Don’t Jump on the Bandwagon for Vale S.A. (VALE) Stock

A disaster in Brazil that’s claimed dozens of lives, with hundreds more still missing, has resulted in major penalties and spiraling losses for Brazilian mining giant Vale (VALE).

On Friday, an idle Vale iron ore tailings dam, which was in the process of being decommissioned, burst. At least 60 people are confirmed dead and hundreds more are missing. A Brazilian judge has frozen $1.3 billion dollars in Vale’s assets, forcing the company to suspend dividend payments and share buybacks. In reaction, VALE shares plunged nearly 17% on the New York stock exchange, wiping nearly $10 billion off its market valuation.

RBC Capital analyst Tyler Broda commented, “It is certainly too early to quantify any financial impact (as the company rightly focuses its efforts on assistance) but we fear the potential liabilities for a disaster so similar to the one in 2015 will likely be heightened. The inspection of Vale’s remedial processes for dam maintenance will likely come under investigation. We would also expect that environmental permitting in Brazil, following Samarco, Alunorte and now Brumadinho will become even more stringent, potentially impacting growth plans. We would expect that beyond the c. 7mtpa produced at the Feijao mine as part of the Parapoeba Complex in the Southern System, that production is likely to remain unaffected in the medium-term (RBCe 2019 398mt) and that tonnages will likely be made up elsewhere in the country. We do see potential that Vale’s overall production may lag in the coming months as the company refocuses on safety. So although shortterm iron ore prices may rise on sentiment, with our forecast for a surplus of 59mt for 2019, we continue to believe fundamental pressure on iron ore prices is likely to remain.”

Broda reiterates an Underperform rating on Vale stock, with a price target of $11, which represents a slight downside potential from current levels. (To watch Broda’s track record, click here)

Most of Wall Street is surveying the troubled mining stock from the sidelines. Based on 12 analysts polled in the last 3 months, 5 rate a Buy on Vale stock, 6 maintain Hold, while 1 issues Sell. The 12-month average price target stands at $14.88, marking a nearly 32% upside from where the stock is currently trading. (See VALE’s price targets and analyst ratings on TipRanks)

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