Are Analysts Turning Optimistic on Vale SA?



Analyst recommendations

Among the analysts that track Vale SA (VALE), 16.0% have given the company a “buy” recommendation, and 16.0% have given it a “sell” recommendation. For Rio Tinto (RIO), 53.0% of analysts are recommending a “buy.” About 16.0% are recommending a “sell” for BHP Billiton (BHP) (BBL).

In comparison, Freeport-McMoRan (FCX) has “buy” recommendations from 15.0% of the analysts covering the stock. FCX forms 3.6% of the SPDR S&P Metals and Mining ETF (XME).

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Citigroup upgraded Vale

Citigroup (C) upgraded Vale to “neutral” from “sell” on November 1, 2016. It also raised Vale’s target price from $4.40 to $7.30. Citigroup analyst Alexander Hacking said in a report, “We downgraded Vale to Sell in 2014 on the thesis that 2014-16 would be a cash crunch, and this now appears to be in the rear-view mirror.”

Citigroup expects Vale to face seasonal tailwinds in the short term and be free cash flow positive in 2017. It also expects Vale to benefit from higher Chinese steel prices. Hacking added, “Chinese steel production and iron ore prices have surprised on the upside this year – and we likely missed the cyclical floor in Vale, which now looks like 1Q16.”

Other rating changes

Jefferies Group maintained its “hold” rating on October 16, 2016. The firm has a target price of $6 for Vale stock.

JPMorgan upgraded Vale from “neutral” to “overweight” on September 12, 2016. It also increased the stock’s 12-month target price from $5 to $7. Stronger-than-expected iron ore prices were part of the reason that JPMorgan turned positive. JPMorgan also mentioned that Vale’s business is improving, and it expects the company to report positive free cash flow in 2017 and beyond.

As we saw in a previous part of this series, this improvement is in line with expectations of Vale’s management. JPMorgan said, “For a while we have been telling investors that Vale was a strong and interesting story but had a timing issue.”

On August 9, 2016, Morgan Stanley upgraded Vale stock from “underweight” to “equal weight” and raised the target price from $4.80 to $6.20. The firm believes that Vale’s balance sheet concerns might be alleviated by future iron ore production and asset sales.

Credit Suisse (CS), on the other hand, maintained its “sell” rating for Vale with a target price of $4. According to the analyst, “We have updated our Vale model, marking to market 1Q and 2Q prices, applied the CS revised price deck (iron ore average of USD40/t from 2H16 until 2019), and decreased 2016 capex by USD0.5bn; in our revised estimates the 2016 cash flow gap improved by USD2.5bn.”


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