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Vale Downgraded to Hold as Iron Ore Price Slump Hits Miners

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On Mar 29, Vale S.A. (VALE - Free Report) was downgraded by a notch to a Zacks Rank #3 (Hold). Going by the Zacks model, companies holding a Zacks Rank #3 have chances of performing in line with the broader market in the next one to three months.

Why the Downside?

Miners are in doldrums as iron ore prices enter bear-market territory. On Mar 21, spot price for benchmark 62% fines dropped 3.1% to $63.12 per ton, the lowest level since Nov 21. In the last three months, prices of this major steel making product have dipped nearly 2% to $65.99 per ton as of Mar 28, 2018.

Subdued construction activity in China along with speculations concerning the possible impact of worldwide trade tensions as well as continuation of some production limitations China (on account of air pollution) is expected to negatively impact the metal’s prices going forward.

Notably, Iron ore is a major product traded by mining behemoths like Vale, BHP Billiton Limited (BHP - Free Report) , Rio Tinto plc (RIO - Free Report) and Golden Minerals Company (AUMN - Free Report) . Hence, slump in its prices might pressurize the top line of these companies.    

Moreover, we fear that headwinds like extensive business rivalry, oversupply situation in the mining market or occurrence of an environmental hazard might prove fatal to Vale.

Factors Still in Favor

Decline in iron ore prices is a major cause of worry for Vale. However, the stock retains certain growth drivers that might help in mitigating existing adversaries.   

In the last six months, Vale’s shares have rallied 23.8%, outperforming 21.5% gain recorded by the industry.


 

 

In fourth-quarter 2017, the company’s revenues had improved 1.3% sequentially, on account of increased sales volumes at the Ferrous Minerals segment and higher sales prices at the Base Metals segment. The company perceives that higher prices of other core metals like copper, cobalt and gold might aid in improving its near-term top-line performance.  

Moreover, investments made for expansion and maintenance of existing facilities are likely to bolster the company’s overall mining yield. In fact, by boosting productivity, Vale tries to bring down its exploration and mining expenses.

Furthermore, the company has been steadily lowering its debt burden backed by the liability management program.

Notably, the Zacks Consensus Estimate for the stock has moved northward over the last 60 days, for both 2018 and 2019, reflecting optimistic market sentiments.

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

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VALE S.A. (VALE) - free report >>

BHP Billiton Limited (BHP) - free report >>

Rio Tinto PLC (RIO) - free report >>

Golden Minerals Company (AUMN) - free report >>


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