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Tuesday, January 31, 2023
  • Market Overview
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    • Analysis Cryptocurrency
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  • Market Overview
    Most Adani shares continue losses; founder loses $28 billion in month

    Most Adani shares continue losses; founder loses $28 billion in month

    Russia-Ukraine war updates for Nov.30, 2022

    Russia-Ukraine war updates for Nov.30, 2022

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    U.S. appeals court rejects Biden’s bid to reinstate student debt plan

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    Trenches, endless mud and death: the Battle of Bakhmut

    Stock futures tick higher after Wednesday’s rally

    Stock futures tick higher after Wednesday’s rally

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    MARKET LIVE: Sensex off 300pts from high, Nifty holds 18,800; ICICI slips

  • Stock Markets
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    Ryanair sees “robust” travel demand over Easter, summer holidays By Investing.com

    Marriott International: Cozy Fundamentals With A Costly Stock (NASDAQ:MAR)

    Marriott International: Cozy Fundamentals With A Costly Stock (NASDAQ:MAR)

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    Coppock Curve: Who Says ‘You Can’t Time The Market’?

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    Adobe Stock: Buy The Dip In This Excellent Compounder (NASDAQ:ADBE)

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    Macro Headwinds To Keep Pressure On Copper Prices

    U.S. CFTC chair to be questioned over FTX collapse by lawmakers By Reuters

    Meta executive says holiday sales were earlier and bigger this year By Reuters

    Investors with $30 trln to push companies on human rights, social issues By Reuters

    Investors with $30 trln to push companies on human rights, social issues By Reuters

    Exclusive-U.S. Chamber of Commerce warns against draft EU plan to exclude non-EU cloud vendors By Reuters

    Exclusive-U.S. Chamber of Commerce warns against draft EU plan to exclude non-EU cloud vendors By Reuters

  • Analysis Forex
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    Pension Investments in Private Credit Hit Eight-Year High

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    Most Viewed Business News Articles, Top News Articles

    stock recommendations: Hot Stocks: Gland Pharma, Mirza International and Agro Tech Foods could give 19-30% return

    stock recommendations: Hot Stocks: Gland Pharma, Mirza International and Agro Tech Foods could give 19-30% return

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    tata play ipo: Tata Play becomes first firm to file confidential papers with Sebi for IPO

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    Fundamental Radar: 6 reasons why TCI Express could rally 20% in next 12 months

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    Inequality in Society Drives Stock-Market Performance

    Being a Cheap Date Is Suddenly a Major Plus

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  • Economy
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    Goldilocks and the three bears By Reuters

    U.S. Inflation Reduction Act ‘super aggressive,’ Macron tells lawmakers By Reuters

    U.S. Inflation Reduction Act ‘super aggressive,’ Macron tells lawmakers By Reuters

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    U.S. appeals court rejects Biden’s bid to revive student debt plan By Reuters

    Thai central bank raises key interest rate by 25 bps to 1.25% By Reuters

    IMF strategy chief heads to China, to focus on speeding up debt treatments By Reuters

    Asian FX bulls loom on signs of slowing Fed rate hikes, China reopening: Reuters poll By Reuters

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  • Cryptocurrency
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    Legal professionals astonished as SBF admits failures, apologizes 12 times in interview

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    Sam Bankman-Fried confronted over the fall of FTX in live interview By Cointelegraph

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  • Forex
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    Chinese yuan leads Asia FX higher in anticipation of Fed meeting By Investing.com

    Dollar slumps on Powell’s comments; Yen benefits the most By Investing.com

    Dollar slumps on Powell’s comments; Yen benefits the most By Investing.com

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    S&P 500 Breaks Tight Range and Overtakes 200-Day Moving Average, Inflation and NFPs Ahead

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    Japanese Yen Leaps as US Dollar Sinks Post Powell. Is the Peak in Place for USD/JPY?

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    Dollar slips lower; Powell speech, GDP data due By Investing.com

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    Swiss inflation steady at 3.0% in November as expected By Reuters

    Euro sags against sterling after euro zone inflation cools By Reuters

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  • Commodities
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  • Bonds
  • More
    • Analysis Cryptocurrency
    • Economic Indicators
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    • Analysis Stock Markets
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Home Analysis Stock Markets

Vale Stock Will Weather the Storm

December 1, 2022
in Analysis Stock Markets
Here’s Why Wrapped Ethereum Isn’t in Trouble
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  • Vale stock has taken a beating year-to-date
  • Underlying business likely to remain highly profitable
  • Returning capital to shareholders, despite the gloomy macroclimate
  • Stock is a low-risk bet

Vale (NYSE:) is down 27% from its high of $21 in April as the market prices in a deteriorating marcroeconomic outlook. Given the high cyclicality of its primary metal products, such as and ferroalloys, this is somewhat reasonable.

