Vale S.A. (VALE), a leading global producer of iron ore and nickel, has experienced a significant stock price decline of nearly 40% since the beginning of 2024, contrasting sharply with the S&P 500’s 28% gain. This downturn is steeper than that of its competitors, such as ArcelorMittal, United States Steel Corporation, and Nucor Corp, which have experienced declines ranging from 10% to 19%. From a high of $20 per share in early 2022, VALE’s stock has plummeted to below $10, driven by a confluence of factors. These include a weakened demand for iron ore stemming from China’s real estate crisis, political risks associated with its operations in Brazil, substantial settlement costs related to the Mariana/Samarco dam disaster, and underwhelming performance in the nickel segment. Despite these challenges, an analysis suggests a potential 50% upside for VALE stock at its current price of around $9.60 per share.
The decline in VALE’s stock price is partly justified by a significant drop in its net income, from $16.7 billion in 2022 to $7.9 billion in 2023. This coincided with a 5% decrease in revenue during the same period. The trend of weak performance has persisted into the current year, primarily attributable to lower average reference prices for iron ore, copper, and nickel, as well as a $1.2 billion provision related to Samarco’s obligations and a potential global settlement with Brazilian authorities. Alongside the revenue contraction, VALE’s price-to-sales (P/S) ratio has also decreased, reaching 1.42 in 2023 and currently standing at 1.14. However, this current P/S ratio, when compared to historical levels, suggests a potential for upside.
Examining VALE’s stock performance over the past three years reveals fluctuations, with returns of -2% in 2021, 32% in 2022, and 1% in 2023. This volatility contrasts with the more stable performance of the Trefis High Quality Portfolio, a collection of 30 stocks that has consistently outperformed the S&P 500 over the same period with lower risk. This raises the question of whether VALE, given the current uncertain macroeconomic environment marked by potential rate cuts and geopolitical conflicts, will experience similar underperformance in the next 12 months, or if a recovery is on the horizon. The comparison with the Trefis High Quality Portfolio highlights the potential benefits of a diversified, lower-risk investment strategy in uncertain times.
VALE’s third-quarter 2024 results further illustrate the company’s challenges, with a 10% year-over-year decline in revenue to $9.5 billion and a 21% decrease in operating profits. These declines were primarily driven by weak iron ore prices and increased freight costs. However, a positive development is VALE’s achievement of its highest iron ore production since 2018, leading to an upward revision of its production guidance for 2024 to a range of 323-330 million tonnes. This suggests a potential for recovery in the future, especially considering the company’s strategic initiatives.
Despite the current challenges, there’s a strong argument for a potential upside in VALE’s stock price. The company is pursuing a “Value over Volume” strategy, focusing on production optimization and cost reduction to improve long-term margins. Significant progress is being made on large-scale growth projects, including the Vargem Grande 1 project, which is ahead of schedule and is a key component of VALE’s ambitious iron ore production target of 340-360 million tonnes by 2026. The Capanema project is also on track for commencement between the first half of 2025 and the second half of 2026. These projects, combined with active efforts to enhance portfolio quality in copper and nickel, position VALE for future growth.
The projected increase in global steel demand driven by urbanization, coupled with the rising demand for copper and nickel in electric vehicles and renewable energy sectors, further supports the optimistic outlook for VALE. These factors contribute to the assessment that VALE’s stock has a potential upside of approximately 50% above its current price. This projection reflects a belief in the company’s ability to overcome current headwinds through its strategic initiatives and capitalize on the growing demand for its key products in evolving global markets. While the recent past has been challenging, the long-term outlook for VALE appears positive, making it a potentially attractive investment opportunity.
