economic analysis brazil final

8/2/2019 Economic Analysis Brazil FINAL

1/19

2011

Nathan Schmidt

Creighton University

11/9/2011

Brazil: Economic Analysis &Mining Industry Analysis

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Real GDP (In Billions) Brazil (PPP GDP Per Capita)


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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 5 th 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 2 nd

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

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%.

03-04 04-05 05-06 06-07 07-08 08-09 09-10

Brazil 8.7% 6.6% 7.3% 9.2% 7.5% 0.3% 8.5%

United States 6.5% 6.5% 6.0% 4.9% 2.2% -1.8% 3.8%

China 13.2% 15.0% 16.4% 17.6% 12.0% 10.2% 11.4%

Japan 5.7% 4.4% 5.1% 5.4% 0.6% -5.4% 6.1%

India 11.3% 13.0% 12.8% 13.0% 7.2% 10.1% 10.8%

Mexico 7.2% 9.2% 10.7% 7.5% 5.7% -5.0% 6.5%

-8.0%-6.0%-4.0%-2.0%0.0%2.0%

4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%

Econo

micGrowth

PPP GDP: Yearly Economic Growth

Geometric Growth Last 5 Years Last 10 Years

Brazil 6.30% 6.16%

United States 2.26% 4.01%

China 12.74% 13.19%

Japan 1.57% 2.97%

India 10.27% 10.47%

Russia 7.09% 11.28%

Mexico 3.55% 6.71%Table 1

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 $ 1,698,754 $ 1,855,239 $ 1,993,542 $ 1,998,985 $ 2,169,180YoY Growth 9.2% 7.5% 0.3% 8.5%

Russian Federation 2,138,597 2,387,519 2,878,201 2,677,803 2,812,383YoY Growth 11.6% 20.6% -7.0% 5.0%

India 2,840,146 3,210,694 3,442,441 3,790,564 4,198,609YoY Growth 13.0% 7.2% 10.1% 10.8%

China 6,242,144 7,338,183 8,217,830 9,056,716 10,084,764YoY 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

Table 2


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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.

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.

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


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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 hyper-

inflation that became the norm, keep in mind during 93-94 the currency effectively had a reset button pushed.

$0.00

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Exchange Rate for Brazilian real (R$) BRZ/USD Rate

Graph 2


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0%

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1000%

1500%

2000%

2500%% Change in CPI

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 23%

Housing 13%

Household Items 4%

Clothing 7%

Transportation 19%Healthcare 11%

Personal Items 10%

Education 7%

Communication 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).

Table 4

Graph 3


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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.

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.

0.0%

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Dec-01 Oct-02 Aug-03 Jun-04 Apr-05 Feb-06 Dec-06 Oct-07 Aug-08 Jun-09 Apr-10 Feb-11

Targeted Inflation Rate

Expected Inflation Rate

% Change in CPI

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Lower Band

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% Change in Retail Sales

Graph 4

Graph 5


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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.

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.

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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1112

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%

ofWorkersUnemployed

Unemployment Rate

80

85

90

95

100

105

110

115120

125Brazil Consumer Confidence Index

Graph 6

Graph 7


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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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65

75

85

95

105115

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135

Industrial Production (Base = 100)

Brazil IP (Base Year2002)

U.S. IP (Base Year2002)

Graph 8


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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

65%

70%

75%

80%

85%

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

Industrial Production Capacity Utilization

Brazil Capacity Utilization U.S. Capacity Utilization

Graph 9


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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.

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 realinterest rate.6

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25000

35000

45000

55000

65000

75000

Bovespa Index & P/E Ratio

IBOVESPA Index P/E Ratio

Graph 10


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8%

9%

10%

11%12%

13%

14%

Brazil Benchmark Interest Rate

(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.

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5%

10%

15%

20%

25%30%

35%

40%

45%

50% Brazil Benchmark Interest Rate

8%

9%

10%

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0 1 2 3 4 5 6 7 8 9 10 11

Yield Curve Analysis

9/30/2011 9/30/2010 9/30/2009 12/31/2010

Graph 11 Graph 12

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 realinterest 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 2009 2010 2011E Q1 2012E 2012E 2013E

Real GDP Growth 0.27% 8.5% 4.0% 1.8% 3.5% 4.0%

Unemployment Rate 8.08% 6.7% 6.3% 6.5% 5.5%

Inflation Rate 4.31% 5.91% 5.5% 6.0% 5.5%

Interest (SELIC) 10.14% 9.91% 11.0% 10.5% 10.0% 9.0%Exchange Rate (US $) $ 1.9932 $ 1.7601 $ 1.65 $ 1.70 $ 1.65

Exchange Rate (Euro ) 2.7731 2.3354 2.30 2.20 2.00

Bovespa Index Return 77% 1.0% -23% 2.5% 7% 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.

