Iron ore prices have surged lately, with many believing that the commodity’s prices may have bottomed out. The prices of iron ore have risen in the wake of China softening its stance on COVID-19 preventive measures. The country’s new top leadership body has stressed the need to minimize the impact of the pandemic on the economy.
The macroeconomic indicators showed that China’s economy could slow down due to the COVID-19 curbs and a slowdown in the country’s property sector. However, news of a rescue package for ailing Chinese developers to ease their liquidity strains and revive home purchases boosted sentiments. In addition, many analysts believe that the Chinese government could take further initiatives to boost economic growth.
Iron ore producer Vale S.A. (VALE) is expected to benefit from the rise in iron ore prices. The Rio de Janeiro-based company is engaged in producing iron ore and nickel. The company also produces iron ore pellets, copper, platinum group metals (PGMs), gold, silver, and cobalt.
Rio Tinto iron ore Chief Executive Simon Trott said, “The long-term future for the iron ore business is strong.” “The world continues to need steel and will continue to need steel for the lives people want to live as well as future decarbonization,” he added.
VALE’s iron ore production in the third quarter rose 1.1% year-over-year and 21% sequentially to reach 89.70 million tons. Its iron ore sales grew 3.5% to 69 million tons.
UBS’ co-head of resources research, Lachlan Shaw, said that the high cost of iron ore operations would see miners lower their production, which will, in turn, reduce supply and eventually lead to a rise in the price.
Over the last three years, VALE’s dividend payouts have grown at a 157.6% CAGR. Its four-year average dividend yield is 7.39%, and its current dividend translates to a 9.02% yield.
VALE’s stock has gained 9.3% in price year-to-date and 29.8% over the past year to close the last trading session at $15.33.
Here’s what could influence VALE’s performance in the upcoming months:
Strategic Agreement
On November 17, 2022, VALE announced that it had entered into a long-term agreement with automaker General Motors Company (GM) to supply battery-grade nickel sulfate for future electric vehicles starting in 2026.
Mixed Financials
VALE’s net income attributable to Vale’s stockholders increased 14.6% year-over-year to $4.45 billion. The company’s EPS came in at $0.98, representing an increase of 28.9% year-over-year. Its total liabilities declined 15.1% to $45.94 billion, compared to $54.13 billion for the fiscal year ended December 31, 2021.
On the other hand, its net operating revenues declined 19.5% year-over-year to $9.93 billion. Its adjusted EBITDA from continuing operations declined 47% year-over-year to $3.66 billion.
Discounted Valuation
In terms of forward non-GAAP P/E, VALE’s 4.45x is 64.6% lower than the 12.56x industry average. Its forward EV/EBITDA of 3.73x is 46% lower than the 6.90x industry average. Also, the stock's 1.59x forward P/S is 42.8% lower than the 1.11x industry average.
Higher-than-industry Profitability
In terms of the trailing-12-month gross profit margin, VALE’s 48.17% is 55.9% higher than the 30.91% industry average. Likewise, its 51.79% trailing-12-month EBITDA margin is 153% higher than the industry average of 20.47%. Furthermore, the stock’s 45.47% trailing-12-month EBIT margin is 233% higher than the industry average of 13.65%.
POWR Ratings Show Promise
VALE has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. VALE has a B grade for Value, in sync with its discounted valuation.
It has an A grade for Quality, consistent with its high profitability.
VALE is ranked #6 out of 36 stocks in the Industrial – Metals industry. Click here to access VALE’s Growth, Momentum, Stability, and Sentiment ratings.
Bottom Line
After a fall from its peak, iron ore prices are finally rising as optimism creeps back amid China’s rescue package to prop up its real estate construction sector. This is expected to benefit iron ore producer VALE.
Given its solid dividend payouts, discounted valuation, and high profitability, it could be wise to buy the stock now.
How Does Vale S.A. (VALE) Stack up Against Its Peers?
VALE has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Industrial - Metals industry with an A (Strong Buy) or B (Buy) rating: BHP Group Limited (BHP), Ferroglobe PLC (GSM), and Marubeni Corporation (MARUY).
VALE shares were trading at $15.23 per share on Friday morning, down $0.10 (-0.65%). Year-to-date, VALE has gained 15.99%, versus a -15.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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