Vale (VALE) Rides on Solid Demand & Cost Control Efforts
Vale S.A VALE is well-poised to benefit from its efforts to improve productivity, introduce high-quality ore in the market, and control costs. Backed by its solid cash flow, Vale has been lowering debt levels while investing in growth projects. The company's efforts to streamline its portfolio and focus on boosting production from its most profitable businesses are commendable.
Iron Ore Demand & Prices to Boost Revenues
Despite a 6% year-over-year decline in iron ore production in the first quarter of 2022 due to high rainfall, Vale maintained iron ore production guidance at 320-335 Mt for 2022. Nickel production declined 5.4% in the quarter on account of unscheduled maintenance in the Onça Puma electric furnace, ramping up at Sudbury mines after the labor disruption and repairs at the Totten mine shaft. With Sudbury reaching pre-strike rates and Totten resuming operations, the company affirmed its nickel production guidance at 175 kt to 190 kt for 2022.
Steel demand from the automotive sector, infrastructure, and housing markets will continue to support demand for iron ore. Vale remains committed to the goal of introducing more high-quality ore into the market. The company ended 2021 with 340 Mt of production capacity and expected it to go up to 370 Mtpy by 2022-end, after the ramp-up of the tailings filtration plants at the Itabira and Brucutu sites and their respective additions in tailings storage capacity during the second half of the year. It is anticipated to increase to 450 Mtpy in the future.
Vale remains committed to the goal of introducing more high-quality ore into the market. It strives to deliver the highest possible margins by managing an extensive supply chain and flexible product portfolio. It has been focusing on the product line to capture industry trends, improve quality and productivity, control costs, strengthen the logistics infrastructure of railroads, ports, shipping and distribution centers, and cement relationships with customers.
Iron ore prices have rebounded to $125 per ton lately, courtesy of solid demand prospects amid easing coronavirus-induced restrictions in Shanghai and other Chinese cities. Several steelmakers are set to restart production amid declining margins and insufficient demand to replenish inventories. Copper prices are expected to gain on a pickup in demand as China eases restrictions. This bodes well for Vale.
Solid Balance Sheet, Investment to Aid Growth
Over 2016-2021, the company's cash flow has witnessed a CAGR of 21%. Backed by solid cash flow, Vale continues to lower its debt position and strengthen its balance sheet. It had a total debt-to-capital ratio of 0.32 at the end of the first quarter of 2022. The company paid $3.5 billion to shareholders as dividends in the first quarter of 2022 and has completed 84% of its current share buyback program so far. Its board of directors has approved a new program of up to 500 million shares (equivalent to around 10% of currently outstanding shares) that will be executed in the following 18 months after the current buyback program is concluded.
Vale expects capital spending of $5.8 billion in 2022. The company is investing in the Serra Sul project, which is expected to increase the S11D mine plant capacity by 20 Mtpy (million tons per year) to 120 Mtpy. Investment in solar energy projects like the Sol do Cerrado project will help cut down the company's average energy cost while increasing its share in renewable energy. Vale has plans to spend an average of $5.5 billion in subsequent years. The company has announced investments of $4-6 billion for greenhouse gas emission reduction by 2030.
It recently announced that it has completed the prefeasibility study for its proposed nickel sulfate project in Quebec, Canada. The project is expected to process 25,000 tons of contained nickel annually into nickel sulfate. This project development is in sync with the company's ongoing endeavors to deliver low-carbon and high-purity nickel products for the promising electric vehicle industry. The project would be the first-of-its-kind fully domestic nickel sulfate facility for the North American market, leveraging current and future production of low-carbon and high-grade nickel from Vale's world-class Canadian operations.
The company is working toward transforming its base metals business and believes it will attain 500 ktpy (kilo tons per year) with projects already in the pipeline — Salobo III, Alemao and Cristalino. It has taken steps to simplify its portfolio and focus on bolstering production from its most profitable businesses.
Price Performance
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In the past year, shares of Vale have fallen 31.3%, compared with the industry's decline of 31.2%.
Zacks Rank & Other Stocks to Consider
Vale currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Some other top-ranked stocks in the basic materials space are Allegheny Technologies Inc. ATI, Nutrien Ltd NTR and Albemarle Corporation ALB, each flaunting a Zacks Rank #1 at present.
Allegheny has a projected earnings growth rate of 869.2% for the current year. The Zacks Consensus Estimate for ATI's current-year earnings has been revised 27.3% upward in the past 60 days.
Allegheny has a trailing four-quarter earnings surprise of 128.9%, on average. ATI has gained 6% in a year.
Nutrien has a projected earnings growth rate of 163.2% for the current year. The Zacks Consensus Estimate for NTR's current-year earnings has been revised upward by 27.5% in the past 60 days.
Nutrien has a trailing four-quarter earnings surprise of 5.8%, on average. NTR has gained 34% in a year.
Albemarle has a projected earnings growth rate of 203.7% for the current year. The Zacks Consensus Estimate for ALB's current-year earnings has been revised 100.4% upward in the past 60 days.
Albemarle has a trailing four-quarter earnings surprise of 22.5%, on average. ALB has appreciated 23% in a year.
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