Vale’s Stock Recovers 60% In 70 Days; Where’s It Headed Now?

by Trefis Team
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Comparing the trend in Vale’s stock (NYSE: VALE) over recent months and its trajectory during and after the great recession of 2008, we believe the stock can potentially gain close to 20% from its current level of $10.50, to reach a little over $12 post the coronavirus crisis. A detailed comparison of Vale’s performance against the S&P 500 is available in our interactive dashboard analysis, How Much Could Vale Stock Gain Post-Covid?

The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued till February 19 with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. Vale’s stock lost 45% of its value (vs. about 34% decline in the S&P 500) between February 19 and March 23. The cumulative drop was 50% compared to the price as on 31st January 2020. A bulk of the decline came after March 6th, when an increasing number of coronavirus cases outside China fueled concerns of a global economic slowdown. Notably though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover 60% over recent weeks (vs. about 38% gain in the S&P 500) to its current level of $10.60.

Reason Behind Vale’s Stock Decline

The global spread of coronavirus has led to lockdown in various cities across the globe, which has 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, has led to a drop in global iron ore prices recently. Additionally, the lockdown is affecting the global supply chain for companies like Vale which have operations spread across geographies, leading to decline in production and shipments. This was confirmed to a certain extent in the Q1 2020 results, where we saw 15% decline in Vale’s revenues, though earnings were higher due to one-time charges in 2019 (related to Brazilian dam accident).

Vale Witnessed Something Similar In 2008

We see Vale stock declined from levels of around $25 in October 2007 (the pre-crisis peak) to roughly $12 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 53% of its value from the pre-crisis peak. This marked a larger drop than the broader S&P, which fell by about 51%. However, Vale recovered strongly post the 2008 crisis to about $29 in early 2010 – rising by a large 146% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

Will Vale Stock Recover Similarly From The Current Crisis?

Keeping in mind the fact that Vale stock fell over 45% from the level as on February 19 and 50% from its pre-crisis peak on January 31 to the low on March 23 compared to the 53% decline during the 2008 recession, we believe it has the potential to bounce back by close to 100% from its March 2020 low to reach about $12 post crisis, of which the stock has already recovered 60%. However, with the iron ore prices expected to remain subdued compared to 2019 levels, and in the absence of any signs of the current crisis abating, we believe that the stock could hover around its current price level. Trefis has a fair price estimate of $11 per share for Vale’s stock, close to its current stock price. This marks a partial recovery to the $13 level Vale’s stock was at before the Covid-19 crisis.

Looking for more insights into how other iron ore players are faring? Here’s how close rival Cleveland-Cliffs’ stock has been performing.

Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

 

See all Trefis Price Estimates and Download Trefis Data here

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