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VALE Declines 34.3% YTD: How Should You Play the Stock?
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Vale S.A (VALE - Free Report) shares have plunged 34.3% in the year-to-date period, underperforming the broader Zacks Basic Materials sector’s 4.5% decline and the S&P 500’s climb of 16.8%.
The downtrend in iron ore prices has been reflected in its share price movement. China’s property crisis has weighed on demand for the steel-making ingredient. Beside low iron ore prices, Vale has been grappling with elevated input costs, particularly freight.
VALE’s YTD Price Performance Versus Sector & S&P
Image Source: Zacks Investment Research
Vale shares are trading below the 50-day moving average, indicating a bearish trend.
VALE's Price Movement vs 50-Day Moving Average
Image Source: Zacks Investment Research
Given the significant pullback in Vale’s shares, investors might be tempted to snap up the stock. But is this the right time to buy? Let us find out.
Weak Demand in China Pulls Down Iron Ore Prices
The weakness in China’s construction sector, stemming from the prolonged debt crisis for major developers, has been weighing on iron ore demand and iron ore prices this year. Iron ore is one of the year’s worst-performing major commodities. Iron ore prices are currently at $98.19 per ton, the lowest level in 20 months.
The World Steel Association expects steel demand in China in 2024 to be flat with that reported in 2023 due to declining real estate investments. In 2025, China's steel demand is anticipated to decrease 1%. The association suggests that China may have reached its peak steel demand, and steel demand is likely to continue to decline in the medium term as the country gradually moves away from an economic development model reliant on real estate and infrastructure investments.
High Costs Hurt Vale’s Profitability
In the first quarter of 2024, VALE reported a 9% year-over-year decline in pro-forma adjusted EBITDA to $3.5 billion. The metric was down 6% to $4 billion in the second quarter. The downfall witnessed in both quarters mainly resulted from higher costs and expenses attributed to freight and maintenance activities. The combination of low iron prices, weak demand and elevated expenses is concerning.
Previous Dam Failures Remain Overhang for VALE
On Nov 5, 2015, the Fundão tailings dam at the Samarco Mariana Mining Complex collapsed and caused environmental and community impacts, claiming 19 lives. The dam was owned and operated by Samarco, a joint venture between BHP Group’s (BHP - Free Report) subsidiary and Vale. Vale, alongside Samarco and BHP, is currently in negotiations with Brazilian authorities to seek a settlement for the obligations and other claims related to the dam failure.
On Jan 25, 2019, a tailings dam failed at Vale’s Córrego do Feijão mine in the city of Brumadinho and the state of Minas Gerais. It killed around 300 people, and caused extensive property and environmental damage in the region.
Following these mishaps, Vale has been decharacterizing its dams, a process that eliminates the dam's function of retaining tailings and water to increase the safety of nearby communities. From 2019 till the second quarter of 2024, Vale has disbursed $11.7 billion related to the reparation of Brumadinho and the decharacterization of its dams. A further $1.2 billion is expected in 2024 and an additional $4.2 billion is intended over 2025-2027.
Despite Record Q2 Iron Ore Output, 2024 Guidance Disappoints
Vale delivered the best second-quarter performance since 2018 in the April-June period, with an iron ore production of 80.6 million tons (Mt). Notably, the production rose 2% year over year. In the first quarter, the company witnessed an 11% increase in iron ore output to 70.8 Mt. The upbeat performance was mainly attributed to improved operating performance at the S11D mine, bolstered by ongoing asset reliability initiatives.
Vale expects iron ore production in 2024 to be near the top end of its guidance of 310-320 Mt. This depicts a decline from the 321 Mt of iron ore produced in 2023. Notably, the guidance reflects Vale's strategy of increasing the production of high-quality products (mainly at S11D).
VALE’s Earnings Estimates Trend Downward
The Zacks Consensus Estimate for fiscal 2024 and 2025 has moved south over the past 60 days. This reflects the decline in iron ore prices and the impacts on the company’s results.
Image Source: Zacks Investment Research
Vale’s Long-Term Prospects are Encouraging
Despite the near-term challenges, the company is well-positioned for long-term growth on the back of several catalysts.
Solid Project Pipeline Supports Vale’s Growth Story: As part of its strategic goal to become the preferred supplier for low-carbon steel, VALE is making progress on major growth projects like Vargem Grande and Capanema, which are expected to add 30 million tons of capacity over the next 12 months. Also, the S11D plus 20 million ton expansion project is scheduled to start in 2026 and will support production growth.
In 2026, Vale expects to raise its iron ore production to 340-360 Mt and agglomerates to 50-55 Mt. It will also continue to focus on improving the quality of its portfolio.
Projects such as Salobo III and Alemão will increase the company’s copper production capacity and the development of the Cristalino project will help extend the life of the Sossego mill. In addition, Vale continues to develop studies of the Hu'u project in Indonesia, a world-class asset, and is investing in the exploration of assets in mining regions considered to be prolific, such as Andean America and Eastern Europe. In 2026, Vale's copper production is expected between 390 kt and 420 kt, and reach more than 900 kt as of 2030.
