Will Vale’s Recent Momentum Last for Long?

Vale (NYSE: VALE) stock has been showing some momentum of late, albeit a weak one. However, the company’s latest report is bound to give investors some more hope that the iron ore miner is progressing in the right direction.

Vale recently reported its production figures for the third quarter of 2019. Let’s take a closer look at the company’s operating performance during the quarter.

Vale is slowly getting better

On a year-over-year basis, Vale’s iron ore output plunged 17.4% as it is still recovering from January’s dam disaster in Brazil that led to the closure of operations at certain mines. More specifically, its production came in at 86.704 million tonnes during the quarter, but the good thing was that this number increased over 35% on a sequential basis.

The quarter-over-quarter growth in production was attributable to the improved operating performance of the Northern System mines, the resumption of operations at Brucutu, and the partial resumption of dry processing at Vargem Grande. Brucutu is Vale’s largest mine in the state of Minais Gerais in Brazil.

What’s more, Vale added that it plans to boost production from the Vargem Grande complex to 50 million tonnes in the next couple of years. At the same time, Vale expects costs to decline in the coming days. As reported by Reuters:

“For this year, Vale said it expected expenses related to halted operations because of the Brumadinho disaster to fall from $3-$4 per tonne of iron ore in the third quarter to $2.5-$3.5 per tonne in the fourth quarter.”

This is probably why analysts are expecting a nice bump in Vale’s bottom line in the coming quarters. In the September quarter, Vale’s bottom line is expected to jump to $0.53 per share, double the year-ago period. The bottom-line growth is expected to continue into 2020 as well. This improvement is not surprising as iron ore prices have shot up tremendously.

In September 2018, the price of iron ore stood at $68.44 per metric tonne. Last month, the price stood at $93.08. This impressive growth in iron ore prices has been a boon for Vale.

Will the good times last?

Vale’s recovery depends on iron ore prices to a large extent. But as the company starts bringing more supply into the market, investors can expect the high iron ore prices to normalize. Fitch Solutions that the iron ore price rally has peaked and a correction will soon get underway. As reported by Mining Weekly:

“We believe iron-ore prices have peaked and will head lower from spot levels over the rest of the year as supply issues ease and Chinese demand temporarily softens, owing to the current yuan strength, as a weaker yuan makes the ore more expensive.

On the other hand, Australia expects the price of iron ore to halve in the next couple of years, citing weak demand out of China on the back of slowing economic activity and the resumption of supply from Vale.

So it is not surprising to see that Vale investors have been treading a cautious path and watching from the sidelines.

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.


Please enter your comment!
Please enter your name here