By using this site, you agree to the Privacy Policy and Terms of Use.
Accept
IndebtaIndebta
  • Home
  • News
  • Banking
  • Credit Cards
  • Loans
  • Mortgage
  • Investing
  • Markets
    • Stocks
    • Commodities
    • Crypto
    • Forex
  • Videos
  • More
    • Finance
    • Dept Management
    • Small Business
Notification Show More
Aa
IndebtaIndebta
Aa
  • Banking
  • Credit Cards
  • Loans
  • Dept Management
  • Mortgage
  • Markets
  • Investing
  • Small Business
  • Videos
  • Home
  • News
  • Banking
  • Credit Cards
  • Loans
  • Mortgage
  • Investing
  • Markets
    • Stocks
    • Commodities
    • Crypto
    • Forex
  • Videos
  • More
    • Finance
    • Dept Management
    • Small Business
Follow US
Indebta > News > Vale Stock: Buy On Higher For Longer Iron Ore Prices (NYSE:VALE)
News

Vale Stock: Buy On Higher For Longer Iron Ore Prices (NYSE:VALE)

News Room
Last updated: 2023/10/13 at 5:58 AM
By News Room
Share
8 Min Read
SHARE

Contents
SummaryInvestment ThesisThe Iron Ore BalanceWhat Has Happened In The Chinese Steel Sector?Peer Comps Iron Ore MinersValuationConclusion

Summary

Vale (NYSE:VALE) has been range bound for the better part of 3 years driven by investor skepticism surrounding the future of China steel demand and the residential construction crises despite consistently high IO (iron ore) prices. I believe that IO prices can stay above US$100 as Chinese steel capacity maintains near peak on increasing exports. At some point Vale should close some of the valuation gap vs Australian peers, which points to 25% share price upside potential with a 7% dividend yield.

Chart Vale Relative Share Performance vs Peers

Vale Relative Share Performance vs Peers (Created by author with data from Capital IQ)

Investment Thesis

Vale is one of the largest seaborne IO miners with the bulk of sales going to China. As such the price setters are Chinese steel companies and their demand for IO has been thought to be greatly dependent on residential construction, which many investors are aware is in a structural decline after decades of overbuilding. The resiliency of IO prices has not translated into a higher share price for Vale, but rather a decline in valuation. The market simply does not price in current IO levels into the future.

The key question for Vale: What is supporting IO prices and can this be maintained.

There are 4 reasons to forecast higher for longer IO prices

  1. China steel demand can continue near capacity via exports.
  2. Chinese iron ore capacity and quality is restricted.
  3. Seaborne IO should continue to represent the bulk of demand input.
  4. The top 4 IO miners are not planning significant expansion.

This means that the seaborn IO miners have entered maturity with a few resounding caveats, there main client depends on them, there are scant substitutes for exported iron ore and the Chinese steel sector can take share from other steel makers via pricing. In essence the iron ore miners are in symbiotic existence with the Chinese steel sector.

Thus, the key to Vale fundamentals is the health and peculiarity of the Chinese steel sector. As with the case for many Chinese companies, the creation of shareholder value may not be a priority. Employ and produce is more relevant. As long as the steel companies can run production at near breakeven (with plenty of govt subsidies) they will make steel products for China and export the rest. The exports prices can and have been highly competitive, perhaps predatory or dumping but that’s the operating model.

Vale and the Australian IO miners see peak China steel production in sight and should limit capacity expansion or perhaps begin to reduce. This is similar to what many oil companies are doing, rationalizing capex, attempting to balance supply with demand and maintaining reasonable prices that permit very healthy FCF and dividend payouts i.e. capital discipline.

Chart Iron Ore Price vs Supply and Demand

Iron Ore Price vs Supply and Demand (Created by author with data Vale)

The Iron Ore Balance

China is 50% of global steel capacity (1bn tons) and it consumes most of the seaborn IO, about 85%. Thus, as real estate construction demand fell and continues to decline (massive over building) China steel companies will export and displace share in any market without high import barriers.

Below are my estimates of the seaborne IO balance between supply and demand. There are many drivers and moving parts. Fundamental to seaborne IO demand is that Chinese steel output remains near peak or near capacity while its primary suppliers do not add significant capacity. Note that I assume global steel demand grows at half a percent in 2024 and 1% in 2025, any move higher means greater IO imbalance.

