Fixing Vale’s Valuation
Vale (NYSE ticker: VALE) is a large Brazilian mining company. In Week 2 you saw that, based on
data up until 2014, an intrinsic business valuation resulted in a stock price of $49.47 per share.
However, the market price at that time was less than three times smaller, at just $14.17 per share.
Case Analysis
Assume that Vale’s market valuation is correct: the fair price of the stock is in fact $14.17 per
share. Therefore, the $49.47 valuation done in Week 2 is missing one or more critical
elements of Vale’s business situation. Your job is to find and discuss these missing pieces,
and to reverse engineer Vale’s intrinsic valuation in order to obtain an intrinsic valuation of
$14.17 per share. The deliverable is a 2-4 page individual report containing your intrinsic
valuation and its rationale. Again, your intrinsic valuation must arrive at a price of $14.17 per
share, equal to the market price then. The report is due on Saturday 11:59 pm in Week 7.
Your project will most likely use knowledge of concepts studied in Week 2 and Week 5.
We are in 2021, so feel free to use the benefit of hindsight. However, your project should read as a
valuation performed in 2014 not in 2021. Specifically, you cannot explicitly use financial statements
or market information after 2013.
The case analysis is INDIVIDUAL. However, you are welcome to help each other and share ideas
among yourselves in Week 5’s Discussion Board. Such discussion will not be graded. Important: you
may not share information in any other format. Because the case analysis is individual, we do not
expect to see identical reports. However, because ideas (not reports!) can be freely shared in Week
5’s Discussion Board, we expect to see idea overlaps across the projects.
Here are some (purposefully loose) ideas:
– Is the assumption that iron ore prices after 2013 will be constant at the average level in 2010-2013 a good one?
– What fraction of VALE’s earnings depends on its purely Brazilian business? Is the assumption that the Brazilian currency after 2013 will be constant at the average level in 2010-2013 a good one?
– Is the assumption of a 17.19% re-investment rate to mantain the business a good one? Is there a chance the company actually required much more investment going forward because of aging infrastructure or other reasons?
– VALE’s relationship with the Brazilian government was not given any kind of special attention. The valuation assumes a zero probability that major political changes in Brazil could result in higher taxes to VALE (“creeping expropriation”). Also, zero probability of outright government expropriation. Are these reasonable assumptions? In a similar vein, check the role of VALE’s “golden shares”.
– We found VALE’s unlevered beta (0.84) using asset betas from comparable US firms. What if we had computed it directly from VALE’s equity beta based on VALE’s stock returns?
If you use a larger growth rate you will end up with an even larger valuation. Remember, the point of the case is to find a valuation that equals the market value of the stock in 2014.