VALE to Benefit From Increasing Demand Amid Cost Concerns

On Jan 9, we issued an updated research report on VALE S.A. VALE. The company’s performance will be backed by rising demand for higher grade iron-ore, investment in projects and lower debt. However, its results might be marred by rising costs, seasonal factors and oversupply situation in the industry.

Rising Demand to Boost Top Line

Vale achieved record iron-ore production and sales in third-quarter 2018. The company expects to meet its full-year iron-ore production guidance of around 390 Mt for 2018. The company will be able to achieve this as volumes continue to improve at its S11D mine. Vale continues to benefit from record high price premiums for its high grade iron-ore fines. Going forward, rise in global steel production will spur demand for iron ore, and in turn, help boost Vale’s top-line performance. Thus, Vale remains committed to its goal to introduce more high-quality ore in the market.

Focus on Investment to Spur Growth

Consistent with its rigorous capital-allocation strategy, Vale approved the investment of $1.1 billion in the Salobo III copper project. The company will receive a bonus of approximately $600-$700 million from Wheaton Precious Metals, after achieving certain production targets. It has also approved a sustaining investment of $428 million in the Gelado project.

Lower Debt Supports Vale

Vale has been steadily lowering its debt, of late, through increased free cash flow generation. During the third quarter, Vale reduced net debt by $815 million, closing the quarter with net debt of $10.7 billion — the lowest level since third-quarter 2009. The company is close to its target of net debt of $10 billion.

Rising Costs to Mar Results

Vale expects that volumes are going to be lower and costs will be higher in first-quarter 2019 mainly due to seasonality.

Oversupply Remains a Concern

An oversupply situation in the mining market might hurt Vale's near-term results. This is because the mining giants are constantly trying to augment productivity in order to become more cost efficient.

Share Price Performance

Shares of the company have outperformed the industry, over the past year. The stock has gained around 10% compared with 7% growth recorded by the industry during the same time period.

Zacks Rank & Key Picks

Vale carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector include Ingevity Corporation NGVT, CF Industries Holdings, Inc. CF and Quaker Chemical Corporation KWR. While Ingevity sports a Zacks Rank #1 (Strong Buy), CF Industries and Quaker Chemical carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingevity has a long-term earnings growth rate of 12%. The company’s shares have been up 18% during the past year.

CF Industries has a long-term earnings growth rate of 6%. The stock has gained around 6% in a year’s time.

Quaker Chemical has a long-term earnings growth rate of 11%. Its shares have rallied 24% in the past year.

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