Table Steel and Iron Ore Price vs Supply and Demand

Steel and Iron Ore Supply and Demand (Created by author with data from GS, Vale, Rio Tinto and BHP)

teable IO Capacity Estimates

IO Capacity Estimates (Created by Author with data from Vale, Rio Tinto and BHP)

What Has Happened In The Chinese Steel Sector?

The Chinese Steel sector is large and divers, I found data and consensus estimates for 9 companies. One of the largest is Baoshan with 50m ton capacity (5% of total).

Contrary to headlines, the sample group, seems to be weathering the real estate construction sector decline well. Revenue and EBITDA has fallen up to 1Q23 and now turned positive in 2Q23. Steel prices seem to have stabilized at above US$500mt with the ratio to iron ore prices at 5x (4x is thought to be healthy). Balance sheets seem to be in good shape with leverage under control.

charts Chinese Steel Financial Data

Chinese Steel Financial Data (Created by author with data from Capital IQ)

The market, as judged by consensus estimates, seems to have a favorable outlook for the sector with over 20% upside and a significant EBITDA rebound in YE24. The demand side dynamics for iron ore looks robust or at least better than in YE22 and YE23.

table Chinese Steel Consensus Data

Chinese Steel Consensus Data (Created by author with data from Capital IQ)

Peer Comps Iron Ore Miners

Vale compares well on fundamentals vs. its peer group of IO miners such as BHP (BHP) and Rio Tinto (RIO). We see similar growth and margin profile but at a lower valuation due primarily to lower business risk on product diversification and country risk i.e. Australia vs Brazil.

Table IO Mining Stock Comps

IO Mining Stock Comps (Created by author with data from Capital IQ)

chart Vale and Peers Forward EV/EBITDA

Vale and Peers Forward EV/EBITDA (Created by author with data from Capital IQ)

Valuation

The stock is cheap vs peers and relative to FCF generation and dividend payout trading at 3.7x EV/EBITDA and 6.2x PE on YE24 consensus estimates. The US$16.5 price target is based on a 4.2x EV/EBITDA target multiple, below peers such as Rio Tinto and BHP, which have a slightly lower risk profile as Australian companies.

Table Vale Consensus Estimates and Valuation

Vale Consensus Estimates and Valuation (Created by author with data from Capital IQ)

Conclusion

Vale is a BUY on positive IO price dynamics supported by Chinese steel exports which drives significant free cash flow and dividends/share buy backs. The stocks valuation is discounted vs peers which further supports a possible re-rate and 25% upside potential.

Read the full article here

News Room October 13, 2023 October 13, 2023
Share this Article
Facebook Twitter Copy Link Print
Leave a comment Leave a comment

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Finance Weekly Newsletter

Join now for the latest news, tips, and analysis about personal finance, credit cards, dept management, and many more from our experts.
Join Now
Howard Lutnick says easing of Nvidia’s AI chip exports linked to China deal

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects…

US banks say consumers are ‘healthy’ despite economic uncertainty

Stay informed with free updatesSimply sign up to the US banks myFT…

French PM proposes scrapping national holidays and freezing spending to cut deficit

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects…

Donald Trump announces trade deal with Indonesia

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects…

Nvidia and Jane Street back Mira Murati’s AI start-up in latest fundraising

Stay informed with free updatesSimply sign up to the Artificial intelligence myFT…

- Advertisement -
Ad imageAd image

You Might Also Like

News

Howard Lutnick says easing of Nvidia’s AI chip exports linked to China deal

By News Room
News

US banks say consumers are ‘healthy’ despite economic uncertainty

By News Room
News

French PM proposes scrapping national holidays and freezing spending to cut deficit

By News Room
News

Donald Trump announces trade deal with Indonesia

By News Room
News

Nvidia and Jane Street back Mira Murati’s AI start-up in latest fundraising

By News Room
News

How one of the gravest security lapses in history was kept secret

By News Room
News

BlackRock inflows hit after big client withdraws $52bn

By News Room
News

Trump is flunking his Epstein test

By News Room
Facebook Twitter Pinterest Youtube Instagram
Company
  • Privacy Policy
  • Terms & Conditions
  • Press Release
  • Contact
  • Advertisement
More Info
  • Newsletter
  • Market Data
  • Credit Cards
  • Videos

Sign Up For Free

Subscribe to our newsletter and don't miss out on our programs, webinars and trainings.

I have read and agree to the terms & conditions
Join Community

2023 © Indepta.com. All Rights Reserved.

Welcome Back!

Sign in to your account

Lost your password?