Table 4


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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) 2010 Market Share

Anglo American PLC 514 2%

Assore Ltd 600 2%

BHP Billiton ltd 4044 15%

Cliff Natural Resources 914 3%Ferrexpo PLC 1502 6%

Rio Tino PLC 2595 10%

Vale 16130 61%

Vedanta Resources PLC 90 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 Herfindahl-

Hirschman Index (HHI) for the mining industry based upon iron ore shipment from 2010.10

Table 5


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Top Iron Ore Producers 2010 Shipments Market Share

Vale 294,414 36% 1,284

Rio Tinto Ltd 184,629 22% 505

BHP Billiton Ltd 128,542 16% 245

Fortescue Metals Group Ltd 41,694 5% 26

Anglo American PLC 49,895 6% 37Mitsui 43,700 5% 28

Kumba Iron Ore 43,109 5% 28

Cliff Natural Resources 35,492 4% 19

Total Shipments 821,475 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 themarkets changes in demand for steel based products and only act as price takers, selling iron ore at thespot price. Although potential fixed price contracts could aid in securing profits a specific price level.

Bargaining Power

of Suppliers

Low The mining industry relies on heavy, specialized excavation and logistical transportation machinery, butneeds so substantial inputs for their process of turning mined iron ore into an input available for sale.

Barriers to Entry Very

High

Iron ore procurement and production is a very integrated process requiring high levels of capitalexpenditure 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.

Degree of Rivalry Low Competitors in the mining industry are always looking for ways to improve efficiency, lower costs, andeliminate potential opportunities for competitors. Although, since they are all price takers and dependentupon demand for metal products each firm has no incentive or ability to fix prices of mined materials;such as iron ore.

Threat of

Substitution

Low 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 2 nd most valuableresource after oil. Technological advances could change this in the future, but certainly not the nearfuture.

Table 6

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.

Vale SA 2006 2007 2008 2009 2010 Averages

ROE 52.7% 54.4% 43.2% 11.9% 32.0% 38.8%

ROA 15.6% 17.2% 16.9% 5.7% 15.4% 14.2%

Profit Margin 33.2% 36.7% 35.3% 21.1% 36.1% 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).

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

ROE ROA Profit Margin

5 Year Average ROE, ROA, & Profit Margins

Vale SA

BHP Billiton PLC

Rio Tinto PLC

Anglo American PLC

Xstrata PLC

Freeport-McMoRan Copper &Gold Inc.

Table 8

Graph 14


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Both (Table 9) and (Table 10) provide comparisons between Vale SA and other large mining operations.

Industry Comparison Return YTD Revenue Growth EPS Growth Dividend Yield P/E P/B P/S P/CF

Vale SA -19% 72% 194% 0.87% 6.1 1.67 2.36 14.52

BHP Billiton PLC -20% 36% 88% 3.52% 7.4 2.96 2.44 9.86

Rio Tinto PLC -21% 35% 144% 2.32% 6.7 1.72 1.79 8.78

Anglo American PLC -28% 34% 169% 0.79% 5.4 1.35 1.50 17.09

Xstrata PLC -32% 34% 544% 2.04% 8.8 1.09 1.39 37.54Freeport-McMoRan Copper & Gold Inc. -30% 26% 53% 2.44% 6.9 2.50 1.71 5.84

GMK Norilsk Nickel -14% 50% 110% 3.01% 6.6 2.15 2.60 9.07

Southern Copper Corporation -32% 38% 68% 8.87% 11.6 6.42 4.00 16.08

Grupo Mexico SAB de CV -22% 57% 77% 4.16% 10.6 2.65 2.36 8.27

Kumba Iron Ore Limited 31% 65% 104% 8.46% 6.9 9.81 3.61 9.19

Competitive Positioning Market Cap (Billions) Quick Ratio Financial Leverage Interest Coverage Ratio Debt/Equity

Vale SA $136,859 1.331 1.699 24.28 31.5

BHP Billiton PLC $193,035 0.832 1.783 8.68 27.5Rio Tinto PLC $112,335 1.136 1.937 3.16 26.2

Anglo American PLC $50,336 1.549 1.905 10.05 32.6

Xstrata PLC $47,735 0.648 1.708 15.55 21.5

Freeport-McMoRan Copper & Gold Inc. $38,864 1.970 2.086 79.63 19.6

GMK Norilsk Nickel $37,394 2.373 1.469 8.91 15.8

Southern Copper Corporation $26,673 3.249 1.947 20.68 66.6

Grupo Mexico SAB de CV $22,254 2.858 1.959 15.67 39.2Industry Averages $73,943 1.772 1.832 20.734 31.168

0

5

10

15

20

25

30

35

Interest Coverage(Latest Quarter) Interest Coverage(Latest Year)

Interest Coverage Ratio

Vale SA

BHP BillitonPLC

Rio Tinto PLC

AngloAmerican PLC

Xstrata PLC

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Financial Leverage

(Latest Quarter)

Financial Leverage

(Latest Year)

Total Assets/Total Equity

Table 9

Table 10

Graph 15Graph 16


19/19

Schmidt | 19

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-brazil4CIA 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.html8 Monstrous risks in Emerging Markets. http://uk.reuters.com/article/2011/06/08/us-investment-summit-bernstein-emergingm-

idUKTRE7576LW20110608

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.html10 The Herfindahl-Hirschman Index. http://www.justice.gov/atr/public/testimony/hhi.htm

economic analysis brazil final

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