- Bulk Materials And Other constitutes 84% of the Trefis price estimate for Vale's stock.
- Base Metals constitute 16% of the Trefis price estimate for Vale's stock.
WHAT HAS CHANGED?
- Impact of Coronavirus
- Vale's stock dropped 44% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus to reach $7 on 23rd March 2020. The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. The iron ore demand from industry players affects global iron ore price levels, in turn impacting the company’s price realization for its products. Lower demand from construction players and shedding of capacity by major steel companies, mainly in China, led to a drop in global iron ore prices recently. The stock price has since then recovered to over $20 as on 8th August 2021 due to economic packages from major governments across the globe and the gradual lifting of lockdowns which has increased iron ore prices and is expected to slowly ease supply bottlenecks which could drive higher shipments in the coming quarters. However, iron ore prices have sharply dropped in September and October 2021, leading to sharp decline in Vale's stock price to $12 at the beginning of November 2021.
- 2020 Earnings Update
- The company reported total revenue of $40 billion in 2020, marking a y-o-y increase of 6.5% from 2019. The rise in revenue was primarily driven by recovery in prices of iron ore, pellet, and copper. Vale reported earnings of $0.95 per share in 2020, as against a loss of $0.33/share in the previous year period mainly due to improvement in gross margin along with lower expenses related to the dam accident in Brazil.
- Minas Gerais Dam collapse
- On January 25, 2019, Vale informed that a dam burst at its iron ore mine in Brazil’s Minas Gerais state. According to reports, the incident killed at least 60 people with hundreds missing. Vale’s stock plunged as much as 20% on January 28, 2019, (the first trading day after the incident), its biggest intraday drop since late 2008. This is a second major incident after the Samarco dam collapse in 2015. However, the Feijao mine, where the recent dam burst took place, is about one-fifth of Samarco’s dam size. Thus, the environmental damage will be lower than in 2015. The dam in question was used to dispose tailings from ore production and was inactive. Thus, the direct impact of the latest incident on the company’s revenue will be minimal. The response from regulators is expected to be more aggressive compared to 2015. The concerned authorities may decide to scrutinize the structural condition of other tailing dams, which could lead to temporary suspension of production at a few other mines while the inspection takes place. Considering the fact that this is the second major incident in 3 years which concerns Vale, we expect the company to face stringent remediation requirements, tougher penalties, and lawsuits. We expect the total liability related to the accident to be close to $3.0 billion. Three court orders over the weekend immediately following the incident have already frozen $2.9 billion worth of the company’s assets pending damages. The stock price also took a further beating as the management abandoned its strategic decisions, such as paying generous dividends, reinvesting to improve functioning of its divisions, and looking for mid-sized acquisitions. Vale decided to suspend its planned shareholder dividend pay-out, share buybacks, and executive bonuses, as Vale braces itself for probable lawsuits and penalties.
- Increased regulatory curtailments in China supporting iron ore prices
- China has been fighting alarming levels of pollution and undergoing a structural change by cutting down its steel output. The Chinese regulatory authorities have cut down the output of substandard steel products and the Chinese steel producers are demanding iron ore with Fe content greater than 60% as it produces more steel per ounce of iron ore and emits less coke into the environment. Vale has access to high-grade iron ore at low cost which has remained beneficial for the company throughout 2017 and 2018. We expect Vale to reap the benefits of this regulatory requirement in 2019 as well.
- Vale agrees to buy New Steel
- In December 2018, Vale agreed to buy New Steel, a company that develops innovative technology to process iron ore and currently owns patents in 56 countries for its dry processing method. The deal, valued at $500 million, is expected to occur in 2019. The New Steel technology will augment the development of Vale's high-grade pellet feed initiatives. As demand for higher grade ore from China is on the rise, Vale is focusing on sale of better quality iron ore, and the deal with New Steel would help Vale increase its shipments and market share.
- Rising iron ore production
- Vale has continued to ramp up its iron ore production. Various projects, particularly the S11D mine, which has been at its full-scale operation since March 2018 is expected to provide a significant cost advantage to the company in the future. S11D mines are expected to add an additional 90 million tons of Vale's annual capacity by 2020. Additionally, Vale plans to expand its production capacity for S11D from 90 to 100 million tons per year starting in 2022, with an investment of about $770 million. This in turn would increase the capacity of the North system (Carajas and S11D) from 230 to 240 million tons while expanding revenue and economic contribution for the region.
- Cut down on nickel output
- Vale, being the world's largest nickel producer has opted to reduce its nickel output. This move comes in an expectation to benefit from a future environment of increased Nickel prices. Vale plans to increase its nickel output gradually over time post the prices for nickel have been correctly valued.
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 $150 per ton by the end of our forecast period as opposed to $130 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.
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.
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 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, a 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).