Vale SA Forced To Shutter Itabira Mines; Analyst Sees The Bright Side

A Brazilian judge has ordered Vale SA (VALE) to shutter several mines due to concerns over Covid-19, as the coronavirus pandemic continues to rage across the country.

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Vale has been instructed to suspend its activities in its Itabira iron ore mining complex until it can obtain a judgement to ensure safety for its workers. It will be fined a nominal BRL 500k ($100k) per day until this is resolved.

Itabira consists of the Caue and Conceicao mines and three beneficiation plants and is part of Vale’s Southeastern System. It produced 36mt of iron ore in 2019 (11% of Vake total 302mt) and has been relatively unaffected by the impacts from the Brumadinho tailings disaster.

It remains uncertain at this point how long this operation will remain shut, but Vale has left its iron ore production guidance unchanged. That’s because its 2020 310-325mt guidance already includes 15mt of potential Covid-19 disruptions, points out RBC Capital analyst Tyler Broda.

He is forecasting Itabira will produce 31.8mt of iron ore in 2020. “In isolation, this disruption does not change our outlook for a global iron ore surplus (we calculate ~80mt in 2021), especially considering this disruption is likely short-term in nature and already more than captured in VALE guidance” Broda reassures investors.

However, the analyst says this latest issue does reinforce structural supply side concerns about Brazilian production. Further disruptions could cause more challenges, especially with an anticipated acceleration in H2 of assets returning post-Brumadinho, the analyst says, writing: “We see risks of consensus production downgrades over the coming weeks.”

In terms of pricing, Broda expect iron ore prices to react positively in the short-term to this development, especially with the wider macro reflation trade ongoing. Moreover, he calculates that the economic impact to VALE is a net positive as price impact outweighs volume impact.

“With VALE’s inexpensive valuation, the likely return of a dividend and buybacks, and with coming divestments acting as catalysts for the shares, we continue to see the shares positively” the analyst concludes. He recently upgraded the stock to buy with a $10.25 price target.

Indeed, Vale shows a firmly bullish Strong Buy analyst consensus thanks to several recent analyst upgrades. The stock now has only buy ratings, alongside an average analyst price target of $11.82 (7% upside potential). Shares are currently trading down 16% year-to-date. (See VALE stock analysis on TipRanks)