Vale Earnings: Solid Iron Ore Sales, the Main Driver of Earnings

We make no change to our fair value estimate for no-moat-rated Vale VALE of USD 14.50 per share after its 2023 third-quarter result was modestly lower than our expectations. Adjusted EBITDA of USD 4.5 billion rose 12% on the same quarter of 2022, with higher iron ore prices and sales volumes more than offsetting increased unit cash costs and foreign-exchange headwinds. The company reiterated 2023 iron ore production and cost guidance but we modestly reduce our forecast iron ore sales by 3% to around 300 million metric tons, similar to 2022. With iron ore sales lagging production by 9% so far this year, we don’t think the gap will be fully made up in the fourth quarter despite sales more likely to track production in the quarter. We retain our forecast for unit cash costs to be at the top end of Vale’s unchanged guidance of between USD 21.50 to USD 22.50 per metric ton given inflation and likely soft volumes. Iron ore dominates Vale’s earnings, accounting for about 90% of our 2023 forecast EBITDA of USD 19.5 billion.

Vale shares trade at a 7% discount to fair value. We think this is likely due to concerns over China’s tottering residential property sector and the potential impact on the country’s steel production given China accounts for around 70% of the seaborne iron ore trade. We continue to forecast iron ore sales rising to around 360 to 370 million metric tons by the end of our five-year forecast period. This is driven by Vale bringing back online much of the 100 million metric tons of capacity taken offline in response to the Brumadinho dam disaster in 2019. Increased sales should help lower unit cash costs, but we think Vale will remain middling on the industry cost curve, above lower-cost competitors BHP and Rio Tinto but below Fortescue once the discount for its lower-grade ore is taken into account.