Vale Mine Ruling Has Analysts Weighing Iron Ore Market Impact

(Bloomberg) -- A Brazilian court ruling that authorized Vale SA to restart a mine that was closed after a dam burst is generally positive for the company but could cause a spillover effect in the iron ore market, which saw a surge in prices in the wake of the deadly disaster, analysts said.

Iron ore prices surged more than 20 percent in early February after the dam break at Brumadinho left some 300 people dead or missing and prompted shutdowns that accounted for more than 80 million tons of iron ore. The court ruling applies to the miner’s Brucutu operation, which accounts for a significant portion of that total. Vale, the world’s largest producer of the raw material, said the mine will remain closed until it gets approval from local environmental regulators.

While the development bodes well for Vale, whose shares have bounced back more than 20 percent from their early February lows, analysts pointed out that a faster-than-expected resumption of production might ease the supply tightness that has driven iron ore prices higher. Iron ore futures tumbled in Asia following news of the mine potential restart.

BMO increased its 2019 Ebitda forecast for Vale by 3 percent, as it now expects the restart to take place in the second quarter of the year. Jefferies decided not to update its models yet, as it believes that iron ore supply risk in Brazil remains high.

Santander doesn’t see a significant correction in iron-ore prices from current levels, as Vale should produce less this year and there are still uncertainties regarding other supply stoppages. “We expect the restart of capacity to have a net positive effect on Vale’s cash generation,” analyst Gustavo Allevato wrote in an emailed note.

Santander, Gustavo Allevato

• Iron ore production in Brucutu mine could resume soon.
  • Restart of capacity is expected to have a net positive effect on Vale’s cash generation.
• Santander doesn’t expect a significant correction in iron ore prices from current levels, as Vale will still produce less this year and competitors aren’t able to make up for the lost production.

Bradesco BBI, Thiago Lofiego

• Positive development for Vale.
• However, it’s still uncertain if the company can regain the provisional operating license under which it operated the Laranjeiras dam or if it will have to restart a licensing process with the Minas Gerais state environmental agency in order to be allowed to operate it.
  • In this case, Brucutu mine would be unlikely to restart in 2019.
• Bradesco BBI sees Vale’s 2019 iron ore shipments totaling 350 million tons.
  • Faster-than-expected resumption of Brucutu could bring upside to the estimate.
• Outperform recommendation maintained.

Goldman Sachs, Thiago Ojea

• Brucutu restart should be quick once its license is returned.
• Vale’s production is expected to reach 370 million tons in 2019.
• Goldman’s global commodities team sees iron ore prices averaging $73/t in 2019.
• Neutral recommendation maintained.

Credit Suisse, Caio Ribeiro

• Market wasn’t expecting the mine’s resumption to be as fast, and potential restart represents a relevant de-risking factor.
• Maintains outperform rating.
• Volatility should increase, but valuation is attractive.

BMO, Edward Sterck

• Restart of Brucutu is now expected to take place in the second quarter of the year.
  • This adds 16Mt iron ore production back into the forecasts, increasing Ebitda by 3%.
• Near-term outlook for Vale remains uncertain.
  • Market perform rating maintained.
• “Vale remains embroiled in regulatory investigations post the Brumadinho dam failure. However it stands to gain from higher iron ore prices leaving an uncertain balance to the outlook.”

Jefferies, Christopher LaFemina

• Even if Brucutu comes back on line, iron ore supply risk in Brazil remains high.
• There is some risk of short-term strength in Vale’s shares and potential weakness in the others if the mine does indeed restart.
• Models weren’t adjusted for this news as the ultimate outcome is still uncertain.

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

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Richard Richtmyer, Julia Leite

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