לפני כמה שבועות קיבלתי התראה במייל על כתבה בסיקינג אלפא על ואלי. הכתבה, היתה, כמו תמיד, "לונג" על החברה. ואלי באמת נראית זולה, אבל היא מלכודת ערך. אני ועדן בשורט על החברה כבר לא מעט זמן ותמיד כשאני חושב שנגמר המיץ אני רואה שנשאר עוד.
הפעם הכתבה היתה קצת שונה – הכותב היה לא אחר מאשר Aswath Damodaran! למי שלא מכיר את השם, דמודרן מלמד הערכת חברות באוניברסיטת NYU וכתב מספר ספרים על הערכת חברות. הוא נחשב שם דבר בתחום.
בשנים האחרונות תמיד התפרסמו כתבות לונג על ואלי, החל מאיזור העשרימים הגבוהים ועד שמונה דולר כיום. כמעט תמיד הניתוח היה דליל, בייחוד בניתוח השוק ככלל. כשאני אומר "דליל בניתוח השוק" אני מתכוון לניתוח תוך כדי התעלמות בוטה מפיל שמן שיושב באמצע השוק. כולם רואים אותו אך מתעלמים מקיומו – פיל שקוראים לו סין, פיל שצורך כמעט 60% מצריכת הברזל העולמית, למרות שאוכלוסיית סין מהווה 19% מהאוכלוסיה העולמית.
מי שקורא את המשפט הזה חושב לעצמו: "אם בערך 20% מהעולם (סין) צורך כמעט 60% מהצריכה העולמית, אם הצריכה בסין תרד בשני שליש או 66% הסינים יצרכו את הממוצע". המשפט הזה נכון בקירוב אם המספרים היו קטנים, נניח ש 20% מהעולם היה צורך 25% מהצריכה העולמית. אבל מסתבר, שכאשר חלק קטן מהעולם צורך פי כמה מהחלק הפרופורציוני שלו, המתמטיקה הזו כבר לא עובדת.
כמה מספרים: נניח שהעולם צורך 100 טון ברזל. זאת אומרת ש 60 טון נצרכים בסין, ו 40 טון בשאר העולם. "שאר העולם" מהווה 80% מאוכלוסיית העולם. כלומר ש 80% מאוכלוסיית העולם צורכת 40 טון, או בממוצע 0.5 טון לכל אחוז באוכלוסיה. אם סין מהווה 20% מהאוכלוסיה, כדי להגיע לממוצע העולמי היא צריכה לצרוך רק… 10 טון! כלומר שצריכת הברזל בסין צריכה לרדת ב 83%, הרבה יותר מ-"רק שני שליש", רק כדי להגיע לממוצע העולמי, ובהתחשב שתמיד אחרי צריכת יתר יש צריכה פחותה, הייתי מרגיש בנוח להניח שצריכת הברזל בסין תרד ב 90% לפחות בעשר השנים הקרובות, תהליך שכבר החל.
מסתבר שגם פרופסורים כמו דמודרן מסוגלים להתעלם מפילים ענקיים שיושבים להם מול הפנים. לאחר פרסום הכתבה (שהתפרסמה אצלו בבלוג וגם בסיקינג אלפא), לא יכולתי שלא להצביע על מספר כשלים בניתוח של הפרופסור. הדיון נערך בתגובות לפוסט, תוכלו לראות אותו שם, אך לנוחותכם העתקתי אותו לכאן. מה שמאוד הפתיע אותי הוא שבגדול הפרופסור הסכים איתי או לפחות הודה שיש לי נקודה טובה, אבל הוא עדיין קנה את המניה – לך תבין. מצד שני זו לא ההשקעה הראשונה שלו שאני פשוט לא מבין…
הנה הכתבה שכתב דמודרן למי מכם שמתעניין.
Hello.
I would like to point out some possible hidden assumptions in your work, that invalidates your final conclusion.
1. Taking VALE LTM operating earnings contains the hidden assumption of iron ore prices average 110 USD/ton, the average price over the last LTM. Stretching that to the infinitum creates a dangerous assumption of iron ore prices above 100 USD /ton built into the valuation, to infinity.
2. To take a "margin of safety" you considered a 20% drop in the operating earnings of VALE. But iron ore dropped much more than 20% than the average price on which your thesis is bulit on -110 USD/ton (see #1). Moreover, a percentage drop in the value of the commodity will cause a much larger drop in operating income due to operational leverage. Since iron ore is trading at about 70 USD / ton, 40% less than the average on the recent LTM price, a more deep discount would be warranted – like a 50 or 60% drop in operating income.
3. You can see that during the last quarter VALE's underlying earnings (earnings adjusted to special charges) dropped 80% comparing to previous quarter (avg iron ore prices of ~120 USD/ton), which empirically proves my point – your valuation assumes iron ore prices to rise to 110 USD, LTM average.
