Shares of Vale S.A VALE hit a 52-week low of $8.38 yesterday to close the session a tad higher at $8.51.
The stock has been in the red territory for a while now, having declined 42.5% over a year. VALE has also underperformed the broader Zacks Basic Materials sector’s 8.3% decline and the S&P 500’s climb of 22.9%.
VALE Stock’s 1-Year Price Performance Versus Sector & S&P
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The downtrend in iron ore prices has been reflected in VALE’s share price movement. Weak demand in China has weighed on demand for the steel-making ingredient. Beside low iron ore prices, the company has been grappling with elevated input costs, particularly freight.
VALE Stock Trades Below Moving Averages
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The VALE stock is trading below its 50-day and 200-day moving averages, indicating a bearish trend. The 50-day SMA has been below the 200-day SMA since March 2024. This reflects the market skepticism about the stock's prospects.
Given the significant pullback in Vale’s shares, investors might be tempted to acquire the stock. But is this the right time to buy? Let us find out.
What is Weighing on Vale?
Declining Iron Ore Prices: The company’s price performance mainly mirrors the downtrend in iron ore prices. Iron ore prices have declined 28% in a year due to the weak demand in China amid the prolonged property crisis. Prices are currently at $98 per ton, as Chinese steel mills have been cutting production in response to weaker demand and shrinking profit margins. The World Steel Association expects steel demand in China in 2025 to decline 1% due to the ongoing downturn in the Chinese real estate sector. This suggests that a near-term price recovery is unlikely.
High Costs Hurt Vale’s Profits: In the first quarter of 2024, VALE reported a 9% year-over-year decline in pro-forma adjusted EBITDA and the same was down 6% in the second quarter and 21% in the third quarter. The downfall was attributed to higher costs and expenses related to freight and maintenance activities. The combination of low iron prices, weak demand and elevated expenses is concerning.
Despite Record Q3 Iron Ore Output, 2024 Guidance Disappoints: Vale’s third-quarter 2024 iron ore production was around 91 million tons (Mt) (up 5.5% year over year) and marked the highest output since the fourth quarter of 2018. This was driven by improved operating performances at Itabira and Brucutu. The S11D mine marked a 14% year-over-year increase and produced 22.1 Mt of iron ore, delivering the seventh quarter of year-over-year production improvement, bolstered by ongoing asset reliability initiatives.
Vale expects iron ore production of 328 Mt for 2024, indicating meager growth of 2% from the 2023 actual. This is lower than the company’s previous expectation of 323-330 Mt.
VALE’s Earnings Estimates Trend Downward
The Zacks Consensus Estimate for fiscal 2024 and 2025 has moved south over the past 60 days. This reflects the decline in iron ore prices, combined with the cost impacts on the company’s results.
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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
Vale’s Long-Term Prospects Encourage
Robust Project Pipeline Underpins Vale's Growth: The company expects to raise its iron ore production to 325-335 Mt in 2025, 340-360 MT in 2026 and 360 Mt by 2030. The Vargem Grande 1 project and the Capanema Maximization project are expected to play a key role in attaining these targets. Other projects underway are Compact Crushing at S11D (capacity: 50 Mtpy, start-up in the second half of 2026) and Serra Sul (capacity: 20 Mtpy, start-up in the second half of 2026).
Vale is also heavily investing in growing the Energy Transition Metals business. In December 2024, the company completed Voisey’s Bay Mine Expansion project, transitioning from open pit to underground mining. The two underground mines — Reid Brook and Eastern Deeps — will deliver ore for processing at the company’s Long Harbour refinery, one of the lowest-emission nickel processing plants in the world. The project’s production capacity is around 45 ktpy of nickel, 20 ktpy of copper and 2.6 ktpy of cobalt as by-products. Full ramp-up is expected by the second half of 2026.
Vale expects to produce 345 kt of copper in 2024 compared with 326.6 kt produced in 2023. Copper output is projected at 340-370 kt for 2025, 350-380 kt in 2026 and 420-500 by 2030. For 2035, it is expected to reach 700 kt.
The Onça Puma 2nd Furnace project is 56% completed. It has a capacity of 12-15 ktpy of nickel and is expected to start up production in the second half of 2025. Vale expects nickel production of 160-175 kt for 2025 and 175-210 kt for 2026. Nickel production is expected to reach 210-250 kt by 2030. The company has secured agreements to supply low-carbon and high-purity nickel to major automakers, and is strategically focused on expanding mine life and the development of growth projects across the portfolio.
Price Recovery on the Horizon: Going forward, growth in world steel production, spurred by urbanization, will fuel demand for iron ore and help sustain prices. The long-term outlook for copper is positive as copper demand is expected to grow, partly driven by electric vehicles, and renewable energy and infrastructure investments. Nickel demand for in electric vehicle batteries is also expected to grow.
Vale Offers Sector-Leading Dividend Yield & Returns
The company’s current dividend yield of 10.79% is higher than the sector’s 2.58% and the S&P 500’s 1.23%. Its payout rate is at 59.92%, higher than the sector’s 55.05% and the S&P 500’s 33.84%. The company has a 5-year dividend growth of 10.5%.
VALE’s return on equity, a profitability measure of how prudently the company is utilizing its shareholders’ funds, is at 21.1%, higher than the sector’s average of 11.5%.
VALE’s Attractive Valuation
The company is trading at a forward 12-month P/E ratio of 4.52X at a discount to the sector’s 14.01X.
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The stock is also cheaper than other iron miners like Rio Tinto RIO, Fortescue Ltd FSUGY and BHP Group BHP, which are trading at 9.3, 9.72 and 11.37, respectively.
How Should Investors Play the VALE Stock?
The downtrend in iron ore prices and weak demand, combined with elevated costs, cast a pall on Vale’s near-term results. This is reflected in its declining estimates. We believe that investors should wait for a better entry point. Those who already own this Zacks Rank #3 (Hold) stock should stay invested to benefit from the company’s solid project portfolio and the long-term positive outlook for iron ore prices, copper and nickel.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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