Top Iron Ore Miner Looks 'Screamingly Cheap' to Rio-Based Fund

(Bloomberg) -- Shares of Vale SA are a clear buy opportunity for Pacifico Gestao de Recursos, which has 2 billion reais ($520 million) in assets under management and has been increasing its exposure to the world’s largest iron ore producer.

“The stock is screamingly cheap,” said Leonardo Rufino, a partner and portfolio manager at Pacifico. "Even assuming lower iron ore prices ahead, considering lower production volumes and all the potential fines, there’s still a disproportionate upside," Rufino said in an interview at Pacifico’s offices in Rio de Janeiro.

After a deadly dam breach in Brumadinho, Brazil in late January, Vale halted operations and posted its worst quarter ever, scaling back 2019 sales volume expectations in the process. The day after the disaster, Vale shares fell as much as 25% in Sao Paulo, the most on record. Now, with iron ore prices up about 53% in Singapore this year, the company has just said it brought its Brucutu mine back online, restoring almost a third of the capacity that had been shuttered.

Vale is the biggest holding of the Pacifico Acoes Master FIA fund, followed by car rental firm Localiza Rent a Car SA, utility Equatorial Energia SA and Brazil’s sole stock exchange operator B3 SA - Brasil Bolsa Balcao. Besides Vale’s attractive valuation, Rufino also cites sees a free cash flow yield of 20%.

Analysts who met with Vale’s executives earlier this month believe that dividends are likely to be reinstated in 2020, with a small chance of payouts resuming in the last quarter of the year. Vale managers also signaled progress in reaching an environmental agreement with authorities.

The main risks to the investment thesis, according to Rufino, include China -- an "imponderable" variable -- and a potentially slower-than-expected recovery in volumes, which he sees as "unlikely".

"Brumadinho’s effect tends to be softened over the next months and that’s the current biggest driver pressuring the stock," said Rufino. "Six months from now, investors are unlikely to get more concerned about that."

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Scott Schnipper

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