On Nov 14, we issued an updated research report on Vale S.A. VALE. The consequences of the Brumadinho tailing dam failure remain a headwind. Nevertheless, Vale strives to deliver the highest possible margins by focusing on product line, improving productivity, controlling costs, and better price realization. The company is also likely to gain from investment in projects, lower debt and efforts to transform its base metals business.
Impact of the Brumadinho Dam Disaster
On Jan 25, 2019, a tailings dam failed at Vale’s Córrego do Feijão mine, in the city of Brumadinho, state of Minas Gerais, killing around 300 people and causing extensive property and environmental damage in the region. Following this, Vale suspended various operations, which impacted the company’s iron ore annualized production by about 92.8 Mt.
In June, Vale announced that it will resume wet processing operations at Brucutu mine — its second largest iron ore operation in Brazil leading to recovery of 30 Metric tons per year (Mtpy) of production capacity. Further, with the partial resumption of dry processing at the Vargem Grande complex added about 12Mtpy. These initiatives have helped Vale in making substantial progress toward the 93 Mtpy of iron ore production capacity stopped in the first quarter. The company expects to recover 50 Mt of lost production by 2021.
Revenues in fiscal 2019 will be lower owing to suspended operations. Vale anticipates incurring significant expenses as a result of assistance and remediation actions following the dam failure. Vale disbursed $608 million in the nine-month period ended Sep 30, 2018 and the current provisions totaled $4.769 billion, as of Sept 30, 2019.
Headwinds in Coal Business
Vale’s coal operations remain challenged with lower productivity at the processing plants, thanks to a decrease in equipment availability. Consequently, the company reassessed its business strategy and implemented a new mining plan and maintenance program for plant recovery. The maintenance program could result in some short-term pressure on volumes and consequently unit costs as major interventions in the processing plants will take place in the first half of 2020.
Vale’s “Value over Volume” Approach to Drive Margins
The company is focusing on maintaining its ‘”value over volume” approach for the iron ore business. Vale remains committed to delivering the highest possible margins by managing extensive supply chain and flexible product portfolio. The company strives for better price realization, based on adjustments to product portfolio according to market demand and supply chain optimization. The company is also focusing on product line to capture industry trends, improving quality and productivity, controlling costs, strengthening logistics infrastructure of railroads, ports, shipping and distribution centers, and strengthening relationships with customers.
Low Debt Levels & Investment to Spur Growth
Backed by solid cash flow, Vale continues to lower debt position and strengthen balance sheet. As of third-quarter fiscal 2019 end, the company’s net debt stood at $5.3 billion, down from $10.7 billion as of third-quarter 2018 end. This was the lowest since fourth-quarter 2008.
Investments totaled $891 million in third-quarter fiscal 2019, consisting of $135 million in project execution, with the Northern System 240 Mtpy and Salobo III as the main projects under development. It also includes $756 million in maintenance of operations, out of which $77 million are related to replacement projects. The company also continues to take several measures to increase safety standards in dams’ management.
Long-Term Outlook for Metals Remain Strong
Vale continues to benefit from high price premiums for high-grade iron ore fines. The company remains committed to the goal of introducing more high-quality ore in the market. The long-term demand remains strong for higher grade ore from newer and bigger blast furnaces in China, and other emerging economies such as India and South East Asia.
The company is also focused on transforming its base metals business into a significant cash generator. Vale is focusing on nickel business through supply chain integration, operational excellence and digital transformation.
The long-term outlook for nickel continues to be positive. Nickel in electric vehicle batteries will become an increasingly important source of demand growth. The company also has plans to develop a multi-year copper expansion plan, with Salobo III being the first approved project in the pipeline. The long-term outlook for copper is positive as demand is expected to grow, partly driven by electric vehicles and renewable energy and infrastructure investments. Meanwhile, future supply growth remains challenged given declining ore grades and the need for greenfield investment, which is likely to drive demand further.
Share Price Performance
Over the past year, Vale's shares have gained 26.6% compared with the industry’s growth of 26.7%.
Zacks Rank & Stocks to Consider
Vale currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Basic Materials space are Franco-Nevada Corporation FNV, Agnico Eagle Mines Limited AEM and Kinross Gold Corporation KGC. While Franco-Nevada Corporation and Agnico Eagle Mines sport a Zacks Rank #1 (Strong Buy), Kinross Gold carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Franco-Nevada has a projected earnings growth rate of 39.3% for the ongoing year. The company’s shares have rallied 84% in a year’s time.
Agnico Eagle has an outstanding estimated earnings growth rate of 168.6% for the current year. Its shares have appreciated 130% over the past year.
Kinross has an expected earnings growth rate of a whopping 210% for 2019. The company’s shares have surged 58% in the past year.
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