4. I think a much deeper valuation of the business itself is required than a simple average of operating income. To make for a margin of safety, one would first calculate or estimate VALE's earnings power under adverse scenarios, like iron ore at 50 USD per tonne or below, for his thesis to include a margin of safety.
Right now I suspect that this thesis fails to do so as it tries to value a commodity company with extremely generous hidden assumptions on the underlying commodity price, conditions that were not met even during the last 9 months, before a large supply will enter the market in 2015.
If you do this exercise I suspect you will see that VALE is currently overvalued or at least does not supply a margin of safety.
Assaf
Assaf,
You are right. There is the real danger that iron ore prices could collapse to $50, but to do your valuation with that scenario is to assume that they will collapse and stay collapsed. That is possible, but if that were the case, you would make far more money selling short on BHP Billiton, since it would require that the Chinese economy come to a standstill and perhaps fall into a long-term recession.
I think you have a good point on the immediate effect of the iron ore price collapse being greater than the 20% that I have estimated though extrapolating from the last quarter's data (when everything was caving in for Vale) is not fair. I think it will make more sense to look at the earnings of global iron ore producers during the period to get a measure of how sensitive earnings are to iron ore prices.
Finally, I personally don't much care for margin of safety. While there are some who use it sensibly (I love Seth Klarman's writings on it), for most value investors, it is the shield that they use from ever acting. They do conservative (often worst case) valuations of companies and then knock 20% of these valuations and then complain that the price is too high. I am not suggesting that you are guilty of it, but if I waited for the absolute worst case scenario to unfold, the value will also reflect that worst case scenario, and I am not sure that the price/value ratio is going to be better there than it is now.
תגובתי השניה:
Assaf Nathan said…
Thank you Professor.
Regarding the price of iron ore, I would argue that a price of below 50 USD / ton is not such an extreme scenario as you imply from your response.
25 year, inflation adjusted price average for iron ore will give you an average of 52 USD per ton.
The longer you stretch the average, the lower the price you get, even after adjusting for inflation. Nowhere in Human history iron ore saw such a rise as it saw in the last 10 years.
This suggests that the current, abnormally high prices of iron ore are a mere result of a "blip" in history, in which a relatively short time of about 10 years imbalance of supply and demand occurred.
Otherwise, it is impossible to explain how VALE and RIO and others are mining iron ore for about 20-40 USD per ton and sell it for 100, enjoying margins like Louis Vitton. Iron ore is abundant in our planet, there is no "peak ore" like for other commodities, it is not of limited supply like wheat that has limited growing areas and – iron is recyclable.
High margins cause more competition and more recycling.
I would also argue that it is incorrect to adjust past prices of iron ore to inflation. On October 1989 a ton of iron ore cost 14 USD. Since then, technology has improved, recycling technology has improved, mining is more efficient, and world population grows at a much slower pace. Taking all those into account, I would argue that the "Normal" Iron ore price should be lower than the inflation adjusted price. USD Inflation was about 100% since 1989, which means Adjusted price would be 28 USD per Ton. I would regard this price as the Maximum normal price, and not as a Minimum.
I have analyzed the supply that will enter the market in the coming years and the situation does not look bright. In the coming 2 years more than 400 million tons of ore supply will be added to the market, increasing world supply by 30%. The Chinese Giant need not standstill for prices to collapse further, it is enough that the next 2 years China will not grow fixed assets investments at the rate of 20%.
Another factor your thesis neglected to mention is the market structure. VALE is very distant from its primary customer – China. RIO and BHP enjoy a much greater proximity working in Australia and S.E Asia. This gives them a competitive advantage over VALE – since shipping prices are fixed, and VALE's already low mining cost, they have much more room for cost savings then VALE.
I think your thesis will enjoy a temporary tailwind from recent rate cut in China and maybe more stimulus but for the long term I think your Thesis will be proven overly optimistic by a wide margin.
I would calculate VALE fair price at about 5-6 USD over the long term, maybe even less, under 70-50 USD *optimistic normal* price per tone of Iron ore.
Thank you again,
Assaf
Assaf Nathan said…
Just one more thing –
China is consuming more iron ore per capita than any other nation in the world, by a far margin.
If it were to cut its consumption by a half or more will not mean that it will fall into a long recession. It will just mean that it will base its economy on viable growth models other than infrastructure investments.
Take EU iron ore consumption or other Asian nations like Vietnam, they consume a fraction of Chinese iron ore per capita, even if you look at Europe's happy days back in 2005.
Aswath Damodaran said…
Assaf,
I am not ruling out this possibility. My only point is if this is the way you see the world unfolding, there is a load of pain in commodity stocks, and especially among those that have not suffered as much as Vale has.
I do think that you have a point about what the norm is in commodity companies. If you go back long enough, the normal price (even if corrected for inflation) can be very different than if you go back a shorter periods. Perhaps, there are long cycles and short cycles in commodities and we don't keep track of the long cycles.
