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Investment Overview for Vale (NYSE:VALE)
The prices of major metallic commodities produced by Vale bottomed out in 2016 and are expected to rise going forward. A large part of this recovery in commodity prices is as a result of an improved demand outlook from the U.S., driven by President Trump's infrastructure plan. In addition, an extended period of depressed prices have resulted into the closure of high cost production capacity, helping prop up prices as well.
- Potential impact of the U.S. government's infrastructure plan
- The U.S. government has planned a ten year $1 trillion overhaul of domestic infrastructure, with a particular focus on transportation infrastructure. The implementation of this infrastructure plan, once it has been passed by Congress, is expected to sharply boost U.S. demand for copper and iron ore, which should translate into improved pricing environments for these commodities.
- Rising iron ore production
- Vale has continued to ramp up its iron ore production despite a sharp decline in prices over 2014 and 2015. Various projects, particularly the S11D mine, are expected to result in a growth in Vale's iron ore production from 349 millions tons in 2016 to over 400 million tons by 2020.
Below are key drivers of Vale's value that present opportunities for upside or downside to the current Trefis price estimate for Vale:
- Iron Ore Shipments: We expect Vale's iron ore shipments to rise rapidly till 2018, due to the completion of the S11D iron ore project and ramp-up of production from the project. However, the demand for iron ore might not rise at the same rate. If demand does not recover sufficiently over the forecast period, Vale may be forced to reduce its planned iron ore shipments. If instead of the currently envisaged rates, iron ore fines and pellet shipments grow at a lower rate, and reach 400 million tons instead of the currently estimated 446 million tons by 2020, it would represent a downside of around 12% to our price estimate.
- Average Realized Iron Ore Price : We expect iron ore prices to rise steadily over the forecast period, after bottoming out in 2016. If the recovery is faster than anticipated and Vale's realized price for iron ore fines reaches $60 per ton by 2020 as opposed to $56 per ton as currently factored into our estimates, this would represent an upside of around 7% to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Vale at the top of the page.
Vale is one of the world's largest mining companies.It primarily operates in Brazil and also has operations in 32 other countries. It is the world leader in iron ore and iron ore pellets production and has access to the world's largest nickel reserves. Apart from iron ore and nickel, it also produces copper, coal, and other base metals. Vale also operates a large logistics network in Brazil which includes railroad, maritime terminals, and a port.
The company's Bulk Materials and Other division is the most valuable division for the following reasons:
Ferrous minerals are the company's primary focus
Ferrous minerals, that include iron ore and iron ore pellets, it the largest source of revenue for Vale, accounting for approximately 75% of the company's revenues. We expect the segment to maintain this share going forward.
We expect the company to see solid revenue growth for ferrous minerals as the company has long-term contracts with iron and steel manufacturers worldwide, thereby safeguarding its production and mining activities.
Recovery in iron ore prices
Iron ore prices fell considerably over the course of 2014-2015 as a result of an oversupply situation created due to weak demand conditions and rising supply of the commodity. Slowing economic growth in China, the world's largest importer of iron ore, translated into weak demand for the commodity. The sharp ramp up of production by major iron ore mining companies such as Vale, Rio Tinto and BHP Billiton despite faltering demand resulted into an oversupply situation. However, an extended period of declining iron ore prices over 2014-2015 resulted in the curtailment of production by several high-cost iron ore producers and a moderation in production growth by the big mining companies. As a result, prices of the commodity stabilized during the course of 2016 and are expected to rise going forward.
Recovery in copper prices
Copper prices declined considerably over the course of 2014-2015 as slowing economic growth in China negatively impacted global demand for the commodity. However, the prospect of the implementation of the U.S. government's $1 trillion infrastructure plan has helped boost the demand outlook for copper and the prices of the commodity.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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