After bottoming out in early November because of concerns over aggressive interest rate hikes by the Federal Reserve and ever-tightening Covid restrictions in China, iron-ore prices have been recovering recently.
This resurgence is being driven by the softening stance of the Chinese leadership on its Covid restrictions in the wake of rare and massive protests. Sentiments have been further boosted by news of a rescue package for ailing Chinese developers to ease their liquidity strains and revive home purchases.
Steadily moderating employment growth and inflation rate and the U.S. Federal Reserve Chair Jerome Powell’s dovish comments have also boosted sentiments about the industry.
These developments bode well for the Rio de Janeiro-based iron ore producer Vale S.A. (VALE). The global mining major operates through Ferrous Minerals and Base Metals segments.
Besides iron ore and pellets, manganese, ferroalloys, and other ferrous products, VALE also extracts nickel and its by-products, such as gold, silver, cobalt, precious metals, and others, as well as copper. Its offerings are instrumental to the infrastructure development and decarbonization goals pursued by economies and organizations worldwide.
Let’s closely examine the factors that make it worthy of investment.
Positive Recent Developments
On December 1, VALE announced the return of capital to its shareholders at R$0.29 per share, with December 14, 2022, being the record date for holders of American Depositary Receipts (ADRs) traded on the NYSE.
VALE currently yields 17.98% as annual dividends at the current price, which is better than its 4-year average dividend yield of 7.46%. The company’s dividend payouts have grown at 39% CAGR over the past five years.
On November 17, 2022, VALE announced Sol do Cerrado solar project start-up p. The project is one of the largest solar farms in Latin America, with an installed capacity of 766 megawatts peak and enough electricity to meet the needs of 800,000 people.
This venture is closely linked to VALE’s ambition to lead sustainable mining.
On the same day, VALE announced that it had entered into a long-term agreement with General Motors Company (GM) for the long-term supply of battery-grade nickel sulfate from Vale’s proposed plant at Bécancour, Québec, Canada.
This agreement strengthens VALE’s presence in the emerging EV space while securing for GM a supply of nickel sulfate from a U.S. free-trade partner to support its fast-growing EV production needs in North America.
Robust Financials
During the third quarter of the fiscal year ended September 29, 2022, VALE’s total revenue came in at R$9.93 billion ($1.87 billion). During the same period, net income attributable to VALE’s stockholders increased 14.6% year-over-year to R$4.46 billion ($840.39 million), while its EPS increased 28.9% year-over-year to R$0.98.
VALE’s total liabilities decreased to R$47.38 billion ($8.93 billion) as of September 29, 2022, from R$52.79 billion ($9.95 billion) as of September 29, 2021.
Impressive Price Action
VALE’s stock is trading above its 50-day and 200-day moving averages of $14.64 and $15.49, respectively. It has gained 4.6% over the past month and 17.2% year-to-date to close the last trading session at $16.18.
Discounted Valuation
In terms of forward P/E, VALE is currently trading at 4.80x, 62% lower than the industry average of 12.63x. The stock’s forward EV/EBITDA multiple of 4.03 is 44% lower than the industry average of 7.18. Also, its forward Price/Cash Flow multiple of 5.01 is 32.5% lower than the industry average of 7.42.
Higher-than-industry Profitability
VALE’s trailing 12-month gross profit margin of 48.2% is 56.3% higher than the industry average of 30.82%. The company’s trailing 12-month EBITDA and net income margins of 51.79% and 45.02% are 153.4% and 406.8%, higher than its industry averages of 20.44% and 8.88%, respectively.
In terms of the trailing 12-month ROCE, ROTC, and ROTA, VALE also surpasses the industry averages of 13.39%, 7.43%, and 5.62% by 301.3%, 226.9%, and 335.8%, respectively.
POWR Ratings Reflect Stable Prospects
VALE has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its weighting.
Our proprietary rating system also evaluates each stock based on eight distinct categories. VALE has an A grade for Quality, consistent with its high profitability.
The stock has grade B for Value and Sentiment, in sync with its attractive valuation and upward price momentum.
VALE is ranked #4 of 36 stocks in the B-rated Industrial – Metals industry. Click here to access additional POWR Ratings for VALE’s Growth, Momentum, and Stability.
Bottom Line
Given the favorable economic data, high profitability, and attractive valuation, VALE’s stock appears to be a smart buy now to tap into its potential upside.
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 its peers with an A (Strong Buy) or B (Buy) rating: BHP Group Limited (BHP), Anglo American PLC ADR (NGLOY), and Marubeni Corporation (MARUY).
VALE shares were trading at $16.31 per share on Wednesday afternoon, up $0.13 (+0.80%). Year-to-date, VALE has gained 24.58%, versus a -13.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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