We issued an updated research report on Vale S.A. VALE on Jan 16.

Inside Story

Vale carries a Zacks Rank #3 (Hold), as we notice that the stock is currently exposed to both positive and negative factors. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Over the last month, Vale’s shares have rallied 17.1%, in line with the growth recorded by its industry.

For the last three months, iron-ore prices flared up nearly 26.5% to $75.98 per ton (as of Jan 15, 2018). The steel-production curtailing decision of the government in China, inflation in steel prices and the steel plant’s restocking demand hopes have been driving the upside. We believe further inflation in the price of this major steel-making component will be beneficial for mining giants like Vale, BHP Billiton Limited BHP, Rio Tinto plc RIO and Kumba Iron Ore Limited KIROY.

Vale is currently following a portfolio simplification and deleveraging strategy. In sync with this, the company recently (December 2017) announced that it will soon divest the Vale Fertilizantes business to The Mosaic Company. The company will secure $1.15 billion in cash and 34.2 million shares of the latter on the back of the deal. The company also received roughly $178 million by successfully accomplishing the divestment of two very large ore carriers in December. It intends to finance growth projects, lower its existing debt burden and boost shareholders’ value with such funds.

Moreover, Vale has been steadily bringing down its exploration and mining expenses by maximizing the productivity of major mines. In third-quarter 2017, the company’s iron-ore ore output touched a record high, rising roughly 3.3% year over year. The upswing stemmed from the robust ramp-up of the company’s S11D mine in the Northern System. Notably, the CLN S11D project will likely enhance the productivity of the S11D mine in the near future. The company also reaffirmed its long-term target to produce 400 million tons of iron ore per year.

On the back of the liability management program, Vale has been its lowering its debt burden. The company estimates its net debt to reduce and lie in the range of $15-$17 billion by the end of 2017 (results not yet released).

Despite these robust growth drivers, we fear headwinds in the mining industry might thwart Vale’s revenues and profitability in the quarters ahead.  

The mining industry is highly competitive and dominated by few major mining companies. The number of new entrants is almost limited due to huge start-up costs involved in such businesses. In order to maintain competency, Vale makes costly investments to maximize the output and minimize productivity expenses. However, these investments increase the company’s overall debt burden.

Further, Vale’s commercial affairs depend on licenses and permits issued by the government. Changes in government policies might lead to situations where licenses are not renewed at all. Such circumstances adversely influence the company’s growth or productivity plans, thereby directly affecting its revenues and margins.

Also, the company’s operational process can be severely hampered due to incidence of environmental hazards like natural disasters or abnormal rainfall. Additionally, an oversupply situation in the mining market is expected to hurt Vale’s near-term results. This is because the mining giants are constantly trying to augment productivity in order to become more cost efficient. In addition, high environmental clean-up expenses required after the closing of a mine prevent shutdowns.

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