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Vale Valuation Paper

In: Business and Management

Submitted By ochlupin
Words 7759
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1

MINING INDUSTRY - OVERVIEW AND RISKS FACTORS
Definition of the Industry
The mining industry encompasses a wide range of companies involved in different supply chain positions that represent exploration, development, extraction, processing, refining and sale of minerals and coal.

With respect to the diverse set of business factors that affect the mining process, the business risk rating for the mining industry would be best qualified in terms of a credit rating of BBB (low). The justification for this rating follows:

a) Higher than average profitability of the industry – related to the need to provide adequate returns on large capital investments

b) Threat of competitors is about on the same level as other industries – based on multiple suppliers and buyers and the prevalence of homogenous products (nonbranded)

c) Inherent volatility in earnings and underlying cash flows – due to volatile pricing of commodity products and responsiveness to economic cycles

d) Above average and increasing prospect of industry regulation

e) Above average and uncertain political risk – industry players have to pursue operations where mineral resources are found and in many cases this would include politically unstable regions

f)

Below average technology risks – due to the basic nature of the materials produced and licensing production technologies and methods among players in the industry

2

The BBB rating is applicable only to industry players that do not have major weaknesses in terms of scale, diversification, cost competitiveness, and operating and financial track record. Major players in mining industry are all strong in these considerations. Consequently, individual companies might have a rating above the BBB industry average rating. This would apply to VALE and its closest peers.

Industry Profitability and Cash Flows…...

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