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Vale’s Loss Is Its Peers’ Gain—More Upside for Miners?

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Vale’s loss is its peers’ gain

The clampdown on Vale (VALE) stock is expected to continue. It’s been spiraling downward since the dam disaster struck. From January 25 to February 6, Vale stock fell 24%. Vale’s price action stands in contrast to the rises in its peers’ stocks since its dam burst.

BHP Billiton (BHP), Rio Tinto (RIO), and Cleveland Cliffs (CLF) have risen 9%, 14%, and 24%, respectively, in the same period, while the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) have risen 3.5% and 3.4%, respectively.

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BHP and RIO

BHP and RIO are direct competitors to Vale’s seaborne iron ore business. A boost to iron ore prices as a result of supply reduction is affecting them favorably. Iron ore prices have risen ~20% since the Vale’s dam burst on January 25.

Cleveland-Cliffs’ higher pellet premiums

Cleveland-Cliffs ceased to be a seaborne iron ore player after it disposed of its Australian mining business last year. Still, CLF is the major beneficiary of the perceived tightness in the iron ore supply market, mainly because Vale is also a leading producer of iron ore pellets, CLF’s main product in the US market (SPY) (DIA).

Moreover, among the 40 million tons of production disrupted due to Vale’s plan to decommission its dams built using the upstream method are 11 million tons of pellets. The disruption in pellet production has led to higher pellet premiums, which should benefit Cliffs’ realized prices and earnings. BMO Capital Markets has increased its estimate for the Atlantic pellet premium from $59 per ton to $75 per ton in 2019.

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