What’s Behind the 50% Fall in VALE Stock?

VALE (NYSE: VALE) stock has lost almost 40% since the beginning of the year as compared to the 28% gain in the S&P 500 Index. Vale’s downward stock price movement is much sharper compared to that for its peers, including ArcelorMittal (NYSE:MT) which is down 10% year to date, United States Steel Corporation (NYSE:X) down 19% year to date, and Nucor Corp (NYSE: NUE) which is down 17% year to date. VALE is one of the largest producers of iron ore and nickel with operations largely based in Brazil. It has seen a 50% drop from levels of $20 seen in early 2022 to less than $10 now. The fall in VALE stock can be attributed to China’s real estate crisis resulting in weak demand for iron ore, political risks to the company from Brazil, large settlement cost relating to the Mariana/Samarco dam collapse, and lastly the poor performance of the nickel segment. At the current price of around $9.60 per share, however, we believe Vale has almost 50% upside.

What’s Behind The Fall In VALE’s Earnings? 

Some of the decline of the last couple of years is justified by the sharp decline in the net income of the company, falling from $16.7 billion in 2022 to $7.9 billion in 2023. Revenues witnessed roughly a 5% drop in growth from 2022 to 2023. Further, the current year has also continued to remain weak. The weakness in performance is primarily due to lower average reference prices of iron ore, copper, and nickel in the year and an extra provision of US $1.2 billion related to Samarco’s obligations and a potential global agreement with Brazilian authorities.

While Vale has seen revenue contract over recent years, its P/S multiple has also declined, falling by 3.6% to 1.42 in 2023. While the company’s P/S is now 1.14 there is an upside, when the current P/S is compared to levels seen in the past years. 

The decrease in VALE stock over the last 3-year period has been far from consistent, although annual returns were less volatile than the S&P 500. Returns for the stock were -2% in 2021, 32% in 2022, and 1% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period.

Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could VALE face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

What to expect from Vale’s stock 

VALE’s revenues fell by 10% in the third quarter of 2024, coming in at $9.5 billion compared to $10.6 billion in the third quarter of the previous year. Operating profits were lower by 21% year on year due to weak iron ore fine prices coupled with the higher freight costs. However, Vale recorded the highest iron ore production since 2018. The company increased its  production guidance for the year, and is aiming to deliver 323-330 million tonnes range for 2024. 

We believe that there is a strong upside to Vale stock. The company is implementing a ‘Value over volume’ strategy, thereby aiming at optimizing production as well as reducing per unit costs. This should help improve margins in the long run. Additionally, the company is undertaking large scale growth projects, making significant progress with the commissioning of the Vargem Grande 1 project’s wet processing operations in September, one month ahead of schedule. The project represents an important step toward Vale’s iron ore production guidance of 340-360 Mt in 2026. Another important project at Capanema is underway and is on track to commence by the first half of 2025 and second half of 2026. The company is also taking active steps to improve the quality of its portfolio. Similar efforts are ongoing in copper and nickel as well. Moving forward, we value VALE stock about 50% above current prices with the expected increase in world steel demand due to urbanization, as well as an increase in copper and nickel demand driven by increasing demand for electrical vehicles and renewable energy.

[1] Returns as of 12/6/2024
[2] Cumulative total returns since the end of 2016

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