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Vale (VALE) Braves Pricing Woes With Robust Productivity

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We issued an updated research report on Vale S.A. (VALE - Free Report) on Nov 15.

Inside Story

Vale carries a Zacks Rank #3 (Hold) as we notice that the stock is currently influenced by both optimistic and pessimistic aspects.  

We notice that over the last month, Vale’s shares lost nearly 7%, wider than the 3.8% loss incurred by the industry.


You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We expect that the declining iron-ore prices might continue to hurt the revenues and profitability of mining giants like Vale, BHP Billiton Limited (BHP - Free Report) , Rio Tinto plc (RIO - Free Report) and Kumba Iron Ore Limited . Over the last three months, price of this major steel-making component dipped nearly 15.8% to $61.49 per ton, as of Nov 14, 2017.

The downside primarily stemmed from negative market segments. China is currently cutting back steel production to shut down pollution-creating steel plants and reduce illegal production. Nevertheless, we notice that lower steel demand in the nation is making investors believe that iron-ore prices (major steel making component) would decline further. Moreover, excess supply of iron ore in the global market and adequate steel inventories in China increases the scope of further price slump in the quarters ahead.

In addition to this, other headwinds such as environmental hazards, issues with government licenses and permission, and stiff industry rivalry might hurt Vale’s revenues and profitability in the near term.

However, the 2017 Zacks Consensus Estimate for Vale moved up over the last 60 days. The upside reflects positive market sentiments.

We anticipate that solid volumes, greater cost discipline and successful ramp-up of major mines will strengthen Vale’s results in the quarters ahead. The company is also bringing down its exploration and mining expenses by maximizing the productivity of major mines.

In third-quarter 2017, its iron-ore ore output touched a record high, rising roughly 3.3% year over year. The upswing stemmed from the robust ramp-up of Vale’s S11D mine in the Northern System. Notably, the CLN S11D project will likely boost the productivity of the mine, going forward.

The company has also reaffirmed its long-term target to produce 400 million tons of iron ore per year. In addition, investments made Vale for expansion and maintenance improvements of its existing facilities are anticipated to bolster the overall productivity in the near term.

Also, Vale has been steadily lowering its debt burden on the back of the liability management program (that aims to reduce the company's debt burden through optimal utilization of cash balance). The company estimates its net debt to reduce and lie in the range of $15-$17 billion by the end of 2017.

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