For 2026, Vale expects its nickel production between 230 kt and 245 kt, reflecting replenishment projects in Canada, exposure to Pomalaa and Morowali, and the start-up of the second furnace at Onça Puma. In 2030, nickel production will likely cross the 300 kt mark, with input from projects such as Thompson Ultramafics, Sorowako HPAL, partnership projects and offtake.
Prices to Pick Up Eventually: Going forward, growth in world steel production, spurred by urbanization, will fuel demand for iron ore and help sustain prices. The long-term outlook for copper is positive as copper demand is expected to grow, partly driven by electric vehicles, and renewable energy and infrastructure investments. Nickel in electric vehicle batteries will become an increasingly important source of demand growth.
Vale’s Sector-Leading Dividend Yield
The company’s current dividend yield of 11.13 is higher than the sector’s 2.52% and the S&P 500’s 1.26%. Its payout rate is at 57.96%, also higher than the sector’s 54.05% and the S&P 500’s 33.79%. The company has a 5-year dividend growth of 12.9%.
Vale Generating Returns Higher Than Broader Market
VALE’s Return on equity, a profitability measure of how prudently the company is utilizing its shareholders’ funds, is at 22.3%, higher than the sector’s average of 11.9%.
Image Source: Zacks Investment Research
VALE’s Attractive Valuation
The company is trading at a forward 12-month Price/Sales ratio of 1.11X at a discount to the sector’s 2.37X.
Image Source: Zacks Investment Research
The stock is also cheaper than other iron miners like Rio Tinto (RIO - Free Report) , Fortescue Ltd (FSUGY - Free Report) and BHP Group, which are trading at 1.55, 2.19 and 2.47, respectively.
Conclusion
The downtrend in iron ore prices and weak demand, as well as elevated costs, cast a pall on Vale’s near-term results. Declining estimates and the recent price drop have made investors somewhat skeptical about retaining this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nevertheless, iron ore prices will eventually pick up, fueled by growth in world steel production spurred by urbanization. Demand for electric vehicles is expected to support copper and nickel prices. Vale is well-poised to benefit from these factors, given its solid portfolio of projects. Banking on its sector-leading dividend yield and reasonable valuation, buying this fundamentally strong company at the current reduced price can prove to be beneficial for long-term investors.
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VALE Declines 34.3% YTD: How Should You Play the Stock?
Vale S.A (VALE - Free Report) shares have plunged 34.3% in the year-to-date period, underperforming the broader Zacks Basic Materials sector’s 4.5% decline and the S&P 500’s climb of 16.8%.
The downtrend in iron ore prices has been reflected in its share price movement. China’s property crisis has weighed on demand for the steel-making ingredient. Beside low iron ore prices, Vale has been grappling with elevated input costs, particularly freight.
VALE’s YTD Price Performance Versus Sector & S&P
Vale shares are trading below the 50-day moving average, indicating a bearish trend.
VALE's Price Movement vs 50-Day Moving Average
Image Source: Zacks Investment Research
Given the significant pullback in Vale’s shares, investors might be tempted to snap up the stock. But is this the right time to buy? Let us find out.
Weak Demand in China Pulls Down Iron Ore Prices
The weakness in China’s construction sector, stemming from the prolonged debt crisis for major developers, has been weighing on iron ore demand and iron ore prices this year. Iron ore is one of the year’s worst-performing major commodities. Iron ore prices are currently at $98.19 per ton, the lowest level in 20 months.
The World Steel Association expects steel demand in China in 2024 to be flat with that reported in 2023 due to declining real estate investments. In 2025, China's steel demand is anticipated to decrease 1%. The association suggests that China may have reached its peak steel demand, and steel demand is likely to continue to decline in the medium term as the country gradually moves away from an economic development model reliant on real estate and infrastructure investments.
High Costs Hurt Vale’s Profitability
In the first quarter of 2024, VALE reported a 9% year-over-year decline in pro-forma adjusted EBITDA to $3.5 billion. The metric was down 6% to $4 billion in the second quarter. The downfall witnessed in both quarters mainly resulted from higher costs and expenses attributed to freight and maintenance activities. The combination of low iron prices, weak demand and elevated expenses is concerning.
Previous Dam Failures Remain Overhang for VALE
On Nov 5, 2015, the Fundão tailings dam at the Samarco Mariana Mining Complex collapsed and caused environmental and community impacts, claiming 19 lives. The dam was owned and operated by Samarco, a joint venture between BHP Group’s (BHP - Free Report) subsidiary and Vale. Vale, alongside Samarco and BHP, is currently in negotiations with Brazilian authorities to seek a settlement for the obligations and other claims related to the dam failure.
