Iron Flux Has Funds Reviewing Vale Bets After $50 Billion Rout

(Bloomberg) -- With iron ore seemingly at a crossroads, one of the world’s top producers of the steelmaking ingredient is trading at its most volatile since the early days of the pandemic.

China’s efforts to temper its polluting and energy-guzzling steel mills, combined with turmoil in the nation’s property market, saw iron-ore futures lose half their value since mid-July, before clawing back some ground.

Vale SA shares have followed a similar path, with 30-day trailing price swings this week hitting the highest since June 2020. The uptick in the Brazilian miner’s volatility reflects divergent views on iron’s next moves.  

Rio de Janeiro-based Pacifico Gestao de Recursos scrapped its Vale holdings altogether in September amid fears over the impact of property developer China Evergrande Group’s debt woes on the real-estate market there.

“Evergrande’s debt crisis may not be a Lehman moment, but should weigh on steel demand,” said Leonardo Rufino, portfolio manager at Pacifico. “We can’t say for sure that prices have already hit the bottom.”

A handful of Wall Street analysts have also ditched their buy-equivalent recommendations for Vale as the iron collapse stripped about $50 billion from its market value. Ten analysts tracked by Bloomberg lowered their 2022 earnings estimates in the past four weeks, more than double the number of upward revisions. Vale declined to comment.

On the other side of the trade, equity-focused hedge fund Meraki Long Biased built a position in Vale last week. With the stock fetching just 2.4 times enterprise value to forward earnings, well below major peers, the risk-reward became attractive again.

“Visibility is still low, but price asymmetry has gotten positive for Vale,” Meraki Capital Chief Investment Officer Roberto Reis said. 

Still, alluring multiples may not be enough to prevent further estimate cuts ahead of a potentially bumpy fourth quarter for Chinese economic activity, Bank of America analysts wrote.

Vale emerged as one of Encore Long Bias FIM’s top holdings earlier this year, but the fund has opted to trim its exposure. “The stock is trading at a low multiple, but the iron ore tide has turned,” said Joao Braga, a founding partner at Encore Asset Management, who manages the fund. 

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