Vale Faces Significant Stock Decline Amid Market Challenges

VALE (NYSE: VALE) stock has plunged almost 40% this year, contrasting sharply with the S&P 500 Index’s impressive 28% gain. This decline is stark compared to peers like ArcelorMittal (NYSE:MT), down 10%, United States Steel Corporation (NYSE:X) down 19%, and Nucor Corp (NYSE: NUE) down 17%. As one of the world’s largest producers of iron ore and nickel, Vale mainly operates in Brazil. The company’s stock has fallen by 50%, dropping from $20 in early 2022 to below $10 currently. Factors contributing to this downturn include China’s real estate crisis reducing iron ore demand, political risk in Brazil, high costs from the Mariana/Samarco dam disaster, and poor performance in nickel sales. However, with shares priced around $9.60, we foresee a potential upside of nearly 50%.

Analyzing Vale’s Earnings Struggles

Over the past couple of years, Vale’s net income has decreased sharply from $16.7 billion in 2022 to $7.9 billion in 2023. Additionally, revenues fell by about 5% from 2022 to 2023. This year has also shown continued weakness, mainly due to lower average prices for iron ore, copper, and nickel. Furthermore, Vale faces an extra provision of $1.2 billion related to Samarco’s obligations and an agreement with Brazilian authorities.

P/S Ratio Decline and Stock Volatility

Vale has experienced both revenue contraction and a decline in its price-to-sales (P/S) ratio, which fell by 3.6% to 1.42 in 2023. Though currently at 1.14, this P/S ratio suggests potential growth compared to levels from previous years.

Inconsistencies characterize Vale’s stock performance over the last three years. Annual returns show -2% in 2021, a strong 32% in 2022, followed by a modest 1% in 2023. This contrasts with the Trefis High Quality (HQ) Portfolio, which has consistently outperformed the S&P 500 during the same period with steadier returns.

Potential for Future Recovery

What is the outlook? Should economic uncertainties persist, will Vale repeat its underperformance from 2021 and 2023 against the S&P 500? Or is a recovery on the horizon?

What to Watch for With Vale’s Stock

Vale’s revenues fell by 10% in the third quarter of 2024, totaling $9.5 billion, down from $10.6 billion in the same quarter last year. Operating profits dropped 21% year over year due to weak iron ore fine prices coupled with rising freight costs. However, Vale achieved its highest iron ore production since 2018 and has raised its production targets for the year, aiming for 323-330 million tonnes in 2024.

We maintain that Vale’s stock holds significant upside potential. The company is shifting to a ‘Value over volume’ strategy focusing on efficient production and cost reduction, which should enhance margins over time. Furthermore, Vale is advancing large-scale growth projects, including the early commissioning of the Vargem Grande 1 project, which is crucial for its goal of reaching 340-360 million tonnes in iron ore production by 2026. Another project at Capanema is scheduled to start in the first half of 2025. Efforts are also underway to enhance the quality of products across copper and nickel sectors. Overall, we estimate a potential valuation of Vale stock at nearly 50% above current prices, driven by rising global steel demand due to urbanization and increasing needs for copper and nickel linked to electric vehicles and renewable energy.

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

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.