VALE Moves Above 50-Day SMA on CEO Appointment: Time to Buy the Stock?
Vale S.A. VALE shares have gained 2% following the announcement on Aug. 26 that its current chief financial officer, Gustavo Pimenta, will take over the reins of the company as the next CEO. He will replace Eduardo Bartolomeo, whose term ends on Dec. 31, 2024.
Pimenta has been VALE’s chief financial officer since 2021. He was chosen over 14 external candidates identified by a consulting firm entrusted with the headhunting process.
This wraps up a tumultuous succession process marred by government interference and disagreements among board members. Two directors resigned, with one alleging political influence in the succession process.
VALE Breaks Out Above the 50-Day Moving Average
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The choice of Pimenta, with his previous experience in VALE and being free from government influence, has been received well by investors.
The VALE stock broke through its 50-day simple moving average (SMA) on Aug. 26, indicating a short-term bullish trend. The 50-day SMA is a key indicator for traders and analysts, often marking the first sign of an uptrend or a downtrend.
Given the recent uptick in Vale’s shares and the conclusion of the appointment process, is this the right time to buy? Let us find out.
Vale's YTD Share Price Performance
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Despite the recent increase, VALE shares have lost 32.6% year to date. The stock has also underperformed the broader Zacks Basic Materials sector’s 2.5% decline and the S&P 500’s climb of 17.9%.
Key Factors That Dragged Vale Stock Down
Declining Iron Ore Prices: The company’s price performance mainly mirrors the downtrend in iron ore prices as China’s prolonged property crisis has weighed on its demand. Iron ore prices are currently at $98.51 per ton, the lowest level in 20 months.
The World Steel Association expects steel demand in China in 2024 to be flat with that reported in 2023 due to declining real estate investments. This suggests that a near-term price recovery is unlikely.
Rising Costs: In the first quarter of 2024, VALE reported a 9% year-over-year decline in pro-forma adjusted EBITDA and the same was down 6% in the second quarter. The downfall was attributed to higher costs and expenses related to freight and maintenance activities. The combination of low iron prices, weak demand and elevated expenses is concerning.
Unresolved Mariana Dam Negotiations: On Nov. 5, 2015, the Fund?o tailings dam at the Samarco Mariana Mining Complex collapsed. It claimed 19 lives, and led to environmental and community impacts. The dam was owned and operated by Samarco, a joint venture between Vale and BHP Group’s BHP subsidiary. Vale, Samarco and BHP are in negotiations with Brazilian authorities to seek a settlement for the claims related to the incident.
The speculation regarding the CEO selection over the past few months has also been impacting its share price.
VALE’s Earnings Estimates Trend Downward
The Zacks Consensus Estimate for fiscal 2024 and 2025 has moved south over the past 60 days. This reflects the impacts of a decline in iron ore prices and its weak production guidance. Vale expects iron ore production in 2024 to be near the top end of its guidance of 310-320 Mt. This indicates a decline from the 321 Mt of iron ore produced in 2023.
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Vale’s Long-Term Prospects Remain Strong
Despite the near-term challenges, the company is well-positioned for long-term growth on the back of several catalysts.
Solid Project Pipeline: VALE is making progress on major growth projects like Vargem Grande and Capanema, which are expected to add 30 million tons of capacity over the next 12 months. Also, the S11D plus 20 million ton expansion project is scheduled to start in 2026 and will support production growth. It will also continue to focus on improving the quality of its portfolio.
Projects such as Salobo III and Alem?o will increase copper production capacity and the development of the Cristalino project will help extend the life of the Sossego mill. Vale continues to develop studies of the Hu'u project in Indonesia, a world-class asset, and is investing in the exploration of assets in mining regions considered to be prolific, such as Andean America and Eastern Europe.
For 2026, Vale expects its nickel production between 230 kt and 245 kt, considering replenishment projects in Canada, contributions from Pomalaa and Morowali, and the start-up of the second furnace at On?a Puma. In 2030, nickel production will likely cross the 300-kt mark, with input from projects such as Thompson Ultramafics, Sorowako HPAL, partnership projects and offtake.
Positive Long-Term Outlook for Prices: Growth in world steel production, spurred by urbanization, will fuel demand for iron ore and support its prices. Copper and nickel demand will also rise, driven by the electric vehicle market and renewable energy investments.
Vale’s Sector-Leading Dividend Yield & Payout
The company’s current dividend yield of 11.13% is higher than the sector’s 2.52% and the S&P 500’s 1.26%. Its payout rate is at 57.96%, also higher than the sector’s 54.05% and the S&P 500’s 33.79%.
VALE’s Attractive Valuation
The company is trading at a forward 12-month Price/Sales ratio of 1.14X at a discount to the sector’s 2.40X.
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The stock is also cheaper than other iron miners like Rio Tinto RIO, Fortescue Ltd FSUGY and BHP Group, which are trading at 1.56, 2.23 and 2.48, respectively.
How to Play VALE Stock?
Pimenta has his work cut out when he takes up the CEO office in January 2025. Per chairman Daniel Stieler, safety and creating value for the company by ensuring production stability should be the top priorities. This will be challenging, considering the weak demand prospects in China. He is also expected to aid in negotiations and help reach a settlement in the Mariana dam dispute.
Considering the challenging near-term outlook for the iron ore industry, Vale’s tepid production guidance for 2024 and elevated costs, we believe that investors should wait for a better entry point. Those who already own this Zacks Rank #3 (Hold) stock should stay invested to benefit from the company’s solid project portfolio and the long-term positive outlook for iron ore prices, copper and nickel.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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