Why We’re Revising Our Price Estimate For Vale To $6

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Vale, the world’s largest producer of iron ore and nickel, has benefited from a mini-revival in the prices of these commodities. The firming up of the prices of iron ore and nickel has boosted the company’s stock price. Iron ore markets have been characterized by an oversupply situation over the past few years, caused due to the rapid ramp up of production by major iron ore mining companies even in the face of subdued demand conditions. Though the oversupply conditions are expected to persist over the next couple of years, limiting the upside for iron ore prices, resilience in Chinese iron ore demand has propped up prevailing prices. The Chinese government’s fiscal stimulus program, restocking activities by Chinese steel mills, and low port inventories have boosted iron ore prices over the past few weeks. [1] Though we don’t expect iron ore prices to recover rapidly in the near term, we have revised upwards our 2016 forecast for Vale’s realized iron ore prices to reflect the stronger than expected prevailing pricing environment.

In addition to the recent revival in iron ore prices, the prices of nickel have also recovered over the past few weeks. A crackdown on mines that violate environmental standards by the Philippine government has resulted in the shutdown of several nickel mines in the country. [2] The Philippines is one of the largest exporters of nickel to China and amongst the largest suppliers of the commodity worldwide. [3] Fears of a disruption of Filipino nickel supply have propped up nickel prices and have also prompted us to revise our forecasts for the company’s realized nickel prices.

As a result of the revisions to our pricing forecasts, our price estimate for the company’s stock has also been modified, reflecting the changed business environment.

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Notes:
  1. Iron ore price soars past $61 per ton to fresh 3-month high, Mining.com []
  2. Philippines Shuts More Nickel Mines on Environment Crackdown, Bloomberg []
  3. Nickel price jumps on Manila mining crackdown, Mining.com []