Could Vale SA Stock Continue Its Outperformance in 2017?



Vale’s outperformance

In 1Q17, Vale SA (VALE) outperformed its peers by rising 24.7%. As we saw in the previous two parts of this series, the stock price gains for BHP Billiton (BHP) and Rio Tinto (RIO) have been muted in comparison.

Vale had a turnaround in 2016 as its net profit increased multiple times from a loss of $8.6 billion in 4Q15 to its net profit of $525 million in 4Q16. Its EBITDA[1. earnings before interest, tax, depreciation, and amortization] also more than tripled to $4.8 billion in 4Q16 compared to $1.4 billion in 4Q15.

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Consolidating share classes

On February 20, 2017, Vale SA (VALE) announced that it’s seeking to merge its two existing classes of stock, which would enable all stock to carry voting rights from the current ~61%. As a result, Vale’s controlling shareholders in Valepar would lose control of the company.

This move is seen as a major governance overhaul that would increase transparency and equal rights for all shareholders. The consolidation would also reduce the potential for government interference.

During the company’s conference call, Vale’s chief financial officer, Luciano Siani Pires, mentioned increased liquidity as well as “a higher access to capital markets” as some of the benefits resulting from the consolidation.

Start of S11D operations

Vale started commercial production for the S11D project in January 2017. S11D involved an investment of $14.3 billion, and the project comprises a mine and a plant with a processing capacity of 90 million tons per year.

Vale expects its cash costs to fall to $7.70 per ounce from $10.80 per ounce once S11D is fully operational. This could help Vale significantly lift its volumes, reduce its unit costs, and act as a major driver for the company’s earnings and free cash flow going forward.

These factors could increase the supply of iron ore in an already oversupplied seaborne market. This oversupply could lead to pressure on iron ore prices, impacting miners such as BHP Billiton (BHP), Rio Tinto (RIO), and Cliffs Natural Resources (CLF). BHP and RIO form 7.2% of the holdings of the SPDR S&P Global Natural Resources ETF (GNR).


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