Brazil-based iron ore giant Vale (VALE) is trading at its lowest price in five years, since the peak of the COVID-19 pandemic in 2020. This has raised questions about whether the stock can bounce back. While the stock is now trading at valuations that seem de-risked, I’m maintaining a neutral rating for now. Bearish sentiment around the stock is likely to persist, especially as iron ore prices are expected to stay depressed throughout this year and Brazil’s macroeconomic situation shows little sign of improvement.
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That said, while the short- to mid-term outlook isn’t promising, Vale’s strong fundamentals and solid shareholder returns point to significant long-term potential. Once commodity prices and Brazil’s macroeconomic situation improve, the company could be well-positioned for a strong recovery.
Understanding Vale’s Business
Before diving into my concerns about Vale, it’s important to recognize why many investors have been so bullish on the company. As one of the largest global producers of iron ore, Vale has built a strong competitive edge thanks to its very low mining costs.
For instance, Vale reported a C1 (direct production) cash cost of $22/ton in 2024 and expects that, through efficiency programs, it could achieve higher volumes and an even more favorable cost structure, potentially reaching $18/ton by the end of 2030. For comparison, Rio Tinto’s (RIO) guidance is between $21.75 and $23.50 per ton.
Because of its cost advantages, Vale has historically attracted many investors who are drawn to its ability to remain profitable and generate strong free cash flow. This allows the company to reward shareholders with substantial dividends and share buybacks. In fact, Vale currently boasts a dividend yield of 11.5% over the past 12 months. It’s also worth noting that the company has repurchased around $13.8 billion worth of shares over the last three years, highlighting the management’s strong commitment to returning value to shareholders.
What’s Behind VALE’s Slump?
Despite my neutral stance on Vale at current levels, the stock momentum is undeniably bearish. In fact, since the height of the COVID-19 pandemic crisis in 2020, Vale shares haven’t traded below $8.50. Today, the stock is priced at a mere 4.3x forward P/E ratio, which is about 25% lower than its historical average over the past five years.
That said, if you’re wondering why investors are so bearish on this stock despite its low valuation and attractive dividends, it’s mainly due to a mix of headwinds that have been weighing down the company.
First off, Vale’s performance is heavily tied to iron ore prices, which, in turn, are closely linked to the Chinese economy—the main market for the commodity. Iron ore prices are currently around $98 per ton, down significantly from their peak in January 2024 when they were close to $130.
Secondly, the increasingly negative outlook for the Brazilian economy has also weighed on Vale’s stock. Interest rate hikes aimed at combating inflation, which is running above the government’s target, have led to a flight of foreign capital, with investors pulling money out of the country, particularly from large funds that include Vale. On top of this, the steep devaluation of the Brazilian real against the U.S. dollar has added even more pressure, creating a strong link between the currency’s drop and Vale’s stock decline over the past year.
Vale May Encounter Challenges amid Weak Iron Ore Prices
In my view, while Vale appears to be undervalued and offers a compelling risk-reward opportunity for investors, but I think it may encounter some challenges in the short term. A more bullish outlook would likely make sense only for those with a long-term horizon—potentially beyond 2025.
To start, the outlook for iron ore prices in the coming months isn’t particularly promising. A report from Fitch’s BMI suggests that, in 2025, iron ore prices will continue to face pressure from weak demand, unless China steps in with additional support measures. On the other hand, ING forecasts that iron ore prices will average around $95 per ton. Analysts expect that a combination of sluggish steel demand, strong shipments, and high port inventories will keep commodity prices under pressure.
In short, the outlook isn’t ideal for a quick turnaround in Vale’s momentum. However, Vale’s own projections show that even with iron ore prices at $90 per ton, the company could still generate a free cash flow yield of around 8%. The catch is that, despite currently offering a dividend yield of about 11%, Vale’s future yield could drop to around 8% at most, based on projected Free Cash Flow yields and falling iron prices. These returns are not all attractive when you factor in Brazil’s equity risk premium of 7.6%. This means that, for Vale’s stock to be truly appealing, it would need to offer returns above this threshold.
Is VALE a Good Stock to Buy?
Vale is rated as a Buy by most experts—eight out of 12 analysts are bullish, while the other four have a neutral stance. The average VALE price target is $15.39, pointing to a massive upside potential of a staggering 81% from its current price.
Key Takeaway
While I’m optimistic about a turnaround for Vale, I’m skeptical it’ll happen in the short to medium term, especially in 2025. The stock is still closely tied to iron ore prices, which are under pressure from the Chinese economy, and that’s likely to keep holding it back. As a result, dividends this year might not be as strong as in 2024.
That said, with valuations so low, the stock looks cheap and could eventually become a double-bagger—similar to the upside Wall Street is predicting—once the macro situation starts to improve.
