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Is the Worst Behind Vale? BAML Upgrades the Stock to a ‘Buy’

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Vale’s problems started with its dam burst

Vale (VALE) stock has been on the receiving end ever since one of the dams at its mine in Brazil burst on January 25, killing more than 240 people. The company has announced that it will decommission all the dams built using the upstream method, and there have been several injunctions on the company’s mines, which has negatively affected its production and reputation. It has also suspended its dividends.

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Iron ore prices push above $100

Vale’s problems have also led to concerns about lower iron ore supply, which—combined with strong demand from China—have buoyed seaborne iron ore prices to above $100 per ton.  The surge in iron ore prices is benefiting all iron ore miners. Cleveland-Cliffs (CLF) stated during its first-quarter earnings results that the Vale dam disaster could mean higher iron ore prices and pellet premiums, as there’s no short- or medium-term solution for these shortages. Since Vale’s dam burst on January 25, its stock has fallen 19.1%, while the stocks of CLF, BHP Billiton (BHP), and Rio Tinto (RIO) have risen 4.4%, 12.6%, and 24.9%, respectively.

Bank of America upgrades Vale

Bank of America Merrill Lynch analyst Timna Tanners raised Vale stock to a “buy” from a “neutral” and increased its target price from $14.5 to $15.5 on May 24. She believes that the worst headline risk appears to be behind the company and that Brazilian politicians will ultimately want to restore lost tax revenue.

As reported by CNBC, Tanners said, “We arrived at a likely max US$6.5B in estimated fines, dam remediation, lawsuits, and environmental clean up, after discussions with mgmt at our Global Metals and Mining conference last week. While civil lawsuits can drag on, mgmt has been replaced and recent headlines have been more bark than bite (more on pg3) with no production impact but reputational hit from rail disruptions and Gongo Soco dam risks.”

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