How Iron Ore Price Could Save Vale Stock

Vale stock price (NYSE: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”VALE” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) nosedived toward the end of January as a dam breach at the company’s Feijao mine in the Brazilian state of Minas Gerais left hundreds missing and at least 84 dead. The disaster wiped out $18 billion of Vale’s market cap in a single day, with the stock down 23% at one point.

Despite a dam breach at their Feijao mine that killed 84 people, Vale shares were back in the green within a week.

The world’s largest iron ore miner has also suspended its dividend and buyback program and delayed the release of its quarterly results as it prepares to face the financial and legal fallout of the disaster.

But despite all this negativity, Vale shares were back in the green within a week of the breach. That might surprise some given the severity of the situation and the potential fines the company might be facing. But a closer look at how this event is going to impact iron ore prices will make it clear why Vale investors have bid the stock up.

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Iron Ore Price Set to Climb

BMO Capital Markets analyst has raised his iron ore price target for 2019 to $78 a tonne from $63 earlier.

Vale has announced that it will slash nearly 10% of its annual iron ore output – amounting to around 40 million tonnes – as it suspends operations at some of its mines to decommission identical tailings dams as a pre-emptive measure. The Brazilian giant will be halting operations at 10 of its mines, creating a tight supply situation as it will take 2.5% of the global supply out of the end market, eventually leading to higher pricing.

That would allow iron ore miners to bring additional higher cost capacity into play to make up for the shortfall caused by Vale’s decision. In fact, Vale itself will try to fill in for the suspended production by tapping into spare capacity at some of its mines. Nevertheless, iron ore prices are set to get a shot in the arm this year.

BMO Capital Markets analyst Colin Hamilton has raised his iron ore price target for 2019 to $78 a tonne from $63 earlier. As it turns out, iron ore prices are already trending higher and they are expected to remain at elevated levels for the next few quarters.

Vale Stock Price Steeled by Iron Ore

Vale’s iron ore production has trended higher with each passing quarter of fiscal year 2018. The company’s production for the first nine months of 2018 stood at 283.6 Mt, an increase of 3% over the prior-year period. The company’s third-quarter output itself was 104.9 Mt, which means that it was on track to achieve its full-year target of 400 million tonnes of production in 2019.

But with 10% of that potential production going out of the equation, Vale’s 2019 production figures could be around 360 million tonnes. Meanwhile, the company has 50 million tonnes of standby capacity that could mitigate the shortfall from the suspended operations, but that’s going to be easier said than done.

It is likely that regulators and potential sanctions will make it difficult for Vale to tap into the additional capacity, so it won’t be surprising to see the company’s 2019 output falling below last year’s levels. Of course, higher iron ore prices will help steel Vale’s top line and prevent a big hit.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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