Current Situation of VALE Shares
Current Situation of VALE Shares
VALE (NYSE: VALE) has experienced a significant drop in its share price, losing nearly 40% since the start of the year, contrasting with the 28% gain in the S&P 500 Index. This decline is more pronounced compared to its peers such as ArcelorMittal, down 10% year-to-date, United States Steel Corporation, down 19% year-to-date, and Nucor Corp (NYSE: NUE), which has also seen a 17% decrease in share price over the same period. As one of the largest iron ore and nickel producers with extensive operations in Brazil, VALE has witnessed a 50% drop in its share price, falling from $20 in early 2022 to less than $10 presently.
Various factors contribute to the fall in VALE's share price. These include China's real estate crisis resulting in weak demand for iron ore, political risks facing the company in Brazil, high settlement costs related to the Mariana/Samarco dam collapse, and poor performance in the nickel segment. At its current price of around $9.60 per share, however, there is a projected 50% upside potential.
Factors behind VALE's Earnings Drop
The company's net income has decreased significantly, falling from $16.7 billion in 2022 to $7.9 billion in 2023. Revenues have also contracted, experiencing a 5% decrease in growth from 2022 to 2023. This trend has continued into the current year, largely due to lower average prices for iron ore, copper, and nickel, as well as an additional provision of $1.2 billion related to Samarco's obligations and a potential global agreement with Brazilian authorities.
The P/S multiple has also decreased, falling by 3.6% to 1.42 in 2023, and is currently at 1.14. However, there is potential upside when this current P/S is compared to figures from previous years.
The VALE stock's decline over the past 3-year period has not been consistent, albeit with less volatility compared to the S&P 500. Returns for the stock were -2% in 2021, 32% in 2022, and 1% in 2023. In comparison, the Trefis High Quality Portfolio, comprising 30 stocks, has been less volatile and outperformed the S&P 500 each year over the same period.
The Cause of VALE's Underperformance
The High Quality Portfolio has provided better returns with reduced risk compared to the benchmark index, resulting in a smoother performance curve. Given the current macroeconomic challenges associated with interest rate cuts and multiple wars, there is a possibility that VALE may face similar challenges, potentially underperforming the S&P 500 over the subsequent 12 months or experience a recovery.
Forecasts for VALE's Stock
VALE's revenues decreased by 10% in the third quarter of 2024, reaching $9.5 billion compared to $10.6 billion in the third quarter of the previous year. Operating profits saw a 21% drop year-on-year due to weak iron ore fine prices and increased freight costs. Despite this, Vale recorded its highest iron ore production since 2018 and raised its production guidance for the year to a 323-330 million tonne range for 2024.
We believe that there is a strong potential for growth in VALE stock. The company's 'Value over volume' strategy focuses on optimizing production and reducing per unit costs to improve margins in the long run. Additionally, the company is undertaking large-scale growth projects, making significant progress in the commissioning of the Vargem Grande 1 project's wet processing operations in September, one month ahead of schedule. The project is an important step towards Vale's iron ore production goal of 340-360 Mt in 2026. Another important project at Capanema is underway and is on track to commence in the first half of 2025 and the second half of 2026. The company is also actively working to enhance the quality of its portfolio, with ongoing efforts in copper and nickel as well.
Looking forward, we project a 50% increase in the value of VALE stock based on the expected growth in world steel demand due to urbanization, as well as an increase in copper and nickel demand driven by the rising demand for electrical vehicles and renewable energy.
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Despite the challenges faced by VALE, such as the impact of China's real estate crisis on iron ore demand, high settlement costs from the Mariana/Samarco dam collapse, and weak revenue growth, the company's valuation based on the Price to Sales (P/S) multiple has decreased, currently standing at 1.14. This decrease in P/S multiple, compared to previous years, suggests a potential upside for investors considering VALE's shares.
Furthermore, despite a 5% decrease in revenue growth from 2022 to 2023, Vale's 'Value over volume' strategy focuses on optimizing production and reducing per unit costs, aimed at improving margins in the long run. The company is also undertaking large-scale growth projects and has made significant progress in commissioning important projects, such as the Vargem Grande 1 project. These factors, along with the projected growth in world steel demand and rising demand for copper and nickel in response to the increasing demand for electrical vehicles and renewable energy, contribute to a projected 50% increase in the value of VALE stock.