Vale’s Stock To Decouple From Its Fundamentals In The Short Term

by Trefis Team
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Vale S.A. (NYSE: VALE), the world’s largest iron ore miner, saw its stock price drop last week, after news broke that the company was struck with another major operational disaster. On January 25, Vale informed that a dam burst at its iron ore mine in Brazil’s Minas Gerais state. According to reports, the incident has killed at least 60 people with hundreds still missing. Vale’s stock plunged as much as 20% on Jan 28 (the first trading day after the incident), its biggest intraday drop since late 2008. The stock closed down 18% at $11.20, but over the next four days recovered to the $12.56 on February 1, 2019.

Source: Market Watch (


A number of analysts who have been very bullish about Vale have cut ratings on the stock. As our estimate was slightly lower than the consensus, we continue to maintain our price estimate of $14.24 for Vale’s share for now, which is higher than its current market price. We have summarized our assumptions that affect Vale’s stock price in our interactive dashboard – Impact Of Dam Disaster On Vale’s Stock.

Impact on Vale

  • 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.
  • There are also reports that the top management will have to face the brunt and a few big names might be asked to step down to face investigation.

What does the future hold?

We believe that Vale’s stock will not trade according to its fundamentals in the near term. Instead, its price movements will be dictated by headlines related to the repercussions of the accident and production estimates. However, this will be a short-term phenomenon and we expect the share price to finally trade close to its intrinsic value. The stock is currently trading at a discount of about 13% to our estimate of the share’s fundamental value.


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