VALUATION HIGHLIGHTS

1. Bulk Materials And Other constitutes 78% of the Trefis price estimate for Vale's stock.
2. Base Metals constitute 22% of the Trefis price estimate for Vale's stock.

WHAT HAS CHANGED?

1. VALE's Q2 2022 Results

VALE's Q2 2022 revenue declined by about 32% from the previous year to $11.16 billion, with net income declining almost 50% to $4.09 billion. The decline is driven largely by lower prices for iron ore and rising costs, particularly for fuel and logistics. That said, earnings were still ahead of street estimates.

2. VALE's 2021 Results

In 2021, VALE reported a strong 38%(y-o-y) growth in total revenues assisted by overall strength in iron & nickel prices and rising production. Pent-up demand and supply chain hurdles due to the Russia-Ukraine war have supported commodity prices in recent months against the expectations of slow macroeconomic recovery perceived earlier. Per annual filings, iron ore fines, iron ore pellets, nickel, copper, and other minerals account for 71%, 13%, 6%, 5%, and 5% of total revenues, respectively. Geographically, Asia, Europe, North America, South America, and other regions account for 69%, 12%, 4%, 11%, and 4% of total sales, respectively. In 2021, the company generated $26 billion of cash from operations, invested $5 billion in property, plant & equipment, and paid $13.4 billion in dividends.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 substantially over our forecast period, due to the completion of the S11D iron ore project and the ramp-up of production from the same. However, the demand for iron ore might not rise at the same rate due to weaker than expected growth in global demand, especially from China. If demand does not grow as expected 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 300 million tons instead of the currently estimated 333 million tons by the end of our forecast period, it would represent a downside of around 10% to our price estimate.

• Average Realized Iron Ore Price : We expect iron ore prices to rise steadily over the forecast period. If the recovery is faster than anticipated and Vale's realized price for iron ore fines reaches $170 per ton by the end of our forecast period as opposed to $150 per ton as currently factored into our estimates, this would represent an upside of around 7-8% 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.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

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 its revenue share at over 80% going forward.

Long-term contracts

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.

KEY TRENDS

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 moderation in production growth by the big mining companies. As a result, prices of the commodity stabilized during the course of 2016 and rose significantly in 2017, and remained stable in 2018. However, additional factors such as the steel production curtailments implemented by the Chinese government, have reduced the demand for iron ore(especially that for lower-grade iron ore) and had a negative impact on prices. Iron ore prices have been on an upswing since January 2019 and recently hit a two-year high on the back of fear of lower output following production cuts at Vale due to the recent dam disaster at Minas Gerais. However, in mid-2019, iron ore prices declined on the back of lower demand from China and faster ramp-up of supply than earlier estimated. Prices again went down in 2020 after the coronavirus pandemic hit the world. However, iron ore prices recovered sharply on the back of economic packages and higher demand expectations.

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 multi-trillion dollar infrastructure plan has helped boost the demand outlook for copper and the prices of the commodity. The price currently is over $4/pound and is expected to be at such an elevated level mainly due to an increase in demand for Electric Vehicles (EVs).