roussef, was viewed as more likely to interfere in the company's operations) have taken their toll. To estimate the cost of capital, I built off the US 10-year treasury bond rate as the risk free rate and used an equity risk premium of 8.25%, reflecting a weighted average of the equity risk premiums across the countries where Vale has its reserves (60% are in Brazil). As Brazilian country risk has declined over much of the last decade, Vale benefited, but country risk is a double-edged sword. Lukoil also benefited from the increase in oil prices in the last decade, driven partly by geopolitics and partly by the explosive surge in automobile sales in emerging markets. As with iron ore, the question of whether oil prices have dropped below a normal price is largely a function of perspective, with the answer being yes, if you have 2 or 3-year perspective but not if you have a ten-year or longer perspective.
The value of Vale is a function of company, country, currency and commodity risks. As a commodity company, Vale does sell into a global market and as a producer of iron ore, it gets a significant portion of its revenues from China, which is the largest consumer of iron ore in the world. The positive is that it gives Vale a leg-up on competition in Brazil, giving it first dibs on Brazilian reserves of iron ore, and the negative is that the company can become a pawn in political games. To the extent that their reserves are in Brazil (at least for iron ore, for Vale) and in Russia (for Lukoil), the costs are in the local currencies but their revenues are in global markets, denominated in US dollars. Not surprisingly, Vale has been affected by changes in perceptions of Brazilian country risk. We DO realise that things have changed and that we have to be on our toes to meet those changes as they happen.