However, Vale is well-prepared to face the coming storm and will likely manage to post attractive profits and return capital to shareholders.

Its financial position is strong and its profitability would have to halve before endangering its 8.8% dividend yield.

At only 3.9x price to long-term earnings per share (P/LTM EPS), the stock is surely worth another look.

Vale Price Vs. 50 Day, 200 Day SMA

Vale Price Vs. 50 Day, 200 Day SMA

Source: InvestingPro

Based in Brazil, Vale is the fifth biggest global mining company by revenue. It explores, mines, and markets raw materials nationally and abroad concentrating in ferrous minerals which account for 90% of sales. The remaining 10% is made up by base metals (ex. nickel) and precious metals (ex. gold).

Vale is exposed to rather high political risk in Brazil, and the government indirectly holds a minor, less than 5%, stake in the company which it has been actively reducing.

The recent election in Brazil is, of course, a subject of great interest. Ex-president Luiz Inácio Lula da Silva (better known as Lula) beat right-wing incumbent Jair Bolsonaro by only 50.9% to 49.1% in the latest presidential elections and is set to take the reins of Latin America’s largest nation on Jan. 1. During his campaign, there were rumors that Lula would raise royalties on certain mining projects—known as a “special stake.” A similar proposal was suggested during the leftist governments of 2011-2016 but was shelved following pushback from the industry.

On the whole, financial markets reacted positively to signs of social peace, political stability, and policies that may boost investment and growth. Analysts are hopeful Lula will push a more centrist than leftist agenda, which will have little impact on Vale. The first indicator of Lula’s true intentions will be his choice of Minister of Economy due to be announced in early January.

Financials and Recessionary Outlook

Like many of its peers, Vale’s rapid expansion in FY 2021 was shown to ultimately be unsustainable. In Q3 2022 Vale a 19% slide year-on-year (yoy) in revenue to $9.92 billion and an EBITDA of $3.66 billion, well shy of the $5.25 billion in Q2 2022. EBITDA margins fell from 47% to 37%.

The market reacted poorly but the results are simply a reversion to Vale’s pre-COVID levels. It shouldn’t come as a surprise that Vale’s operating metrics are expected to weaken through FY 2023, in line with deteriorating macro headwinds.

Vale’s financial position remains solid, which should safeguard dividend payments so long as the decline is not too severe or prolonged.

In terms of net debt, it is anticipated to reach $10 – $17 billion by year’s end—with $13.3 billion being the mean estimate. With Q3 2022 operating income of $5.15 billion, net debt stands at just-over two times EBIT. This low leverage means Vale is in a good position to deal with any challenges thrown up by any downturn.

Thankfully, this isn’t Vale’s first rodeo. In past recessions, the miner has kept EBITDA margins fairly stable which is a positive for investors worried about dividend payments. Vale’s profitability is consistently above industry. Cyclically adjusted (10-year) annual operating profit stands at ∼$13 billion, so profitability would need to halve to put the 9% dividend yield at risk.

The business is also planning to continue investing, with its capex commitments emphasizing management’s faith in medium-term growth opportunities in the global energy transition.

Vale Income Statement

Commodity Volatility and Production Plans

Iron accounts for more than half of Vale’s revenues so it has benefited from the strong price increases in the metal for the last couple of quarters. However, that is beginning to fade as China seems to be loosening some of its COVID-zero restrictions.

In the mid- to short-term, a weaker global economy combined with mining investment plans that are expected to result in a major increase in production could severely damage iron ore prices worldwide. Also, the ongoing energy crisis raises the cost of mining inputs and equipment.

Iron Ore Future Daily

Valuation

Vale shares have only recently begun to hover slightly above its long-term support of $11.80, last approached in November 2021. Given the very different macroeconomic situation, it is hard to envision the stock price going lower than that support.

After the earnings selloff, the price rebounded to $15.13, yet I believe there is further upside. The mining giant trades at a P/LTM EPS of only 3.9x, compared to a sector average of 9.2x. It’s EV/EBITDA is near COVID lows despite the company having recovered considerably since then.

Vale is well positioned to face any upcoming storm, if it ever materialise. Given the resilience of profit margins in past recessions, one can assume the 8.9% dividend yield will be maintained.

Disclosure: The author does not currently hold a position in Vale. This article is written for informational purposes only. It does not constitute a solicitation, offer, advice, counseling, or an investment recommendation.

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