The shares of VALE (NYSE: VALE) one of the world’s largest producers of iron ore and nickel, with operations largely based in Brazil, have gained about 9% year-to-date, although they remain down by almost 30% from levels seen in early April, roughly tracking the movement in iron ore prices. While iron ore prices are up marginally year to date, trading at about $121 per ton presently, they remain down from highs of roughly $157 per ton in March 2022, and levels of around $220 in July 2021. Chinese steelmakers account for about half of all global consumption of iron ore and demand has been hampered of late by Covid-19 restrictions in the country as well as a downturn in the Chinese real estate market. New home prices in China have been on the decline, with sales of properties also down nearly 60% year-over-year over April and May. Separately, the U.S. Federal Reserve and other central banks have also been hiking interest rates at a more aggressive pace to combat surging inflation. The monetary tightening, as well as elevated energy prices caused by the war in Ukraine, could hurt global growth and, in turn, impact demand from key steel consumers.
VALE’s financial performance has also been somewhat mixed recently. Over Q1 2022, VALE revenues and earnings dropped sequentially, as iron ore production dropped 22.5% versus Q4, due to intense rains in the Minas Gerais state in Brazil, although this was partly offset by rising prices for iron ore, copper, and nickel. The company realized about $141 per ton of iron ore, up 29% sequentially although it was down 15% year-over-year. With commodity prices declining further in recent weeks, we could see some pressure on the company’s revenue and margins in the coming quarters.
So, what’s the outlook like for VALE stock? At its current market price of about $15 per share, VALE stock trades at under 4x consensus 2022 earnings. Although highly cyclical stocks such as VALE typically see lower multiples when the markets project that earnings and revenues are approaching a near-term peak, there is still reason to consider the stock. The EIA’s lower benchmark oil projections for 2023 and prospects of leniency in China’s Covid policy after Shanghai and Beijing reported no new cases on Monday, could help the Chinese economy and the steel sector to an extent. Now, although the outlook for China’s real estate sector still remains concerning, the issues have been well known for some time, and this probably means that this risk is already priced into VALE stock. Even the concerns regarding a downturn in the U.S. economy could be overstated. Indicators do not point to a very deep decline even if there is a recession, with household savings rising post the pandemic and banks also remaining well-capitalized. VALE appears to be in a stronger position to weather a downturn, given that it has paid down debt in recent years. The company’s net debt stood at a little over $4 billion as of Q1 2022, down from $18 billion at the end of 2017.
VALE is also looking at more futuristic bets, by increasing its exposure to the fast-growing electric vehicle space. For example, the company recently announced a deal to supply EV bellwether Tesla with low-carbon nickel, while also considering the development of a nickel sulfate operation in Canada with an annual capacity seen at 25,000 tonnes. These bets could help to drive some incremental upside for the stock. We value VALE stock at about $25 per share, which is meaningfully ahead of the current market price. See our analysis on VALE valuation for more details on what’s driving our price estimate for the stock and how it compares to peers.
|S&P 500 Return||-8%||-20%||71%|
|Trefis Multi-Strategy Portfolio||-6%||-24%||198%|
 Month-to-date and year-to-date as of 6/29/2022
 Cumulative total returns since the end of 2016