Vale Investors Look Past Top Iron Ore Miner's Worst Quarter Ever

(Bloomberg) -- Investors are looking past Vale SA’s worst-ever quarter as analysts highlight the top iron ore miner’s brightening prospects after it set aside $4.5 billion to cover potential costs linked to a fatal dam disaster.

Shares gained as much as 2.6 percent in Brazil trading on Friday, even after the company posted a net loss of $1.6 billion in the three months ended in March. Provisions related to the dam breach in January took the company’s adjusted earnings before interest, taxes, depreciation and amortization to negative $652 million, the first such loss in its history.

“Once Vale reaches a final agreement with authorities on compensation for families and environment (which we don’t think will surpass US$4-5bn), we think investor focus will shift back to fundamentals, potentially triggering a re-rating,” Thiago Lofiego, an analyst at Bradesco BBI said in a note Friday. “This is actually the remaining overhang on the stock.”

Vale Investors Look Past Top Iron Ore Miner's Worst Quarter Ever

The Brazilian miner set aside provisions to cover legal costs and agreements with local authorities related to the Brumadinho dam rupture that left hundreds dead in January. The company is taking steps to turn things around after its prospects dimmed. Last year, it was on pace to boost 2019 output to a record 400 million metric tons. On Friday, Chief Financial Officer Luciano Siani Pires said it will take two to three years to meet that target. The deadly disaster forced it to shut mines that account for almost a quarter of that goal.

On Monday, Rio de Janeiro-based Vale scaled back its 2019 outlook, saying sales of iron ore and pellets will likely be in the middle-to-lower end of its guidance of 307 million to 332 million tons after a local court ordered that operations at its Brucutu mine be halted for a second time.

"The earnings are in the rear-view mirror now," said Leonardo Rufino, a portfolio manager at Pacifico Gestao de Recursos, in an interview. "The level of iron ore prices and Vale’s ability to recover volumes are more relevant."

Iron ore prices have climbed about 30 percent in Singapore this year. The company’s reference price for its iron ore sales averaged $82.70 a ton in the first quarter, up from $74.30 a year earlier.

Still, Brucutu is the site most likely to resume operations this year, the CFO said during the company’s earnings call on Friday. Siani Pires declined to offer an outlook on when Vale will resume paying dividends.

“We’re not in a position to address this topic. It isn’t a priority,” Siani Pires said, adding that the company is focused on responding to communities affected by the dam spill.

The $4.5 billion provision matches the amount that various Brazilian courts have ordered frozen, which the company disclosed in April. The iron ore producer had said last month that it may set aside $220 million to cover damages and that amount may increase.

Vale Investors Look Past Top Iron Ore Miner's Worst Quarter Ever

Vale shares advanced to an intraday high of 49.80 reais before closing 1.9 percent higher at 49.46 reais amid a sell-off in the stock market on Friday. Brazil’s benchmark Ibovespa stock index was down 0.6 percent.

What Bloomberg Intelligence Says

“Vale’s strong cash flow, tied to premium prices for its iron ore, positions the company to absorb potential fines and liabilities resulting from the Brumadinho dam collapse. The decision to suspend its shareholder-remuneration policy provides additional cash that can be used to revamp operations, pay penalties and settle litigation.”
--Richard Bourke, BI Senior Credit Analyst
--Conor Cuddy, BI Associate Analyst
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