We are maintaining our Neutral recommendation on Vale S.A. (VALE - Analyst Report) based on the optimism stemming from the worldwide demand upside for metals and minerals owing to industrial development.
The industrial development is expected to drive growth in the commercial market for miners like Vale, particularly on the back of rising spot prices for metals and minerals. On this backdrop, we believe that Vale’s operational efficiency and mining development will drive top-line growth. Moreover, investment in research and development is expected to boost Vale’s organic growth.
Vale focuses on volume growth of bulk material, which we believe will certainly boost the company’s sales in the coming quarters. Its diversified product portfolio allows the company to maximize the life of its mines over the long term. Moreover, Vale plans to diversify further in areas of coal, copper and fertilizers, while maintaining a competitive position in iron ore and nickel.
However, risk remains as we witness volatile international iron ore market impacting the company’s financials and dampening sales. Moreover, competitive pricing, rising oil price and mining cost inflation are also anticipated to affect margins. Uncertain market movements may also dampen results of this cyclical stock.
Vale faces governmental delays on permits and tight environmental regulations and policies. Mining and income taxation on miners has also been threatening top-line results for quite sometime. Natural disasters, abnormal rainfall, shortages of skilled workers and destabilizing industrial infrastructure continue to threaten stock performance.
Vale S.A. is one of the world’s largest producers and exporters of iron ore and pellets. The company keeps improvising its competitiveness against rival companies, such as Rio Tinto plc (RIO - Analyst Report) and BHP Billiton Ltd (BHP - Analyst Report).
Vale holds a Zacks #5 Rank, which translates into a short-term (1-3 months) Strong Sell rating.