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ETFs to Watch as Vale Collapses on Tailings Dam Tragedy

Zacks Equity Research

Vale SA VALE shares fell sharply on Jan 28 after it suspended dividend payments, share buybacks and executive bonuses in an aftermath to a tailings dam collapse on Friday.  About 60 people have been killed and hundreds are still missing after the dam’s collapse in Vale’s Corrego do Feijao mine in southeastern Brazil (read: Brazil Economy Gaining Steam: ETFs in Focus).

Vale’ s American depositary receipts (ADR) fell by almost 8% on Jan 25 and around 18% on Jan 28—lowest close since December 2017. The incident has affected the market valuation of Brazil’s biggest iron-ore miner, resulting in 71.34 billion reais (US$18.96 billion) worth of decline in its market value. The pure play steel ETF, VanEck Vectors Steel ETF SLX plunged 3% during trading hours on Jan 28.

The reservoirs contain byproducts from mining operations known as tailings. In November 2015, a similar event took place when a huge tailings dam operated by Brazilian mining company, Samarco, collapsed. Samarco is a joint-venture between Vale and BHP Billiton Ltd BHP.

Prosecutors, politician and victim families have asked for severe punishment as the death toll is expected to reach hundreds.  Per, Igor Lima, a fund manager and partner at Galt Capital in Rio de Janeiro, the reaction coming from government and other public agencies is stronger than the Samarco incident. The reaction has raised a lot of uncertainty with regard to financial punishment.

However, Vale’s output levels are not going to be affected massively as the concerned mine accounted for about 7% of the total output. So, analysts have highlighted risks such as remediation charges, lawsuits, additional inspections and the potential closing of other mines.

Downgrades in Vale Securities

Vale’s securities are coming under scrutiny from reputed credit rating institutions like Fitch and Standard & Poor’s. Fitch has downgraded the company's debt to ‘BBB- ‘ and placed it on ratings watch negative, while the S&P has put Vale’s debt under review for possible downgrade. Several investment banks have downgraded the stock of Vale, but have struck a cautious note until investigations are complete.

BMO Capital markets have downgraded the stock to market perform and cut the price target to $13 per share. Jefferies and HSBC have also lowered the stock’s rating to ‘hold’ and lowered their price targets.

Current Fines Imposed

The company has disclosed that judges have sealed around $2.9 billion worth of assets. Also, Brazil’s environmental protection bureau IBAMA and Minas Gerais have imposed sanctions amounting to $66 million and $26 million, respectively.

ETFs in Focus

Against this backdrop, we highlight SLX and iShares Latin American 40 ETF ILF, which provide significant exposure to Vale:

SLX— Vale has 11.9% exposure

The fund tracks the NYSE Arca Steel Index which tracks the performance of companies involved in the steel sector. It comprises 26 holdings with Vale sitting at the second position. Country wise, United States (36.2%), Brazil (20.7%), the Netherlands (14.4%) and Australia (1.9%) have double-digit allocation each. The fund’s AUM is $64.0 million and expense ratio is 0.56% (see: all the Materials ETFs here).

ILF— Vale has 9.3% exposure

The fund tracks the S&P Latin America 40 Index which provides access to large, established companies in Latin America. It comprises 41 holdings. Country-wise, Brazil (63.1%) and Mexico (21.1%) have double-digit allocation. The fund’s AUM is $1.2 billion and expense ratio is 0.48%. Currently, ILF carries a Zacks ETF Rank #3 (Hold) with a High risk outlook (see: all the Latin American Equity ETFs here).

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iShares Latin America 40 ETF (ILF): ETF Research Reports
VanEck Vectors Steel ETF (SLX): ETF Research Reports
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