On Jan 25, 2019, a tailings dam failed at Vale’s Córrego do Feijão mine in the city of Brumadinho and the state of Minas Gerais. It killed around 300 people, and caused extensive property and environmental damage in the region.
Following these mishaps, Vale has been decharacterizing its dams, a process that eliminates the dam's function of retaining tailings and water to increase the safety of nearby communities. From 2019 till the second quarter of 2024, Vale has disbursed $11.7 billion related to the reparation of Brumadinho and the decharacterization of its dams. A further $1.2 billion is expected in 2024 and an additional $4.2 billion is intended over 2025-2027.
Despite Record Q2 Iron Ore Output, 2024 Guidance Disappoints
Vale delivered the best second-quarter performance since 2018 in the April-June period, with an iron ore production of 80.6 million tons (Mt). Notably, the production rose 2% year over year. In the first quarter, the company witnessed an 11% increase in iron ore output to 70.8 Mt. The upbeat performance was mainly attributed to improved operating performance at the S11D mine, bolstered by ongoing asset reliability initiatives.
Vale expects iron ore production in 2024 to be near the top end of its guidance of 310-320 Mt. This depicts a decline from the 321 Mt of iron ore produced in 2023. Notably, the guidance reflects Vale's strategy of increasing the production of high-quality products (mainly at S11D).
VALE’s Earnings Estimates Trend Downward
The Zacks Consensus Estimate for fiscal 2024 and 2025 has moved south over the past 60 days. This reflects the decline in iron ore prices and the impacts on the company’s results.
Image Source: Zacks Investment Research
Vale’s Long-Term Prospects are Encouraging
Despite the near-term challenges, the company is well-positioned for long-term growth on the back of several catalysts.
Solid Project Pipeline Supports Vale’s Growth Story: As part of its strategic goal to become the preferred supplier for low-carbon steel, VALE is making progress on major growth projects like Vargem Grande and Capanema, which are expected to add 30 million tons of capacity over the next 12 months. Also, the S11D plus 20 million ton expansion project is scheduled to start in 2026 and will support production growth.
In 2026, Vale expects to raise its iron ore production to 340-360 Mt and agglomerates to 50-55 Mt. It will also continue to focus on improving the quality of its portfolio.
Projects such as Salobo III and Alemão will increase the company’s copper production capacity and the development of the Cristalino project will help extend the life of the Sossego mill. In addition, Vale continues to develop studies of the Hu'u project in Indonesia, a world-class asset, and is investing in the exploration of assets in mining regions considered to be prolific, such as Andean America and Eastern Europe. In 2026, Vale's copper production is expected between 390 kt and 420 kt, and reach more than 900 kt as of 2030.
For 2026, Vale expects its nickel production between 230 kt and 245 kt, reflecting replenishment projects in Canada, exposure to Pomalaa and Morowali, and the start-up of the second furnace at Onça Puma. In 2030, nickel production will likely cross the 300 kt mark, with input from projects such as Thompson Ultramafics, Sorowako HPAL, partnership projects and offtake.
Prices to Pick Up Eventually: Going forward, growth in world steel production, spurred by urbanization, will fuel demand for iron ore and help sustain prices. The long-term outlook for copper is positive as copper demand is expected to grow, partly driven by electric vehicles, and renewable energy and infrastructure investments. Nickel in electric vehicle batteries will become an increasingly important source of demand growth.
Vale’s Sector-Leading Dividend Yield
The company’s current dividend yield of 11.13 is higher than the sector’s 2.52% and the S&P 500’s 1.26%. Its payout rate is at 57.96%, also higher than the sector’s 54.05% and the S&P 500’s 33.79%. The company has a 5-year dividend growth of 12.9%.
Vale Generating Returns Higher Than Broader Market
VALE’s Return on equity, a profitability measure of how prudently the company is utilizing its shareholders’ funds, is at 22.3%, higher than the sector’s average of 11.9%.
Image Source: Zacks Investment Research
VALE’s Attractive Valuation
The company is trading at a forward 12-month Price/Sales ratio of 1.11X at a discount to the sector’s 2.37X.
Image Source: Zacks Investment Research
The stock is also cheaper than other iron miners like Rio Tinto (RIO - Free Report) , Fortescue Ltd (FSUGY - Free Report) and BHP Group, which are trading at 1.55, 2.19 and 2.47, respectively.
Conclusion
The downtrend in iron ore prices and weak demand, as well as elevated costs, cast a pall on Vale’s near-term results. Declining estimates and the recent price drop have made investors somewhat skeptical about retaining this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nevertheless, iron ore prices will eventually pick up, fueled by growth in world steel production spurred by urbanization. Demand for electric vehicles is expected to support copper and nickel prices. Vale is well-poised to benefit from these factors, given its solid portfolio of projects. Banking on its sector-leading dividend yield and reasonable valuation, buying this fundamentally strong company at the current reduced price can prove to be beneficial for long-term investors.